A contract provision which appears to be helpful on the front end can harm a business in unforeseen ways, especially businesses which are frequently subject to lawsuits such as nursing homes. The contract provision in this instance requires the losing party to pay the attorneys’ fees and expenses of the prevailing party (i.e., an attorneys’ fees provision). From the perspective of a nursing home, the attorneys’ fees provision in an admissions contract with a resident may seem to be attractive because it has the potential to minimize law suits with a low possibility of success. However, the attorneys’ fees provision, especially a poorly drafted provision, can create a perverse incentive for the plaintiff’s attorney. The plaintiff’s attorney may incur expenses in stronger cases even if the amounts at risk are small. Under these circumstances, the tool to limit overall expenses can become a burden because the associated legal fees are greater than expected relative to the amount in dispute.
The potentially adverse effects of the attorneys’ fees provision can be magnified in a world where the Nursing Home Transparency and Improvement Subtitle to the Patient Protection and Affordable Care Act is effective (the “Transparency Statute”). The Patient Protection and Affordable Care Act was signed into law in 2010. In brief, the Transparency Statute requires nursing homes to disclose (i) the principals of the nursing home (including but not limited to each of the following: the officers, directors, trustees, managers, partners, members etc.), (ii) any other person who has control of a facility, has input on its operations or manages the facility, and (iii) the organizational structure of each of the foregoing and the relationships among those persons. The Transparency Statute is part of an effort by the federal government to raise the level of accountability at nursing homes. Nursing home operators should consider whether the attorneys’ fees provision in admissions contracts will end up funding plaintiff litigation against their principals and other persons involved in the business.
The net effect of an attorneys’ fee provision in admissions contracts could be more of an emphasis by legal counsel to follow through on litigation for stronger cases against nursing homes involving small amounts and a corresponding increase in settlement amounts. A recommended course of action for the nursing home operator is to conduct a review of its admissions contract to determine whether the attorneys’ fee provision is included. If the attorneys’ fee provision is included, the amendments are easy to implement for future contracts; however, a detailed review and analysis is required to determine how to deal with currently effective admissions contracts.