The 27-year-old right-hander will receive the club's offer of $9.4 million rather than his request for $10.4 million.
Arbitrators Margaret Brogan, Phillip LaPorte and Steven Wolf made the decision Thursday, a day after listening to arguments.
Latos made $7.25 million last year, when he was 5-5 with a 3.25 ERA for Cincinnati in 16 starts. He had surgery in October 2013 to remove bone spurs from his pitching elbow and another operation on Feb. 14 for torn cartilage in his left knee, delaying his first big league outing until June 14.
He made his last start of the season on Sept. 7 because of a bone bruise in his right elbow. He was traded at the winter meetings to Miami for pitching prospect Anthony DeSclafani and minor league catcher Chad Wallach.
Latos is 60-45 with a 3.34 ERA over six seasons. He can become a free agent after this season.