HIPAA Omnibus Final Rule Has Important Changes for Business Associates and Covered EntitiesMarch 25, 2013
On January 25, 2013, the Office for Civil Rights, Department of Health and Human Services (HHS) published its long-awaited Omnibus Final Rule (Final Rule) implementing provisions of the Health Information Technology for Economic and Clinical Health (HITECH) Act enacted by Congress in 2009. HITECH significantly modified requirements under the Health Insurance Portability and Accountability Act (HIPAA) of 1996. Not surprisingly, the Final Rule contains many important changes for "covered entities," such as health care providers, health plans, and health care clearinghouses, which had already been subject to HIPAA's requirements. However, the Final Rule also addresses significant new obligations for certain entities that do business with covered entities - so-called "business associates" - and their subcontractors. We address some of the most notable new requirements for business associates, subcontractors and covered entities below.
Definition of "Business Associate"
The Final Rule revises the definition of "business associate." Under the Final Rule, a "business associate" is generally a person or entity that creates, receives, maintains, or transmits protected health information (PHI) in fulfilling certain functions or activities for a HIPAA-covered entity. Health information that is created or received by a covered entity, identifies an individual, and relates to that individual's physical or mental health condition, treatment, or payment for health care is considered PHI when it is transmitted by or maintained in any form of medium, including electronic media. Notably, the new definition clarifies that "business associates" include entities that "maintain" PHI for a covered entity, such as a data storage company.
The Final Rule also clarifies the definition of a "business associate" by expressly including health information organizations, e-prescribing gateways, and other persons that provide data transmission services with respect to PHI and require "routine access" to PHI. Additionally, as further explained below, the new definition of "business associate" provides that certain subcontractors of business associates are also "business associates." Due to the significance of the new rules and the imposition of direct liability on business associates under HIPAA (see below), entities which are unsure of whether they qualify as a business associate should clarify with legal counsel.
Requirements for Business Associates
The Final Rule implements provisions in HITECH that significantly expand the accountability of business associates under HIPAA. Under current HIPAA regulations (those in place prior to the effective date of the new rules), covered entities must enter into contracts with their business associates (business associate agreements) which require, among other responsibilities, the business associate to implement administrative, physical and technical safeguards that reasonably and appropriately protect the confidentiality, integrity and availability of electronic PHI. Additionally, under current regulations, business associate agreements must require a business associate to use appropriate safeguards to prevent the use or disclosure of PHI. With the passage of HITECH and the publication of the Final Rule, parts of the HIPAA Security Rule (i.e., HIPAA's regulations relating to security standards for electronic PHI) and Privacy Rule (i.e., HIPAA's regulations relating to the privacy of PHI) will apply directly to business associates, making them potentially liable for civil and criminal penalties for any non-compliance with the HIPAA regulations, rather than just a breach of contract.
1. The Final Rule applies the Security Rule directly to Business Associates
The Final Rule implements HITECH's requirements for business associates to directly comply with parts of the Security Rule. For example, under the Final Rule, the Security Rule requires business associates to ensure the confidentiality, integrity and availability of electronic PHI that the business associate creates, receives, maintains or transmits, and also to protect against reasonably anticipated threats or hazards to the security or integrity of electronic PHI. The Final Rule also directly requires a business associate to adopt certain security measures to implement the standards and implementation specifications under the Security Rule, including specific administrative safeguards, physical safeguards and technical safeguards. Business associates must also conduct a risk analysis and assess the risks and vulnerabilities of electronic PHI.
In summary, business associates must implement policies and procedures to comply with the Security Rule. Notably, the Security Rule was designed to be scalable to the size of the entity. In identifying reasonable safeguards, entities may consider the size, complexity and capabilities of the entity, and the cost of security measures, among certain other factors.
2. The Final Rule Clarifies Which Parts of the Privacy Rule Apply to Business Associates
The Final Rule also applies parts of the Privacy Rule directly to business associates. For example, among other requirements, a business associate under the Final Rule:
- Must not use or disclose PHI, except as permitted under the Privacy Rule;
- May use or disclose PHI only as permitted or required by its business associate agreement or as required by law;
- May not use or disclose PHI in a manner that would violate the Privacy Rule if done by the covered entity (with certain limited exceptions);
- Must disclose PHI to HHS to investigate or determine compliance;
- Must disclose PHI to the covered entity, individual or individual's designee as necessary to satisfy a covered entity's obligations to respond to an individual's request for an electronic copy of electronic PHI;
- Must not sell PHI, except as otherwise permitted under the Privacy Rule;
- Must make reasonable efforts to limit PHI to the minimum necessary to accomplish the intended purpose when using, disclosing or requesting PHI; and
- Must directly enter into a business associate agreement with a subcontractor that creates, receives, maintains, or transmits PHI on the business associate's behalf.
In addition to direct liability under HIPAA, business associates will continue to remain contractually liable under their business associate agreements. Covered entities must still terminate a business associate agreement if the business associate materially breaches the business associate's obligations (unless the covered entity takes reasonable steps to cure).
Although parts of the Privacy Rule apply to business associates under the Final Rule, the Final Rule does not require business associates to comply with all requirements of the Privacy Rule. For example, business associates would not have to provide a Notice of Privacy Practices to individuals or designate a privacy official under the Privacy Rule, unless a covered entity delegated such responsibility to the business associate to perform on behalf of the covered entity.
3. The Final Rule Provides that Certain Subcontractors Are Business Associates
The Final Rule clarifies that a subcontractor of a business associate who creates, receives, maintains, or transmits PHI on behalf of the business associate is also a business associate under HIPAA. In other words, if a business associate delegates a function, activity or service to a subcontractor that the business associate agreed to perform for a covered entity, and such function, activity, or service involves creating, receiving, maintaining or transmitting PHI, the subcontractor of the business associate is likewise a "business associate" under HIPAA.
For example, if a business associate hires an entity to shred its documents, the hired entity will also be a business associate if (i) the business associate has taken on responsibility for the shredding under its business associate agreement with the covered entity, and (ii) the documents to be shredded contain PHI. If, however, the documents are not related to the business associate's responsibilities to the covered entity, but rather pertain to the business associate's own management, administration, or legal responsibilities, then the subcontractor will not be considered a business associate. Likewise, if the subcontractor is shredding documents related to the business associate's responsibilities to the covered entity, but those documents do not contain PHI, the subcontractor will not be a business associate.
HHS's clarification that certain subcontractors are business associates significantly expands the obligations of subcontractors who may not previously have viewed themselves as business associates. Such subcontractors are now directly accountable for complying with the Security Rule and Privacy Rule in the same manner as the business associates who directly contract with the covered entity. In making this change, HHS's concern was to avoid lapses in the privacy and security of PHI merely because a subcontractor performed the function.
Under the Final Rule, business associates must enter into business associate agreements with their subcontractors that satisfy HIPAA's detailed requirements for such agreements. The requirements for business associate agreements between business associates and their subcontractors under the Final Rule mirror the required terms for business associate agreements between covered entities and their business associates. The Final Rule also requires business associates to terminate a business associate relationship (or take steps to cure or end the violation and terminate if not successful) if they know of a pattern of activity or practice of a subcontractor that constitutes a material breach or violation of the subcontractor's obligations. However, the Final Rule clarifies that a covered entity itself is not required to enter into a business associate agreement with a subcontractor of the covered entity's business associate.
The Final Rule includes a myriad of changes that directly affect covered entities. Two of the most prominent changes - the need to update the Notices of Privacy Practices and changes to the breach notification rules - are discussed in this article. Covered entities should carefully review the new rules to determine if any other changes may affect their practices and activities, including changes relating to marketing, fundraising, the right to restrict uses of and disclosures to health plans, the sale of PHI, the right of an individual to obtain a copy of PHI, and changes relating to the ability of health plans to use genetic information for underwriting purposes.
1. The Final Rule Requires Changes to the Notice of Privacy Practices
The Final Rule includes a number of changes to the requirements for providing a Notice of Privacy Practices. First, the Final Rule requires the Notice of Privacy Practices to include a description of certain types of uses and disclosures that require an authorization, in addition to the statement that other uses and disclosures not described will be made only with an authorization. Covered entities must include a statement that most uses and disclosures of psychotherapy notes, most uses and disclosures of PHI for marketing, and most "sales of PHI," require an authorization. Additionally, the Final Rule requires the Notice of Privacy Practices to include a notice regarding the right of an individual to restrict certain disclosures to health plans.
Second, the Final Rule requires a separate statement in the Notice of Privacy Practices regarding certain activities (if applicable) of a covered entity, including statements relating to:
- Fundraising activities and the ability to opt out of fundraising communications;
- The ability of a group health plan, or health insurance issuer or HMO with respect to a group health plan, to disclose PHI to the sponsor of the plan; and
- If a health plan intends to use or disclose PHI for underwriting purposes, a statement that the covered entity may not use or disclose genetic information for such purposes.
Third, the Final Rule requires covered entities to include in their Notice of Privacy Practices information pertaining to the covered entity's breach notification responsibilities. Specifically, the Notice of Privacy Practices must include a statement that: (i) the covered entity is required by law to maintain the privacy of PHI; (ii) the covered entity is required to provide the individual with notice of its legal duties and privacy practices with respect to PHI; and (iii) the covered entity is required to notify affected individuals following a
Covered entities must retain copies of the Notice of Privacy Practices they issue (including prior versions of the notice). Covered entities must also ensure that they provide the updated Notice of Privacy Practices in compliance with applicable HIPAA requirements. For example, when a Notice of Privacy Practices is revised, a covered entity that is a health care provider must make the Notice of Privacy Practices available upon request by individuals on or after the effective date of the revision. Additionally, health care providers that maintain a physical service delivery site must promptly make the Notice of Privacy Practices available at their service delivery sites for individuals to take, and post the Notice of Privacy Practices in a clear and prominent location where it is reasonable to expect individuals to be able to read it. Covered entities must also update any Notice of Privacy Practices placed on websites.
2. The Final Rule Modifies the Breach Notification Rules
In the Final Rule, HHS has departed from the interim breach notification rules (which were published August 24, 2009) in several significant ways. HIPAA defines a "breach" as the acquisition, access, use or disclosure of PHI in a manner not permitted under the Privacy Rule, which compromises the security or privacy of the PHI. Under the interim breach notification rules, the term "compromises the security or privacy of PHI" means that the acquisition, access, use or disclosure constituted a significant risk of financial, reputational or other harm to the individual. Thus, under the interim breach notification rules, covered entities perform a risk assessment to determine whether an impermissible acquisition, access, use or disclosure actually resulted in a "breach" of PHI, and notification is required only if a significant risk of financial, reputational or other harm to the individual is identified through the risk assessment.
In the Final Rule, HHS has eliminated the "harm" standard. Instead, an impermissible acquisition, access, use or disclosure of PHI is presumed to be a breach, unless the covered entity or business associate (as applicable) demonstrates that there is a low probability that the PHI has been compromised based on a risk assessment of at least the following factors:
- The nature and extent of the PHI involved, including the types of identifiers and the likelihood of re-identification. For example, if the PHI involved could be used by an unauthorized individual in a manner adverse to the subject of the PHI (e.g., particularly sensitive health information or financial information, such as credit card or social security number), it is more likely that PHI will be considered compromised.
- The unauthorized person who used the PHI or to whom the disclosure was made. For example, a disclosure made to a person or entity required to abide by the Privacy Rule would make it less likely that PHI has been compromised, since the recipient of the PHI must protect the information in a similar manner as the disclosing entity.
- Whether the PHI was actually acquired or viewed.
- The extent to which the risk of PHI has been mitigated.
It is important to note that in the Final Rule HHS has also removed the "limited data set" exception found in the interim breach notification rules, which except from the breach notification requirements disclosures of "limited data sets" that, in addition to excluding certain directly identifying information, do not contain an individual's date of birth and zip code. Under the Final Rule, covered entities and business associates must undertake a risk assessment of the factors discussed above whenever an impermissible acquisition, access, use or disclosure of PHI occurs, even if the PHI involved is only a limited data set and does not contain dates of birth or zip codes.
In short, HHS has retained the need for covered entities and business associates to perform a risk assessment, but the assessment is more objective. HHS has not otherwise modified the breach notification requirements in any significant manner. For example, HHS has retained the qualification that a "breach" notification is only necessary if the PHI was "unsecured." Thus, no breach notification is required when the PHI that has been impermissibly acquired, accessed, used, or disclosed was encrypted pursuant to HHS guidelines. HHS has also continued to exclude the following incidents from the definition of "breach":
- Unintentional acquisitions, access or uses of PHI by a workforce member or person acting under the authority of a covered entity or business associate, if such acquisition, use or disclose was made in good faith, within the scope of authority, and does not result in a further impermissible use or disclosure under the Privacy Rule.
- Inadvertent disclosures by a person authorized to access PHI at a covered entity or business associate to another person authorized to access PHI at the same covered entity or business associate if the information received as a result of the disclosure is not further used or disclosed in a manner not permitted under the Privacy Rule.
- A disclosure of PHI where a covered entity or business associate has a good faith belief that an unauthorized person to whom the disclosure was made would not reasonably have been able to retain the PHI.
Updates to Business Associate Agreements
The Final Rule makes a number of changes to the required terms and conditions of a business associate agreement, which will require covered entities, business associates and subcontractors to update existing business associate agreements. In addition to other requirements in business associate agreements, the Final Rule provides that the agreement must:
- Require the business associate to comply with applicable requirements of the Security Rule.
- Require the business associate to ensure that subcontractors that create, receive, maintain or transmit electronic PHI on behalf of the business associate agree to comply with the requirements of the Security Rule by entering into a business associate agreement with the subcontractor that complies with the requirements for business associate agreements.
- Require the business associate to ensure that any subcontractors that create, receive, maintain or transmit PHI on behalf of the business associate agree to the same restrictions and conditions that apply to the business associate with respect to such PHI.
- Require the business associate to report breaches of unsecured PHI.
- If the business associate will carry out a covered entity's obligation under the Privacy Rule (e.g., serving as the privacy official), require the business associate to comply with the requirements of the Privacy Rule that apply to the performance of such obligation.
Covered entities, business associates and subcontractors generally have until September 23, 2013 to update and implement business associate agreements to comply with the new requirements. However, HHS has opted to grandfather business associate agreements entered into prior to January 25, 2013 and which complied with the requirement in effect as of such date. Covered entities, business associates and subcontractors with such "grandfathered" agreements have until the earlier of September 22, 2014 (an extra one-year transition period) or the date the business associate agreement is modified or renewed after
September 23, 2013 to update the "grandfathered" business associate agreements. The parties to such "grandfathered" agreements need to be careful - if they modify or renew the agreement after September 23, 2013, they can effectively cut short the extra one-year transition period and must make sure the modified or renewed agreement complies with the new rules. Importantly, HHS has clarified that agreements with automatic renewal terms will not be deemed to have "renewed" for purposes of determining whether the agreement is eligible for the extra one-year transition period. Additionally, despite the "grandfathered" status of existing agreements, covered entities and business associates must still satisfy the requirements of the Final Rule as of the compliance date (discussed below) even if such requirements are not reflected in the agreement itself.
Finally, in the Final Rule's Preamble, HHS addressed whether agreements that were negotiated prior to the Final Rule in an attempt to satisfy HITECH would need to be updated. HHS responded that covered entities should review such agreements to determine if they satisfy the Final Rule, but noted that the parties may have the transition period to update the agreement (assuming it complied with existing requirements as of January 25, 2013). HHS also addressed business associate agreements with provisions that require "compliance with all applicable laws." HHS noted that such contracts would not sufficiently reflect the new requirements. Thus, covered entities, business associates and subcontractors must review their existing business associate agreements to make sure that they are updated to comply with the new rules.
While the effective date of the Final Rule is March 26, 2013, all covered entities and business associates have 180 days beyond the effective date, that is, until September 23, 2013, to comply with the new requirements. Note, however, that until September 23, 2013, covered entities and business associates must continue to comply with the breach notification interim rules.
As discussed above, covered entities, business associates and their subcontractors have a lot of work to do before September 2013. Furthermore, there are many other provisions contained in the Final Rule not discussed in this alert which may affect certain entities. If you have any questions regarding the Final Rule and its effect on your organization, please contact a member of the Godfrey & Kahn Health Care Team.