On January 17, 2013, the US Department of Health and Human Services released the long awaited and highly anticipated HITECH Final Rule, which was published in the Federal Register on January 25, 2013. The Final Rule memorializes many elements of the Proposed Rule, which was released in July 2010, but also makes certain changes. In addition, HHS recently published on its website new sample business associate agreement provisions that reflect the requirements set forth in the Final Rule. This Client Alert highlights certain key changes between the Proposed Rule and the Final Rule that are particularly noteworthy, certain clarifications provided in the Final Rule that warrant attention, and modifications to the contents of business associate agreements imposed by the Final Rule.

Changes in the Final Rule

What constitutes a breach?

Perhaps the most significant component of the Final Rule is the change it makes to the definition of breach. Previously, when PHI was improperly used or disclosed it was considered a HIPAA breach if it posed a significant risk of financial, reputational, or other harm to the individual(s) whose PHI was affected. The Final Rule replaces the harm standard with a general presumption that any impermissible use or disclosure of PHI is a breach unless it can be shown that there is a low probability that the PHI has been compromised (or an express exception applies). According to HHS, the harm standard in the Proposed Rule was interpreted by many as setting too high a threshold for breach notification, and the change is intended to be a more objective approach that will result in more breach notifications.

HHS set forth four specific factors that must be considered (along with any other relevant factors) in determining the probability that improperly used or disclosed PHI was compromised. Those four factors are:

  1. The nature and extent of the PHI involved, including types of identifiers and the likelihood of re-identification;
  1. The unauthorized person who used the PHI or to whom it was disclosed (if the person to whom the PHI was improperly disclosed is another covered entity or someone obligated to protect PHI, this would favor a determination that there is a low probability that the PHI was compromised);
  1. Whether the PHI was actually acquired or viewed (if, for example, a laptop containing unencrypted PHI is lost, but later found and forensic analysis reveals that the PHI was never accessed, this would favor a determination that no notification is required); and
  2. The extent to which the risk to the PHI has been mitigated (if PHI is improperly used or disclosed, the covered entity or business associate should immediately take steps to mitigate any potential risk to the PHI, which would favor a determination that there is a low probability that the PHI was compromised).

Regardless of whether or not something is considered a breach, the Final Rule establishes a safe harbor for any breach of PHI that is encrypted according to federal guidelines. This is significant, and covered entities and business associates should find some comfort in the fact that, despite the elimination of the harm standard and the likelihood that more breach notifications will be required as a result, as long as PHI is encrypted, there should be no requirement to provide notification.

Who is a business associate?

Under the Proposed Rule, a business associate was generally defined as anyone who creates, receives, or transmits PHI on behalf of a covered entity, but the Final Rule adds the word "maintains" to this definition. This means that a company that provides offsite storage of PHI for a covered entity is now more clearly considered a business associate because the storage of PHI is deemed to constitute maintaining. While it is clear that such a party would not have to have actually accessed the PHI to be considered a business associate, it is not clear whether a party that maintains PHI but does not have the ability to access it at all would nonetheless be considered a business associate. This is an area that would benefit from further attention and guidance from HHS. It is important to note, however, that a person or entity that is a mere conduit of PHI (such as, for example, a messenger bringing PHI from provider A to provider B) is still not considered a business associate.

The Final Rule also provides that a subcontractor who creates, receives, transmits, or maintains PHI on behalf of a business associate is now considered a business associate, and the Final Rule requires the business associate and the subcontractor to enter into a business associate agreement at least as protective as that between the business associate and the covered entity. Additionally, the Final Rule points out that this requirement extends infinitely "down the chain" of subcontractors, meaning if, for example, (1) a covered entity engages a business associate (requiring a business associate agreement), (2) the business associate engages a subcontractor (requiring a business associate agreement), and (3) the subcontractor engages another subcontractor, the subcontractor's subcontractor would also be considered a business associate, and the two subcontractors must enter into a business associate agreement.

When is a covered entity liable for the wrongdoing of a business associate?

Previously, while it was possible for a covered entity to be held vicariously liable for the improper acts of its business associate agents, there was an exemption if the covered entity did not know of the improper acts and if there was a business associate agreement in place between the parties. The Final Rule eliminates this exemption, such that now a covered entity can be held vicariously liable for violations of its business associate, as long as the business associate is considered an agent of the covered entity (and this is true of business associates and subcontractors as well). Whether someone is considered an agent is dependent on the federal common law of agency and involves a fact-specific analysis.

Important Clarifications

The Final Rule reaffirms the fact that the timeline for breach notification begins to run at the time the incident becomes known, but not when it is actually determined that a breach, as defined by the Final Rule, has occurred. The Final Rule also clarifies that a breach is treated as discovered by a covered entity or business associate if any person (other than the individual committing the breach) that is an employee, officer, or other agent (apparently, without regard to duties, responsibilities, or seniority) of such covered entity or business associate knows or should reasonably have known of the breach.

Impact on Business Associate Agreements

The Final Rule requires business associate agreements to require the business associate to:

  • Comply with HIPAA's security standards;
  • Comply with HIPAA's privacy standards to the extent the business associate is carrying out one or more of the covered entity's obligations under the privacy standards;
  • Enter into agreements with its subcontractors that create, receive, maintain, or transmit PHI on behalf of the business associate, whereby the subcontractors agree to the same restrictions imposed on the business associate with respect to such PHI; and
  • Terminate subcontracts for subcontractor violations.

Take Away; Implications

Given certain changes and clarifying statements included in the Final Rule, it seems clear that HHS wants more breach notifications to be made in the future. For example, HHS expressly conceded that the reason for doing away with the harm standard was because they perceived that it was too high a standard and not resulting in enough breach notifications. Also significant is the expanded definition of business associates, which now includes anyone who "maintains" PHI on behalf of a covered entity, and also expressly includes subcontractors of business associates. This means individuals who before may not have been considered business associates and were not subject to HIPAA will now be directly subject to HIPAA.

Finally, changes in the circumstances for when a covered entity can be vicariously liable for their business associate agents may result in increased enforcement, and likely means that covered entities (and business associates) will increase the level of monitoring of their agents in an effort to prevent something that may result in vicarious liability. In light of recent trends of increased enforcement and the changes in the Final Rule, which appear to suggest that even more enforcement is on the horizon, perhaps the most significant thing for covered entities and business associates to remember is to encrypt PHI. Encrypting PHI should substantially lower the risk of exposure to HIPAA violations and enforcement.

The general compliance date for the Final Rule is September 23, 2013 (with some exceptions, such as a possible extension for revising business associate agreements).

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.