United States: Employers Take Note: Final HIPAA Rules Mandate New Obligations For Group Health Plans

Also see:

Overview of HIPAA Amendments (Duane Morris Alert, January 29, 2013)

Breach notification under 2013 HIPAA Amendments (Duane Morris Alert, January 25, 2013)

Business associate definition under 2013 HIPAA Amendments (Duane Morris Alert, January 23, 2013)

Minimum necessary standard under HIPAA amendments (Duane Morris Alert, February 11, 2013)

Genetic information under HIPAA amendments (Duane Morris Alert, February 25, 2013)

Group Health Plans

Employers that sponsor group health plans for their employees should pay careful attention to the newly announced final omnibus rule amending the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") in accordance with the HITECH Act of 2009 (the "HITECH Act"). This final rule under the HITECH Act (the "Final Rule") issued on January 17, 2013, impacts group health plans in two significant ways. First, the Final Rule expands the existing definition and obligations of a business associate of a group health plan under HIPAA. In addition, the Final Rule modifies the obligation of a group health plan in regard to breaches of protected health information ("PHI") that is unsecured.

Group health plan sponsors should act now to make changes to existing plan documents, including HIPAA procedures and business associate agreements, in response to the Final Rule. An overview of how HIPAA generally applies in the context of employer-sponsored group health plans and these significant changes impacting group health plans follows.

The Basics: HIPAA and Group Health Plans

A group health plan sponsored by an employer (subject to exceptions for certain plans) is a covered entity under HIPAA. The HIPAA Privacy, Security, Breach Reporting and Enforcement Rules protect PHI received, used, maintained or created by the group health plan as a HIPAA-covered entity. Thus, an employer vis-Ă -vis its role as the sponsor and/or administrator of a group health plan acquires the obligation to comply with HIPAA and the protections HIPAA places on PHI under these HIPAA rules.

What Is PHI?

HIPAA defines PHI as all information, including demographic information used or transmitted by a group health plan or a business associate of a group health plan, that identifies an individual or for which there is a reasonable basis to believe the information could be used to identify an individual and which relates to an individual's physical or mental condition; provision of healthcare to an individual; or payment related to the provision of healthcare. From a practical perspective, this broad definition of PHI means that much of the information which commonly comes across a plan administrator's desk or email, or that is orally communicated by an employee to an employer who administers the plan, is protected as PHI under HIPAA. PHI includes information, including but not limited to, an employee's enrollment status in a group health plan; an employee's payments for benefit coverage under a group health plan; and information contained on explanation of benefits statements ("EOBs") provided by insurers to plan participants.

The scope of PHI can be broad; however, medical information that an employer receives in its role as an employer (and not as the sponsor or administrator of a group health plan), is generally not PHI subject to HIPAA. Examples of records typically excluded from HIPAA regulation include medical information received by an employer related to an employee's leave of absence. Employers should take heed, however, that although HIPAA may not apply to such information, other privacy requirements likely apply to it.

What Is a Business Associate?

An employer's obligations as the plan administrator and/or plan sponsor would be much simplified if the PHI was not communicated outside the four walls of its human resources office. By necessity though, an employer contracts with third parties that are not members of the employer's own workforce to provide services to its group health plan. These third parties range from legal counsel to insurance companies to consultants, who perform functions or activities on behalf of the employer's plan that involve the use or disclosure of PHI, such as claims processing; data analysis; utilization review; and billing. It is the receipt of plan PHI by one of these specified third parties that makes the person or entity a "business associate" of the group health plan under HIPAA.

Group Health Plans Prior to the HITECH Act

HIPAA required a group health plan to comply with the HIPAA Privacy and Security Rules long before the HITECH Act. These requirements included complying with HIPAA policies and procedures, entering into agreements with business associates governing a business associate's obligation to protect plan PHI, the distribution of a plan HIPAA notice of privacy practices (if applicable under HIPAA) and numerous other requirements designed to safeguard group health plan PHI.


When the HITECH Act passed in 2009, it modified HIPAA in two significant ways that impacted group health plans. First, it made a business associate of a group health plan directly subject to several HIPAA requirements (which previously applied only to group health plans and other covered entities). Second, the HITECH Act imposed a requirement that a HIPAA group health plan and other types of covered entities, as well as business associates, take certain steps in the event of an unauthorized disclosure of unsecured PHI called a "Breach."

The Final Rule

The Final Rule, which is effective on March 26, 2013, supplements and modifies the HIPAA Privacy, Security, Breach Reporting and Enforcement Rules, including prior regulations and guidance issued under the HITECH Act. Among the most significant changes in the Final Rule are: (1) the extension of the Security Rules and certain Privacy Rule provisions directly to business associates and the expansion of the definition of a business associate to include subcontractors of business associates ("business associate subcontractors") and (2) modifications to the definition of a "Breach" that impacts how a group health plan must evaluate the risk posed by an unauthorized disclosure of unsecured PHI.

Business Associate Modifications

Expansion of Business Associate Definition

  • Definition of Business Associate: The Final Rule modifies the definition of a business associate (as discussed above) to explicitly designate a business associate subcontractor as a business associate. A business associate subcontractor is any person or entity to whom a business associate delegates a function, activity or service that involves PHI, whether or not there is a written agreement prior to the Final Rule. In practice, all downstream vendors of a group health plan that handle PHI must now comply with HIPAA's business associate obligations. Thus, for instance, in the situation where a group health plan uses a business associate for data analysis support, and the business associate uses a subcontractor that provides data storage services, the data storage entity is now a business associate. It is important to note that narrow exceptions to this provision of the Final Rule could apply; however, whether any potential exception applies will have to be determined on a case-by-case basis.
  • The Business Associate Agreement (BAA) Requirement: Under existing HIPAA rules, a group health plan is required to enter into BAAs with all business associates. With the expansion of the definition of a business associate under the Final Rule, there must also be a BAA between a business associate and a business associate subcontractor. Furthermore, a business associate subcontractor must enter into a BAA with its subcontractor. It is important to note that a group health plan does not have to enter into a BAA directly with a business associate subcontractor.

Expansion of Business Associate Liability

  • Direct Liability: The HITECH Act imposes direct liability on business associates and business associate subcontractors for a specific set of obligations under HIPAA's Privacy, Security and Breach Reporting Rules. In addition to the BAA obligations discussed above, the business associate and the subcontractor(s) thereof, are obligated to:
    • Comply with all of the Security Rule's administrative, physical and technical safeguards;
    • Comply with any request by the Secretary of HHS for PHI, policies, procedures and other information related to compliance;
    • Make reasonable efforts to limit PHI to the minimum necessary to accomplish the intended purpose of the use, disclosure or request;
    • Comply with all notification requirements under the HIPAA Breach Notification Rule (discussed below); and
    • Provide, upon request of the individual, an accounting of disclosures of PHI in an electronic health record (EHR) within the prior three years, as well as an electronic copy of PHI that is part of an EHR.

Breach Notification Requirements

The Final Rule modifies the interim final rule ("Breach Notification Rule") published under the HITECH Act in August 2009 by changing the definition of "Breach" and the risk-assessment approach required for Breach notification from those in the Breach Notification Rule.

What Is a Breach?

The Final Rule changes the Breach Notification Rule by modifying the definition of a Breach and adding a presumption that a Breach has occurred, unless an exception applies. HHS defines a Breach as the "acquisition, access, use, or disclosure" of PHI in violation of the Privacy Rule that "compromises the security or privacy" of the PHI. HHS clarified that uses or disclosures of PHI that exceed the "minimum necessary" standard may qualify as a Breach. The Final Rule provides that an impermissible use or disclosure of PHI is presumed to be a Breach, unless the group health plan or other HIPAA-covered entity can demonstrate there is a low probability that the PHI has been compromised based upon, at minimum, a four-part risk assessment, which is detailed in the Final Rule.

The three types of unauthorized disclosures of PHI are still not a Breach under the Final Rule:

  • Any "unintentional" acquisition, access or use of PHI by a workforce member or individual acting under the authority of the covered entity or business associate that is made in good faith, within the course or scope of employment or other professional relationship, and is not further used or disclosed in an unlawful manner under the HIPAA Privacy Rule.
  • An "inadvertent" disclosure to another authorized person at the same covered entity, business associate or organized healthcare arrangement, and the PHI is not further used or disclosed in an unlawful manner under the HIPAA Privacy Rule.
  • A disclosure where the covered entity or business associate had a good-faith belief that the unauthorized person to whom the information was disclosed would not reasonably be able to "retain" such information.

Employer Time Frames

The Final Rule becomes effective on March 26, 2013, and the time frames on group health plan and business associate compliance with the Final Rule are firm. By September 23, 2013, group health plans and business associates (including subcontractors) have to meet all obligations imposed on them under the Final Rule, including entering into BAAs - except if prior to January 25, 2013, a group health plan or other covered entity, or a business associate with respect to a subcontractor, had entered into and is operating pursuant to a BAA or other written agreement that imposes the same obligations as those imposed under the HIPAA Security and Privacy Rules, and the agreement is not renewed prior to September 23, 2013, then the parties are deemed compliant until the earlier of the date that the agreement is modified, or September 24, 2014, by which date the agreement must be modified.

Employers: Take Action Now to Comply

An employer that sponsors a group health plan should take action now to ensure timely compliance with the Final Rule. Key steps include review and amendment of both BAAs and existing group health plan HIPAA policies and procedures to ensure that all requirements under the Final Rule are met. Failure to comply with the HIPAA as amended by the Final Rule can result in significant penalties for group health plans. Penalties for willful neglect and failure to correct in 30 days from the date that a group health plan knew of or should have known about the violation is at least $50,000 per violation, with a maximum of $1.5 million in a calendar year. Penalties even apply to violations where it is established that the group health plan did not know about, and by exercising reasonable diligence would not have known about, the violation.

If you have any questions about this Alert, please contact any member of the Health Law Practice Group, any member of the Employee Benefits and Executive Compensation Practice Group or the attorney in the firm with whom you are regularly in contact.

This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.

Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets. Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets. The Duane Morris Institute provides training workshops for HR professionals, in-house counsel, benefits administrators and senior managers.

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