Lessons Gleaned From Recent HIPAA Settlements: An Ounce of Prevention is Worth a Pound of Cure: How Recent OCR Enforcement Impacts Your Transaction Diligence

by McGuireWoods LLP
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HIPAA enforcement has been on the rise during the last several years, and the dollar impact of those settlements has continued to grow significantly. The Department of Health and Human Services, Office of Civil Rights (OCR) announced a record number of enforcement actions in 2016, including reaching its largest settlement to date in August 2016 of $5.5 million with an entity that incurred three separate breaches of electronic protected health information (ePHI) over the course of a year. OCR has already announced three (3) enforcement actions only two months into 2017, including its first settlement with an entity for failing to timely report a breach.

Recent statistics support that HIPAA compliance is a risk that should be taken seriously. According to a February 2017 report from Protenus, in 2016, on average there was at least one health data breach per day. More importantly, a Ponemon Institute report notes the average total organizational cost of a breach is about $7 million.  The adage that the lack of robust HIPAA policies and procedures or a failure to conduct the required Security Risk Assessment is “typical” could be a costly and time consuming mistake. Indeed, it’s not just the potential settlement costs that must be considered.  It’s also the going forward cost to implement the corrective action plan that may be required as part of the settlement, which can include the requirement to hire an independent third-party to investigate and assess compliance with the corrective action plan, in addition to requirements to provide annual compliance reports and officer attestations.

What OCR Enforcement Tells Us About HIPAA Diligence

Several recent OCR settlements highlight exactly the issues that frequently come up during the transaction diligence process. Part one of this blog examines a few of the key HIPAA diligence areas and related OCR enforcement action. In part two, we will address how to tackle HIPAA diligence by asking the right questions and consider strategies for risk mitigation.

  1. Business Associate Agreements (BAA) – Missing, Non-Existent or Unsigned BAAs Should Not be Overlooked. HIPAA diligence should include a thorough analysis of BAAs, particularly those for key vendors or vendors handling ePHI. OCR has entered into sizable settlements both with Covered Entities for failing to have BAAs in place and with Business Associates for failing to meet HIPAA requirements. For example, in March 2016, OCR entered into a $1.55 million settlement with a health system that failed to enter into a BAA with a vendor whose employee had an unencrypted laptop stolen from a locked vehicle. In June 2016, OCR entered into a $650,000 with a Business Associate that provided management and information technology services to nursing homes for failure to comply with the HIPAA Security Rule.
  2. Security Risk Assessments (SRA) – Failure to Conduct or Follow Recommendations Identified in a SRA Can be Costly. Don’t forget to inquire about Security Risk Assessments. Under the HIPAA Security Rule, Covered Entities and Business Associates must maintain appropriate technical, administrative and physical safeguards for e-PHI. Issues that frequently arise during the diligence process are (i) failure to conduct a SRA, or (ii) conducting an SRA, but failing to implement remedial action leaving documented vulnerabilities. Several settlements in 2016 and in early 2017 underscore the importance of not only conducting a Security Risk Assessment, but also taking affirmative action to address areas of weakness once an entity is made aware of security gaps. A perfect example is OCR’s January 2017 $3.2 million settlement with a Dallas medical center for failure to comply “over many years with multiple standards of the HIPAA Security Rule.” Significantly OCR noted there was a “failure to implement risk management plans, contrary to prior external recommendations to do so, and a failure to deploy encryption or an equivalent alternative measure on all laptops, work stations, mobile devices and removable storage media . . .”
  3. Carefully Review Data on a Cloud Server. As technology offers increased convenience many providers have turned to cloud based solutions. In October 2016, OCR issued guidance for HIPAA-covered entities that use cloud computing services for ePHI. Among other things, the guidance requires the use of a BAA with cloud service providers. The guidance also notes that cloud providers are liable for failing to safeguard ePHI. This guidance comes on the heels of OCRs July 2016 $2.7 million settlement with a university that was storing data on a cloud-based server without a BAA in place. Specifically, a stolen laptop computer resulted in the breach ePHI which was being stored on an internet-based service provider without a BAA. In this regard, diligence should include inquiring about steps to ensure compliance with OCRs most recent guidance.
  4. Understand Processes, Don’t Just Check the Policy Box – Fines Can be Assessed for Lack of Timely Breach Notification. Most diligence inquiries ask the basic questions regarding HIPAA breaches; however it is also critical to review a company’s policies and procedures (both on paper and in practice) for reviewing and responding to HIPAA breaches. In January 2017, OCR entered a $475,000 settlement with a provider for failing to notify OCR within the required sixty (60) day timeframe upon discovering a breach affecting more than 500 individuals. While not a large settlement, this settlement is OCRs first enforcement action for failing to follow breach notification requirements. Accordingly, if a provider has experienced HIPAA breach activity, it is important to ask targeted follow up questions to ensure the provider is following all breach notification requirements. When underlying issues are discovered, consideration should be giving to future enforcement and potential penalties. Notably, the breach activity involved in this settlement occurred in October 2013, with notification to OCR occurring in early 2014 and OCRs enforcement action in January 2017. Our next blog post will address various ways to consider the time gap for enforcement activity.

Key Takeaways.  When conducting transaction diligence, it is important to ask questions beyond a standard set of requests for policies and procedures to those that look around corners and assess areas that could result in future fines, not to mention significant headline risks.  In our next blog post, we will examine key diligence questions, data room considerations and potential mitigants to consider when HIPAA issues arise during the diligence process.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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