Final HIPAA Regulations Impact Group Health Plans

by Dechert LLP

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) sets forth rules to protect the privacy and security of individuals’ health information that is held by “covered entities,” such as group health plans. Recently, the Department of Health and Human Services (“HHS”) issued comprehensive final regulations (the “Regulations”) that revise and expand the privacy and security protections under HIPAA and also finalize the civil enforcement and breach notification rules under the Health Information Technology for Economic and Clinical Health Act (“HITECH”). 

Group health plans will generally have until September 23, 2013 to comply with the Regulations. Employer-sponsored group health plans will need to review and update their Business Associate Agreements, Notice of Privacy Practices, HIPAA policies and procedures and related risk assessments, plan documents and summary plan descriptions to conform to the Regulations. 

This OnPoint provides a summary of certain changes under the Regulations that will directly impact an employer’s group health plans.

Business Associates

Business Associates (“BAs”) are generally third parties that provide administrative services to a group health plan and due to the nature of such services may receive, transmit or create protected health information (“PHI”). Under the Regulations, BAs will now be held directly liable for failure to comply with the HIPAA security rules and many of the HIPAA privacy rules. This change also directly impacts BA downstream subcontractors, who will now be responsible for compliance with HIPAA. A “subcontractor” is defined as a person to whom a BA delegates a function, activity, or service, other than as a member of the BA’s workforce. Specifically, a BA and the BA's subcontractors must comply with the provisions of the contract entered into with the group health plan (or other covered entity), the HIPAA security rules (including administrative, physical and technical safeguards), as well as the HIPAA privacy rules pertaining to uses and disclosures of protected health information. In addition, BAs will be responsible for notifying HHS of security breaches of unsecured PHI (discussed in more detail below).

The definition of BA has been broadened to include entities such as (i) a Health Information Organization, E-prescribing Gateway or other person that provides data transmission services with respect to PHI to a covered entity and that requires access on a routine basis to such PHI (e.g., Cloud storage providers), and (ii) a person that offers a personal health record to one or more individuals on behalf of a covered entity. The preamble to the Regulations clarifies that a “conduit exception” exists for courier services (e.g., the U.S. Postal Service, United Parcel Services, or their electronic equivalents) who merely transport PHI but do not access it other than on a random or infrequent basis as necessary to perform such courier service. However, organizations that store or shred hard copy documents containing PHI on behalf of a group health plan would not meet this narrow conduit exception and will be BAs.

BAs must agree to act in accordance with the Regulations by entering into a Business Associate Agreement (a “BAA”) with the group health plan that reflects the new requirements. The group health plan is not responsible for entering into BAAs with its BA’s subcontractors. However, the BA will be responsible for entering into BAAs with each of its downstream subcontractors who create, receive, maintain or transmit PHI on behalf of the BA. 

The Regulations provide further cautionary guidance regarding the creation of an agency relationship between covered entities, such as group health plans, and their BAs or subcontractors. Under the Regulations, group health plans will be liable for civil monetary penalties under the “federal common law of agency” for the acts and omissions of a BA if an “agency relationship” exists. The primary factor in determining whether an “agency relationship” exists is whether the group health plan has the right or authority to control the BA’s conduct. A BA may be held similarly liable for the acts and omissions of a subcontractor in the context of an agency relationship. 

Group health plans will need to review existing BAAs and revise as necessary to comply with the new requirements and to ensure that the BAA does not reflect an agency relationship thereby subjecting the group health plan to unnecessary liability and civil penalties in the event of a BA’s negligence.  Employers should also consider whether any other vendors, entities or persons providing services to the group health plan would be considered a BA under the new rules for which an additional BAA would be required. Existing BAAs that are compliant with pre-Regulation guidance will not need to be revised until the earlier of (i) the date the contract or other arrangement is renewed or modified on or after September 23, 2013, or (ii) September 22, 2014 (together, the “Effective Date”). If a vendor or other service provider is determined to be a new BA with respect to a group health plan, a BAA which satisfies the new requirements must be executed no later than September 23, 2013 or the effective date of the new service provider relationship, if later.   

Individual Rights

The Regulations further expand certain individual rights. If the group health plan maintains PHI in designated record sets electronically, it must provide an individual access to the PHI in the electronic form and format requested. However, if the PHI cannot be readily produced in the form and format requested, then the PHI must be provided in a readable electronic form and format as agreed to by the group health plan and the individual. In addition, if an individual requests that a copy of PHI be sent to another person, the group health plan must comply with any such written request, signed by the individual making the request, and which clearly identifies the third party who is to receive the PHI. 

Security Breaches

HITECH introduced rules with regard to notifications of breaches of “unsecured” PHI. PHI is unsecured if it has not been encrypted using appropriate standards, such as those set forth by the National Institute of Standards and Technology. Although interim final breach notification rules were published in 2009 and are currently effective, the Regulations modify those rules. Group health plans are permitted to continue following the prior rules until the Effective Date. Under the Regulations, any impermissible use or disclosure of unsecured PHI is presumed to be a breach unless the covered entity or BA, as applicable, demonstrates “a low probability that the PHI has been compromised.”  Accordingly, covered entities and BAs now have the burden of proof to demonstrate that all breach notifications were provided or that an impermissible use or disclosure of PHI did not constitute a breach of unsecured PHI. In order to demonstrate that an incident does not constitute a breach, the covered entity or BA, as applicable, must conduct a risk assessment and maintain documentation sufficient to meet the burden of proof. The risk assessment must include at least the following: (i) the nature and extent of the PHI involved, including the types of identifiers and the likelihood of re-identification; (ii) the unauthorized person who used the PHI or to whom the disclosure was made; (iii) whether the PHI was actually acquired or viewed; and (iv) the extent to which the risk to the PHI has been mitigated. 

Group health plans will need to revise BAAs to reflect that BAs are responsible for reporting breaches of unsecured PHI. Plan documents, summary plan descriptions, policies and procedures will also need to be reviewed and appropriate changes must be made to reflect the new rule. In addition, Notices of Privacy Practices must be revised to include a statement that affected individuals will be notified following a breach of unsecured PHI.


Group health plans must now obtain authorization to use or disclose PHI for all communications relating to treatment or healthcare operations if they are receiving payment from a third party who is marketing a product or service. In addition, BAs and subcontractors who receive payment from a third party in exchange for marketing a product or service must also obtain prior authorization. “Marketing” is defined as “a communication about a product or service that encourages recipients of the communication to purchase or use the product or service.” Group health plan participants must be notified of this new authorization requirement in the group health plan’s Notice of Privacy Practices.    

Deceased Individual

The Regulations permit group health plans to disclose a decedent’s PHI to a family member and others (including a relative, domestic partner or close personal friend) unless doing so would be inconsistent with any prior wishes of the decedent known by the group health plan. The group health plan must have reasonable assurance that the individual to whom the PHI will be disclosed was involved in the decedent’s care or payment for care prior to death. In addition, only PHI relevant to such individual’s involvement in the decedent’s care or payment for care may be disclosed.

Genetic Information  

The definition of “health information” under the Regulations has been revised specifically to include “genetic information.” A group health plan is no longer permitted to use or disclose PHI that is genetic information for underwriting purposes, such as determining eligibility or determination of benefits, computation of premium or contribution amounts, application of pre-existing condition exclusions and other activities related to the creation, replacement or renewal of a contract of health insurance or health benefits.   

Plan documents, summary plan descriptions, policies and procedures must be reviewed and appropriate changes must be made to reflect the new rules. In addition, for group health plans that engage in underwriting, the Notice of Privacy Practices must be revised to include a statement that the plan is prohibited from using or disclosing genetic information for underwriting purposes, except with regard to issuers of long-term care policies, which are not subject to the underwriting prohibition. 

Notice of Privacy Practices

As mentioned above, group health plans are responsible for revising their Notices of Privacy Practices. The following items must be reflected in Notices of Privacy Practices: (i) a description of the types of uses and disclosures that require an authorization; (ii) a statement that other uses and disclosures not described in the notice will be made only with the individual’s written authorization; (iii) a statement that an individual may revoke an authorization; (iv) if the group health plan intends to contact the individual to raise funds for the entity, a statement that the individual has a right to opt out of receiving such communications; (v) if a group health plan intends to use or disclose PHI for underwriting purposes, a statement that the plan is prohibited from using or disclosing PHI that is genetic information; (vi) a statement informing individuals of their new right to restrict certain disclosures of PHI which pertain solely to an item or service for which the individual (or other person on behalf of the individual) has paid in full; and (vii) a statement of the right of affected individuals to be notified following a breach of unsecured PHI. 

An employer who currently posts the Notice of Privacy Practices on its website, on behalf of its group health plan, must (i) prominently post the changes required by the Regulations (or a revised notice) on its website by the Effective Date, and (ii) provide the revised notice (or information about the material changes and how to obtain the revised notice) in the next annual mailing to individuals covered by the plan (e.g., at the beginning of the plan year or during the open enrollment period). Employers who do not post the Notice of Privacy Practices on a website must provide the revised notice (or information about the material changes and how to obtain the revised notice) to individuals within 60 days of the Effective Date.

Increased Enforcement Penalties

The Regulations retain the higher penalty amounts implemented under HITECH for violations of the HIPAA privacy and security rules. For violations where it is established that the group health plan or BA did not know and, by exercising reasonable diligence, would not have known that a violation occurred, penalty amounts range from $100 to $50,000 per violation, up to a maximum of $1,500,000 for all violations of an identical provision in a calendar year. For violations where it is established that the violation was due to “reasonable cause,” penalties range from $1,000 to $50,000 per violation, also capped at a maximum penalty of $1,500,000 for all identical violations occurring in a calendar year. If it is established that a violation is due to “willful neglect” and the violation is corrected during the 30-day period beginning on the date the group health plan or BA knew, or by exercising reasonable diligence, would have known that the violation occurred, the penalty ranges from $10,000 to $50,000 per violation. However, if a violation due to willful neglect is not corrected within such 30-day period, the penalty is $50,000 per violation. 

“Reasonable cause” is defined as an act or omission in which a group health plan or BA knew, or by exercising reasonable diligence would have known, that the act or omission violated an administrative simplification provision, but in which the group health plan or BA did not act with willful neglect. “Willful neglect” is defined as conscious, intentional failure or reckless indifference to the obligation to comply with the administrative simplification provision violated. 

Factors that will be considered in determining the amount of the civil penalty are (i) the nature of the violation, including the number of affected individuals and the time period during which the violation occurred; (ii) the nature and extent of the harm resulting from the violation, whether the harm was of a physical or financial nature, or resulted in harm to an individual’s reputation or hindered the individual’s ability to obtain health care; (iii) the history of prior compliance and whether or not the violation is the same or similar to previous indications of noncompliance; and (iv) the financial condition of the group health plan or BA which may have affected its ability to comply and whether imposing a monetary penalty would jeopardize the ability to provide health care.

Final Thoughts

Group health plans and their sponsors and administrators should start to review and update the various documents impacted by the Regulations. We note that updates to BAAs will need to be negotiated with third parties, and that resulting process and possible delay should be taken into account. 

The need to review and update BAAs and related documentation may present an opportunity to update the group health plan, summary plan description, Notice of Privacy Practices and HIPAA policies and procedures, and to conduct risk assessments and to train employees who work directly or indirectly with PHI. 

Please contact us with your questions or for assistance with HIPAA compliance.

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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