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Health Care Reform Blog: Who is a Business Associate and Why Do We Care? - January 22, 2013

Under the revised HIPAA regulations published on 01/25/2013 business associates and their subcontractors become specifically liable for most of the security and privacy regulations under HIPAA and the HITECH Act. This represents significant but not unexpected changes as it adopts much of the prior proposed rule relating to business associates.

Business associates include those previously encompassed in the law and now specifically health information organizations, e-prescribing gateways and other persons or entities that maintain or provide for data transmission services are cited. The definition includes as business associates, an entity that “creates, receives, maintains or transmits” protected health information on behalf of a covered entity.  

The rules and subsequent comments provide some limited exemptions for who may be considered to be a business associate. Those entities who do not have access to protected health information on a routine basis and serve exclusively as a “conduit” are excepted from this rule.  The conduit exemption is narrow and is intended to exclude a limited number of entities such as the US Postal Service, UPS and “their electronic equivalents, such as internet service providers (ISPS)”.  Essentially a courier or its electronic equivalent is exempted from the business associate rule.  However, internet service providers, including cloud providers, should be aware that when data is stored on their systems, even on a temporary basis, this may give rise to the business associate designation.  If an entity maintains protected health information, even if it does not intend to access that information, the entity may no longer be considered a conduit.  The more information an entity maintains and the longer it maintains that information the more likely it will give rise to the implication that the entity is in fact a business associate.

Note that these same requirements and definitions apply to subcontractors of business associates.  If a subcontractor “creates, receives, maintains or transmits protected health information on behalf of the business associate” that subcontractor will also be subject to the HIPAA rules, including the penalty structure for breaches. Subcontractors are typically considered to be those persons (Section 160.103), who act on behalf of a business associate but are not direct employees of the business associate.  Section 160.103 states a subcontractor is “a person to whom a business associate delegates a function, activity or service other than in the capacity of a member of the workforce of such business associate.”

Of critical importance here is the obligations which now rest on covered entities to obtain assurances from business associates they will in fact comply with HIPAA as the covered entity may be subject to penalty and liabilities for business associate activity.  The business associate has a commensurate obligation to seek such assurances from its subcontractors for the same reasons.  Covered entities are not required to contract directly with business associate subcontractors.  However, on constructing a business associate agreement the initial covered entity needs to address the potentiality of these “downstream” companies or entities and will need affirmative statements from the business associate that it will ensure that its subcontractors meet all obligations.

HIPAA has a four-tiered penalty system which depends upon various levels of knowledge and intent (mens rea) for the person or entity participating in the violation.  The business associate language becomes increasingly important as HHS has now adopted the view that the federal common law of agency will apply to assessment of penalties in regard to any violation.  See 160.402(c).  Commentary states that the analysis of whether or not a business associate is also an agent is fact specific and will turn on a variety of factors.  This includes the covered entities ability to control the business associate’s conduct, including the right to “give interim instructions and directions during the course of the relationship”. Business association agreements with large entities that contain strict and rigidly enforced contractual terms may not fall under the agency standard set forth here. However, more informal or less specific arrangements, particularly those that smaller hospitals and practitioners enter into with those who provide assistance to them are more likely to fall under the agency requirements. This is particularly dangerous as many small entities who may provide business associate or outside services to hospitals and others may have a lesser ability to protect and safe guard data or implement security measures. HHS has specifically stated in section 160.402(c) that in the event that an agency relationship exists the covered entity may be held liable for the acts of the business associate. Commensurately, the business associate may also be held liable for the acts of its subcontractors.