[Federal Register: December 28, 2000 (Volume 65, Number 250)]
[Rules and Regulations]
[Page 82561-82610]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28de00-31]

[[pp. 82561-82610]] Standards for Privacy of Individually Identifiable Health
Information

[[Continued from page 82560]]

[[Page 82561]]

A covered entity may only extend the deadline one time per request for
accounting.
    The NPRM did not address whether a covered entity could charge a
fee for the accounting of disclosures.
    In the final rule, we provide that individuals have a right to
receive one free accounting per 12 month period. For each additional
request by an individual within the 12 month period, the covered entity
may charge a reasonable, cost-based fee. If it imposes such a fee, the
covered entity must inform the individual of the fee in advance and
provide the individual with an opportunity to withdraw or modify the
request in order to avoid or reduce the fee.

Procedures and Documentation

    As in the proposed rule, we establish documentation requirements
for covered entities subject to this provision. In accordance with
Sec. 164.530(j), for disclosures that are subject to the accounting
requirement, the covered entity must retain documentation of the
information required to be included in the accounting. The covered
entity must also retain a copy of any accounting provided and must
document the titles of the persons or offices responsible for receiving
and processing requests for an accounting.

Section 164.530--Administrative Requirements

Designation of a Privacy Official and Contact Person

    In Sec. 164.518(a) of the NPRM, we proposed that covered entities
be required to designate an individual as the covered entity's privacy
official, responsible for the implementation and development of the
entity's privacy policies and procedures. We also proposed that covered
entities be required to designate a contact person to receive
complaints about privacy and provide information about the matters
covered by the entity's notice. We indicated that the contact person
could be, but was not required to be, the person designated as the
privacy official. We proposed to leave implementation details to the
discretion of the covered entity. We expected implementation to vary
widely depending on the size and nature of the covered entity, with
small offices assigning this as an additional duty to an existing staff
person, and large organizations creating a full-time privacy official.
In proposed Sec. 164.512, we also proposed to require the covered plan
or provider's privacy notice to include the name of a contact person
for privacy matters.
    The final regulation retains the requirements for a privacy
official and contact person as specified in the NPRM. These
designations must be documented. The designation of privacy official
and contact person positions within affiliated entities will depend on
how the covered entity chooses to designate the covered entity(ies)
under Sec. 164.504(b). If a subsidiary is defined as a covered entity
under this regulation, then a separate privacy official and contact
person is required for that covered entity. If several subsidiaries are
designated as a single covered entity, pursuant to Sec. 164.504(b),
then together they need have only a single privacy officer and contact
person. If several covered entities share a notice for services
provided on the same premises, pursuant to Sec. 164.520(d), that notice
need designate only one privacy official and contact person for the
information collected under that notice.
    These requirements are consistent with the approach recommended by
the Joint Commission on Accreditation of Healthcare Organizations, and
the National Committee for Quality Assurance, in its paper ``Protecting
Personal Health Information; A framework for Meeting the Challenges in
a Managed Care Environment.'' This paper notes that ``accountability is
enhanced by having focal points who are responsible for assessing
compliance with policies and procedures * * * '' (p. 29)

Training

    In Sec. 164.518(b) of the NPRM we proposed to require that covered
entities provide training on the entities' policies and procedures to
all members of the workforce likely to have access to protected health
information. Each entity would be required to provide initial training
by the date on which this rule became applicable. After that date, each
covered entity would have to provide training to new members of the
workforce within a reasonable time after joining the entity. In
addition, we proposed that when a covered entity made material changes
in its privacy policies or procedures, it would be required to retrain
those members of the workforce whose duties were related to the change
within a reasonable time of making the change.
    The NPRM would have required that, upon completion of the training,
the trainee would be required to sign a statement certifying that he or
she received the privacy training and would honor all of the entity's
privacy policies and procedures. Entities would determine the most
effective means of achieving this training requirement for their
workforce. We also proposed that, at least every three years after the
initial training, covered entities would be required to have each
member of the workforce sign a new statement certifying that he or she
would honor all of the entity's privacy policies and procedures. The
covered entity would have been required to document its policies and
procedures for complying with the training requirements.
    The final regulation requires covered entities to train all members
of their workforce on the policies and procedures with respect to
protected health information required by this rule, as necessary and
appropriate for the members of the workforce to carry out their
functions within the covered entity. We do not change the proposed time
lines for training existing and new members of the workforce, or for
training due to material changes in the covered entity's policies and
procedures. We eliminate both the requirement for employees to sign a
certification following training and the triennial re-certification
requirement. Covered entities are responsible for implementing policies
and procedures to meet these requirements and for documenting that
training has been provided.

Safeguards

    In Sec. 164.518(c) of the NPRM, we proposed to require covered
entities to put in place administrative, technical, and physical
safeguards to protect the privacy of protected health information. We
made reference in the preamble to similar requirements proposed for
certain electronic information in the Notice of Proposed Rulemaking
entitled the Security and Electronic Signature Standards (HCFA-0049-P).
We stated that we were proposing parallel and consistent requirements
for safeguarding the privacy of protected health information. In
Sec. 164.518(c)(3) of the NPRM, we required covered entities to have
safeguards to ensure that information was not used in violation of the
requirements of this subpart or by people who did not have proper
authorization to access the information.
    We do not change the basic proposed requirements that covered
entities have administrative, technical and physical safeguards to
protect the privacy of protected health information. We combine the
proposed requirements into a single standard that requires covered
entities to safeguard protected health information from accidental or
intentional use or disclosure that is a violation of the requirements
of this rule

[[Page 82562]]

and to protect against the inadvertent disclosure of protected health
information to persons other than the intended recipient. Limitations
on access to protected health information by the covered entities
workforce will also be covered by the policies and procedures for
``minimum necessary'' use of protected health information, pursuant to
Sec. 164.514(d). We expect these provisions to work in tandem.
    We do not prescribe the particular measures that covered entities
must take to meet this standard, because the nature of the required
policies and procedures will vary with the size of the covered entity
and the type of activities that the covered entity undertakes. (That
is, as with other provisions of this rule, this requirement is
``scalable.'') Examples of appropriate safeguards include requiring
that documents containing protected health information be shredded
prior to disposal, and requiring that doors to medical records
departments (or to file cabinets housing such records) remain locked
and limiting which personnel are authorized to have the key or pass-
code. We intend this to be a common sense, scalable, standard. We do
not require covered entities to guarantee the safety of protected
health information against all assaults. Theft of protected health
information may or may not signal a violation of this rule, depending
on the circumstances and whether the covered entity had reasonable
policies to protect against theft. Organizations such as the
Association for Testing and Materials (ASTM) and the American Health
Information Management Association (AHIMA) have developed a body of
recommended practices for handling of protected health information that
covered entities may find useful.
    We note that the proposed HIPAA Security Standards would require
covered entities to safeguard the privacy and integrity of health
information. For electronic information, compliance with both
regulations will be required.
    In Sec. 164.518(c)(2) of the NPRM we proposed requirements for
verification procedures to establish identity and authority for
permitted disclosures of protected health information.
    In the final rule, this material has been moved to Sec. 164.514(h).

Use or Disclosure of Protected Health Information by Whistleblowers

    In Sec. 164.518(c)(4) of the NPRM, this provision was entitled
``Implementation Specification: Disclosures by whistleblowers.'' It is
now retitled ``Disclosures by whistleblowers,'' with certain changes,
and moved to Sec. 164.502(j)(1).

Complaints to the Covered Entity

    In Sec. 164.518(d) of the NPRM, we proposed to require covered
entities to have a mechanism for receiving complaints from individuals
regarding the health plan's or provider's compliance with the
requirements of this proposed rule. We did not require that the health
plan or provider develop a formal appeals mechanism, nor that ``due
process'' or any similar standard be applied. Additionally, there was
no requirement to respond in any particular manner or time frame.
    We proposed two basic requirements for the complaint process.
First, the covered health plan or health care provider would be
required to identify in the notice of information practices a contact
person or office for receiving complaints. Second, the health plan or
provider would be required to maintain a record of the complaints that
are filed and a brief explanation of their resolution, if any.
    In the final rule, we retain the requirement for an internal
complaint process for compliance with this rule, including the two
basic requirements of identifying a contact person and documenting
complaints received and their dispositions, if any. We expand the scope
of complaints that covered entities must have a means of receiving to
include complaints concerning violations of the covered entity's
privacy practices, not just violations of the rule. For example, a
covered entity must have a mechanism for receiving a complaint that
patient information is used at a nursing station in a way that it can
also be viewed by visitors to the hospital, regardless of whether the
practices at the nursing stations might constitute a violation of this
rule.

Sanctions

    In Sec. 164.518(e) of the NPRM, we proposed to require all covered
entities to develop, and apply when appropriate, sanctions against
members of its workforce who failed to comply with privacy policies or
procedures of the covered entity or with the requirements of the rule.
Covered entities would be required to develop and impose sanctions
appropriate to the nature of the violation. The preamble stated that
the type of sanction applied would vary depending on factors such as
the severity of the violation, whether the violation was intentional or
unintentional, and whether the violation indicated a pattern or
practice of improper use or disclosure of protected health information.
Sanctions could range from a warning to termination. The NPRM preamble
language also stated that covered entities would be required to apply
sanctions against business associates that violated the proposed rule.
    In the final rule, we retain the requirement for sanctions against
members of a covered entity's workforce. We also require a covered
entity to have written policies and procedures for the application of
appropriate sanctions for violations of this subpart and to document
those sanctions. These sanctions do not apply to whistleblower
activities that meet the provisions of Sec. 164.502(j) or complaints,
investigations, or opposition that meet the provisions of
Sec. 164.530(g)(2). We eliminate language regarding business associates
from this section. Requirements with respect to business associates are
stated in Sec. 164.504.

Duty To Mitigate

    In proposed Sec. 164.518(f), we would have required covered
entities to have policies and procedures for mitigating, to the extent
practicable, any deleterious effect of a use or disclosure of protected
health information in violation of the requirements of this subpart.
The NPRM preamble also included specific language applying this
requirement to harm caused by members of the covered entity's workforce
and business associates.
    With respect to business associates, the NPRM preamble but not the
NPRM rule text, stated that covered entities would have a duty to take
reasonable steps in response to breaches of contract terms. Covered
entities generally would not be required to monitor the activities of
their business associates, but would be required to take steps to
address problems of which they become aware, and, where the breach was
serious or repeated, would also be required to monitor the business
associate's performance to ensure that the wrongful behavior had been
remedied. Termination of the arrangement would be required only if it
became clear that a business associate could not be relied upon to
maintain the privacy of protected health information provided to it.
    In the final rule, we clarify this requirement by imposing a duty
for covered entities to mitigate any harmful effect of a use or
disclosure of protected health information that is known to the covered
entity. We apply the duty to mitigate to a violation of the covered
entity's policies and procedures, not just a violation of the
requirements of the subpart. We resolve the ambiguities in the NPRM by
imposing this duty on covered entities for harm caused by

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either members of their workforce or by their business associates.
    We eliminate the language regarding potential breaches of business
associate contracts from this section. All other requirements with
respect to business associates are stated in Sec. 164.504.

Refraining from Intimidating or Retaliatory Acts

    In Sec. 164.522(d)(4) of the NPRM, in the Compliance and
Enforcement section, we proposed that one of the responsibilities of a
covered entity would be to refrain from intimidating or retaliatory
acts. Specifically, the rule provided that ``[a] covered entity may not
intimidate, threaten, coerce, discriminate against, or take other
retaliatory action against any individual for the filing of a complaint
under this section, for testifying, assisting, participating in any
manner in an investigation, compliance review, proceeding or hearing
under this Act, or opposing any act or practice made unlawful by this
subpart.''
    In the final rule, we continue to require that entities refrain
from intimidating or retaliatory acts; however, the provisions have
been moved to the Administrative Requirements provisions in
Sec. 164.530. This change is not just clerical; in making this change,
we apply this provision to the privacy rule alone rather than to all
the HIPAA administrative simplification rules. (The compliance and
enforcement provisions that were in Sec. 164 are now in Part 160,
Subpart C.)
    We continue to prohibit retaliation against individuals for filing
a complaint with the Secretary, but also prohibit retaliation against
any other person who files such a complaint. This is the case because
the term ``individual'' is generally limited to the person who is the
subject of the information. The final rule prohibits retaliation
against persons, not just individuals, for testifying, assisting, or
participating in an investigation, compliance review, proceeding or
hearing under Part C of Title XI. The proposed regulation referenced
the ``Act,'' which is defined in Part 160 as the Social Security Act.
Because we only intend to protect activities such as participation in
investigations and hearings under the Administrative Simplification
provisions of HIPAA, the final rule references Part C of Title XI of
the Social Security Act.
    The proposed rule would have prohibited retaliatory actions against
individuals for opposing any act or practice made unlawful by this
subpart. The final rule retains this provision, but applies it to any
person, only if the person ``has a good faith belief that the practice
opposed is unlawful, the manner of the opposition is reasonable and
does not involve a disclosure of protected health information in
violation of this subpart.'' The final rule provides additional
protections, which had been included in the preamble to the proposed
rule. Specifically, we prohibit retaliatory actions against individuals
who exercise any right, or participate in any process established by
the privacy rule (Part 164 Subpart E), and include as an example the
filing of a complaint with the covered entity.

Waiver of Rights

    In the final regulation, but not in the proposed regulation, we
provide that a covered entity may not require individuals to waive
their rights to file a complaint with the Secretary or their other
rights under this rule as a condition of the provision of treatment,
payment, enrollment in a health plan or eligibility for benefits. This
provision ensures that covered entities do not take away the rights
that individuals have been provided in Parts 160 and 164.

Requirements for Policies and Procedures, and Documentation
Requirements

    In Sec. 164.520 of the NPRM, we proposed to require covered
entities to develop and document their policies and procedures for
implementing the requirements of the rule. In the final regulation we
retain this approach, but specify which standards must be documented in
each of the relevant sections. In this section, we state the general
administrative requirements applicable to all policies and procedures
required throughout the regulation.
    In Sec. 164.530(i), (j), and (k) of the final rule, we amend the
NPRM language in several respects. In Sec. 164.530(i) we require that
the policies and procedures be reasonably designed to comply with the
standards, implementation specifications, and other requirements of the
relevant part of the regulation, taking into account the size of the
covered entity and the nature of the activities undertaken by the
covered entity that relate to protected health information. However, we
clarify that the requirements that policies and procedures be
reasonably designed may not be interpreted to permit or excuse any
action that violates the privacy regulation. Where the covered entity
has stated in its notice that it reserves the right to change
information practices, we allow the new practice to apply to
information created or collected prior to the effective date of the new
practice and establish requirements for making this change. We also
establish the conditions for making changes if the covered entity has
not reserved the right to change its practices.
    We require covered entities to modify in a prompt manner their
policies and procedures to comply with changes in relevant law and,
where the change also affects the practices stated in the notice, to
change the notice. We make clear that nothing in our requirements
regarding changes to policies and procedures or changes to the notice
may be used by a covered entity to excuse a failure to comply with
applicable law.
    In Sec. 164.530(j), we require that the policies and procedures
required throughout the regulation be maintained in writing, and that
any other communication, action, activity, or designation that must be
documented under this regulation be documented in writing. We note that
``writing'' includes electronic storage; paper records are not
required. We also note that, if a covered entity is required to
document the title of a person, we mean the job title or similar
description of the relevant position or office.
    We require covered entities to retain any documentation required
under this rule for at least six years (the statute of limitations
period for the civil penalties) from the date of the creation of the
documentation, or the date when the document was last in effect, which
ever is later. This generalizes the NPRM provision to cover all
documentation required under the rule. The language on ``last was in
effect'' is a change from the NPRM which was worded ``unless a longer
period applies under this subpart.''
    This approach is consistent with the approach recommended by the
Joint Commission on Accreditation of Healthcare Organizations, and the
National Committee for Quality Assurance, in its paper ``Protecting
Personal Health Information; A framework for Meeting the Challenges in
a Managed Care Environment.'' This paper notes that ``MCOs [Managed
Care Organizations] should have clearly defined policies and procedures
for dealing with confidentiality issues.'' (p. 29).

Standards for Certain Group Health Plans

    We add a new provision (Sec. 164.530(k)) to clarify the
administrative responsibilities of group health plans that offer
benefits through issuers and HMOs. Specifically, a group health plan
that provides benefits solely through an issuer or HMO, and that does
not create, receive or maintain protected health

[[Page 82564]]

information other than summary health information or information
regarding enrollment and disenrollment, is not subject to the
requirements of this section regarding designation of a privacy
official and contact person, workforce training, safeguards,
complaints, mitigation, or policies and procedures. Such a group health
plan is only subject to the requirements of this section regarding
documentation with respect to its plan documents. Issuers and HMOs are
covered entities under this rule, and thus have independent obligations
to comply with this section with respect to the protected health
information they maintain about the enrollees in such group health
plans. The group health plans subject to this provision will have only
limited protected health information. Therefore, imposing these
requirements on the group health plan would impose burdens not
outweighed by a corresponding enhancement in privacy protections.

Section 164.532--Transition Provisions

    In the NPRM, we did not address the effect of the regulation on
consents and authorizations covered entities obtained prior to the
compliance date of the regulation.
    In the final rule, we clarify that, in certain circumstances, a
covered entity may continue to rely upon consents, authorizations, or
other express legal permissions obtained prior to the compliance date
of this regulation to use or disclose protected health information even
if these consents, authorizations, or permissions do not meet the
requirements set forth in Secs. 164.506 or 164.508.
    We realize that a covered entity may wish to rely upon a consent,
authorization, or other express legal permission obtained from an
individual prior to the compliance date of this regulation which
permits the use or disclosure of individually identifiable health
information for activities that come within treatment, payment, or
health care operations (as defined in Sec. 164.501), but that do not
meet the requirements for consents set forth in Sec. 164.506. In the
final rule, we permit a covered entity to rely upon such consent,
authorization, or permission to use or disclose protected health
information that it created or received before the applicable
compliance date of the regulation to carry out the treatment, payment,
or health care operations as long as it meets two requirements. First,
the covered entity may not make any use or disclosure that is expressly
excluded from the consent, authorization, or permission. Second, the
covered entity must comply with all limitations expressed in the
consent, authorization, or permission. Thus, we do not require a
covered entity to obtain a consent that meets the requirements of
Sec. 164.506 to use or disclose this previously obtained protected
health information as long as the use or disclosure is consistent with
the requirements of this section. However, a covered entity will need
to obtain a consent that meets the requirements of Sec. 164.506 to the
extent that it is required to obtain a consent under Sec. 164.506 from
an individual before it may use or disclose any protected health
information it creates or receives after the date by which it must
comply with this rule.
    Similarly, we recognize that a covered entity may wish to rely upon
a consent, authorization, or other express legal permission obtained
from an individual prior to the applicable compliance date of this
regulation that specifically permits the covered entity to use or
disclose individually identifiable health information for activities
other than to carry out treatment, payment, or health care operations.
In the final rule, we permit a covered entity to rely upon such a
consent, authorization, or permission to use or disclose protected
health information that it created or received before the applicable
compliance date of the regulation for the specific activities described
in the consent, authorization, or permission as long as the covered
entity complies with two requirements. First, the covered entity may
not make any use or disclosure that is expressly excluded from the
consent, authorization, or permission. Second, the covered entity must
comply with all limitations expressed in the consent, authorization, or
permission. Thus, we do not required a covered entity to obtain an
authorization that meets the requirements of Sec. 164.508 to use or
disclose this previously obtained protected health information so long
as the use or disclosure is consistent with the requirements of this
section. However, a covered entity will need to obtain an authorization
that meets the requirements of Sec. 164.508, to the extent that it is
required to obtain an authorization under this rule, from an individual
before it may use or disclose any protected health information it
creates or receives after the date by which it must comply with this
rule.
    Additionally, the final rule acknowledges that covered entities may
wish to rely upon consents, authorizations, or other express legal
permission obtained from an individual prior to the applicable
compliance date for a specific research project that includes the
treatment of individuals, such as clinical trials. These consents,
authorizations, or permissions may specifically permit a use or
disclosure of individually identifiable health information for purposes
of the project. Alternatively, they may be general consents to
participate in the project. A covered entity may use or disclose
protected health information it created or received before or after to
the applicable compliance date of this rule for purposes of the project
provided that the covered entity complies with all limitations
expressed in the consent, authorization, or permission.
    If, pursuant to this section, a covered entity relies upon a
previously obtained consent, authorization, or other express legal
permission and agrees to a request for a restriction by an individual
under Sec. 164.522(a), any subsequent use or disclosure under that
consent, authorization, or permission must comply with the agreed upon
restriction as well.
    We believe it is necessary to grandfather in previously obtained
consents, authorizations, or other express legal permissions in these
circumstances to ensure that important functions of the health care
system are not impeded. We link the effectiveness of such consents,
authorizations, or permissions in these circumstances to the applicable
compliance date to give covered entities sufficient notice of the
requirements set forth in Secs. 164.506 and 164.508.
    The rule does not change the past effectiveness of consents,
authorizations, or other express legal permissions that do not come
within this section. This means that uses or disclosures of
individually identifiable health information made prior to the
compliance date of this regulation are not subject to sanctions, even
if they were made pursuant to documents or permissions that do not meet
the requirements of this rule or were made without permission. This
rule alters only the future effectiveness of the previously obtained
consents, authorizations, or permissions. Covered entities are not
required to rely upon these consents, authorizations, or permissions
and may obtain new consents or authorizations that meet the applicable
requirements of Secs. 164.506 and 164.508.
    When reaching this decision, we considered requiring all covered
entities to obtain new consents or authorizations consistent with the
requirements of Secs. 164.506 and 164.508 before they would be able to
use or disclose protected health information obtained

[[Page 82565]]

after the compliance date of these rules. We rejected this option
because we recognize that covered entities may not always be able to
obtain new consents or authorizations consistent with the requirements
of Secs. 164.506 and 164.508 from all individuals upon whose
information they rely. We also refrained from impeding the rights of
covered entities to exercise their interests in the records they have
created. We do not require covered entities with existing records or
databases to destroy or remove the protected health information for
which they do not have valid consents or authorizations that meet the
requirements of Secs. 164.506 and 164.508. Covered entities may rely
upon the consents, authorizations, or permissions they obtained from
individuals prior to the applicable compliance date of this regulation
consistent with the constraints of those documents and the requirements
discussed above.
    We note that if a covered entity obtains before the applicable
compliance date of this regulation a consent that meets the
requirements of Sec. 164.506, an authorization that meets the
requirements of Sec. 164.508, or an IRB or privacy board waiver of
authorization that meets the requirements of Sec. 164.512(i), the
consent, authorization, or waiver is effective for uses or disclosures
that occur after the compliance date and that are consistent with the
terms of the consent, authorization, or waiver.

Section 164.534--Compliance Dates for Initial Implementation of the
Privacy Standards

    In the NPRM, we provided that a covered entity must be in
compliance with this subpart not later than 24 months following the
effective date of this rule, except that a covered entity that is a
small health plan must be in compliance with this subpart not later
than 36 months following the effective date of the rule.
    The final rule did not make any substantive changes. The format is
changed so as to more clearly present the various compliance dates. The
final rule lists the types of covered entities and then the various
dates that would apply to each of these entities.

III. Section-by-Section Discussion of Comments

    The following describes the provisions in the final regulation, and
the changes we make to the proposed provisions section-by-section.
Following each section are our responses to the comments to that
section. This section of the preamble is organized to follow the
corresponding section of the final rule, not the NPRM.

General Comments

    We received many comments on the rule overall, not to a particular
provision. We respond to those comments here. Similar comments, but
directed to a specific provision in the proposed rule, are answered
below in the corresponding section of this preamble.

Comments on the Need for Privacy Standards, and Effects of this
Regulation on Current Protections

    Comment: Many commenters expressed the opinion that federal
legislation is necessary to protect the privacy of individuals' health
information. One comment advocated Congressional efforts to provide a
comprehensive federal health privacy law that would integrate the
substance abuse regulations with the privacy regulation.
    Response: We agree that comprehensive privacy legislation is
urgently needed. This administration has urged the Congress to pass
such legislation. While this regulation will improve the privacy of
individuals' health information, only legislation can provide the full
array of privacy protection that individuals need and deserve.
    Comment: Many commenters noted that they do not go to a physician,
or do not completely share health information with their physician,
because they are concerned about who will have access to that
information. Many physicians commented on their patients' reluctance to
share information because of fear that their information will later be
used against them.
    Response: We agree that strong federal privacy protections are
necessary to enhance patients' trust in the health care system.
    Comment: Many commenters expressed concerns that this regulation
will allow access to health information by those who today do not have
such access, or would allow their physician to disclose information
which may not lawfully be disclosed today. Many of these commenters
stated that today, they consent to every disclosure of health
information about them, and that absent their consent the privacy of
their health information is ``absolute.'' Others stated that, today,
health information is disclosed only pursuant to a judicial order.
Several commenters were concerned that this regulation would override
stronger state privacy protection.
    Response: This regulation does not, and cannot, reduce current
privacy protections. The statutory language of the HIPAA specifically
mandates that this regulation does not preempt state laws that are more
protective of privacy.
    As discussed in more detail in later this preamble, while many
people believe that they must be asked permission prior to any release
of health information about them, current laws generally do not impose
such a requirement. Similarly, as discussed in more detail later in
this preamble, judicial review is required today only for a small
proportion of releases of health information.
    Comment: Many commenters asserted that today, medical records
``belong'' to patients. Others asserted that patients own their medical
information and health care providers and insurance companies who
maintain health records should be viewed as custodians of the patients'
property.
    Response: We do not intend to change current law regarding
ownership of or responsibility for medical records. In developing this
rule we reviewed current law on this and related issues, and built on
that foundation.
    Under state laws, medical records are often the property of the
health care provider or medical facility that created them. Some state
laws also provide patients with access to medical records or an
ownership interest in the health information in medical records.
However, these laws do not divest the health care provider or the
medical facility of its ownership interest in medical records. These
statutes typically provide a patient the right to inspect or copy
health information from the medical record, but not the right to take
the provider's original copy of an item in the medical record. If a
particular state law provides greater ownership rights, this regulation
leaves such rights in place.
    Comment: Some commenters argued that the use and disclosure of
sensitive personal information must be strictly regulated, and
violation of such regulations should subject an entity to significant
penalties and sanctions.
    Response: We agree, and share the commenters' concern that the
penalties in the HIPAA statute are not sufficient to fully protect
individuals' privacy interests. The need for stronger penalties is
among the reasons we believe Congress should pass comprehensive privacy
legislation.
    Comment: Many commenters expressed the opinion that the proposed
ruled should provide stricter privacy protections.

[[Page 82566]]

    Response: We received nearly 52,000 comments on the proposed
regulation, and make substantial changes to the proposal in response to
those comments. Many of these changes will strengthen the protections
that were proposed in the NPRM.
    Comment: Many comments express concerns that their health
information will be given to their employers.
    Response: We agree that employer access to health information is a
particular concern. In this final regulation, we make significant
changes to the NPRM that clarify and provide additional safeguards
governing when and how the health plans covered by this regulation may
disclose health information to employers.
    Comment: Several commenters argued that individuals should be able
to sue for breach of privacy.
    Response: We agree, but do not have the legislative authority to
grant a private right of action to sue under this statute. Only
Congress can grant that right.

Objections to Government Access to Protected Health Information

    Comment: Many commenters urged the Department not to create a
government database of health information, or a tracking system that
would enable the government to track individuals health information.
    Response: This regulation does not create such a database or
tracking system, nor does it enable future creation of such a database.
This regulation describes the ways in which health plans, health care
clearinghouses, and certain health care providers may use and disclose
identifiable health information with and without the individual's
consent.
    Comment: Many commenters objected to government access to or
control over their health information, which they believe the proposed
regulation would provide.
    Response: This regulation does not increase current government
access to health information. This rule sets minimum privacy standards.
It does not require disclosure of health information, other than to the
subject of the records or for enforcement of this rule. Health plans
and health care providers are free to use their own professional ethics
and judgement to adopt stricter policies for disclosing health
information.
    Comment: Some commenters viewed the NPRM as creating fewer hurdles
for government access to protected health information than for access
to protected health information by private organizations. Some health
care providers commented that the NPRM would impose substantial new
restrictions on private sector use and disclosure of protected health
information, but would make government access to protected health
information easy. One consumer advocacy group made the same
observation.
    Response: We acknowledge that many of the national priority
purposes for which we allow disclosure of protected health information
without consent or authorization are for government functions, and that
many of the governmental recipients of such information are not
governed by this rule. It is the role of government to undertake
functions in the broader public interest, such as public health
activities, law enforcement, identification of deceased individuals
through coroners' offices, and military activities. It is these public
purposes which can sometimes outweigh an individual's privacy interest.
In this rule, we specify the circumstances in which that balance is
tipped toward the public interest with respect to health information.
We discuss the rationale behind each of these permitted disclosures in
the relevant preamble sections below.

Miscellaneous Comments

    Comment: Many commenters objected to the establishment of a unique
identifier for health care or other purposes.
    Response: This regulation does not create an identifier. We assume
these comments refer to the unique health identifier that Congress
directed the Secretary to promulgate under section1173(b) of the Social
Security Act, added by section 262 of the HIPAA. Because of the public
concerns about such an identifier, in the summer of 1998 Vice President
Gore announced that the Administration would not promulgate such a
regulation until comprehensive medical privacy protections were in
place. In the fall of that year, Congress prohibited the Department
from promulgating such an identifier, and that prohibition remains in
place. The Department has no plans to promulgate a unique health
identifier.
    Comment: Many commenters asked that we withdraw the proposed
regulation and not publish a final rule.
    Response: Under section 264 of the HIPAA, the Secretary is required
by Congress to promulgate a regulation establishing standards for
health information privacy. Further, for the reasons explained
throughout this preamble above, we believe that the need to protect
health information privacy is urgent and that this regulation is in the
public's interest.
    Comment: Many commenters express the opinion that their consent
should be required for all disclosure of their health information.
    Response: We agree that consent should be required prior to release
of health information for many purposes, and impose such a requirement
in this regulation. Requiring consent prior to all release of health
information, however, would unduly jeopardize public safety and make
many operations of the health care system impossible. For example,
requiring consent prior to release of health information to a public
health official who is attempting to track the source of an outbreak or
epidemic could endanger thousands of lives. Similarly, requiring
consent before an oversight official could audit a health plan would
make detection of health care fraud all but impossible; it could take
health plans months or years to locate and obtain the consent of all
current and past enrollees, and the health plan would not have a strong
incentive to do so. These uses of medical information are clearly in
the public interest.
    In this regulation, we must balance individuals' privacy interests
against the legitimate public interests in certain uses of health
information. Where there is an important public interest, this
regulation imposes procedural safeguards that must be met prior to
release of health information, in lieu of a requirement for consent. In
some instances the procedural safeguards consist of limits on the
circumstances in which information may be disclosed, in others the
safeguards consist of limits on what information may be disclosed, and
in other cases we require some form of legal process (e.g., a warrant
or subpoena) prior to release of health information. We also allow
disclosure of health information without consent where other law
mandates the disclosures. Where such other law exists, another public
entity has made the determination that the public interests outweigh
the individual's privacy interests, and we do not upset that
determination in this regulation. In short, we tailor the safeguards to
match the specific nature of the public purpose. The specific
safeguards are explained in each section of this regulation below.
    Comment: Many comments address matters not relevant to this
regulation, such as alternative fuels, hospital reimbursement, and gulf
war syndrome.
    Response: These and similar matters are not relevant to this
regulation and will not be addressed further.

[[Page 82567]]

    Comment: A few commenters questioned why this level of detail is
needed in response to the HIPAA Congressional mandate.
    Response: This level of detail is necessary to ensure that
individuals' rights with respect to their health information are clear,
while also ensuring that information necessary for important public
functions, such as protecting public health, promoting biomedical
research, fighting health care fraud, and notifying family members in
disaster situations, will not be impaired by this regulation. We
designed this rule to reflect current practices and change some of
them. The comments and our fact finding revealed the complexity of
current health information practices, and we believe that the
complexity entailed in reflecting those practices is better public
policy than a perhaps simpler rule that disturbed important information
flows.
    Comment: A few comments stated that the goal of administrative
simplification should never override the privacy of individuals.
    Response: We believe that privacy is a necessary component of
administrative simplification, not a competing interest.
    Comment: At least one commenter said that the goal of
administrative simplification is not well served by the proposed rule.
    Response: Congress recognized that privacy is a necessary component
of administrative simplification. The standardization of electronic
health information mandated by the HIPAA that make it easier to share
that information for legitimate purposes also make the inappropriate
sharing of that information easier. For this reason, Congress included
a mandate for privacy standards in this section of the HIPAA. Without
appropriate privacy protections, public fear and instances of abuse
would make it impossible for us to take full advantage of the
administrative and costs benefits inherent in the administrative
simplification standards.
    Comment: At least one commenter asked us to require
psychotherapists to assert any applicable legal privilege on patients'
behalf when protected health information is requested.
    Response: Whether and when to assert a claim of privilege on a
patient's behalf is a matter for other law and for the ethics of the
individual health care provider. This is not a decision that can or
should be made by the federal government.
    Comment: One commenter called for HHS to consider the privacy
regulation in conjunction with the other HIPAA standards. In
particular, this comment focused on the belief that the Security
Standards should be compatible with the existing and emerging health
care and information technology industry standards.
    Response: We agree that both this regulation and the final Security
Regulation should be compatible with existing and emerging technology
industry standards. This regulation is ``technology neutral.'' We do
not mandate the use of any particular technologies, but rather set
standards which can be met through a variety of means.
    Comment: Several commenters claimed that the statutory authority
given under HIPAA cannot provide meaningful privacy protections because
many entities with access to protected health information, such as
employers, worker's compensation carriers, and life insurance
companies, are not covered entities. These commenters expressed support
for comprehensive legislation to close many of the existing loopholes.
    Response: We agree with the commenters that comprehensive
legislation is necessary to provide full privacy protection and have
called for members of Congress to pass such legislation to prevent
unauthorized and potentially harmful uses and disclosures of
information.

Part 160--Subpart A--General Provisions

Section 160.103--Definitions

Business Associate

    The response to comments on the definition of ``business partner,''
renamed in this rule as ``business associate,'' is included in the
response to comments on the requirements for business associates in the
preamble discussion of Sec. 164.504.

Covered Entity

    Comment: A number of commenters urged the Department to expand or
clarify the definition of ``covered entity'' to include certain
entities other than health care clearinghouses, health plans, and
health care providers who conduct standard transactions. For example,
several commenters asked that the Department generally expand the scope
of the rule to cover all entities that receive or maintain individually
identifiable health information; others specifically urged the
Department to cover employers, marketing firms, and legal entities that
have access to individually identifiable health information. Some
commenters asked that life insurance and casualty insurance carriers be
considered covered entities for purposes of this rule. One commenter
recommended that Pharmacy Benefit Management (PBM) companies be
considered covered entities so that they may use and disclose protected
health information without authorization.
    In addition, a few commenters asked the Department to clarify that
the definition includes providers who do not directly conduct
electronic transactions if another entity, such as a billing service or
hospital, does so on their behalf.
    Response: We understand that many entities may use and disclose
individually identifiable health information. However, our jurisdiction
under the statute is limited to health plans, health care
clearinghouses, and health care providers who transmit any health
information electronically in connection with any of the standard
financial or administrative transactions in section 1173(a) of the Act.
These are the entities referred to in section 1173(a)(1) of the Act and
thus listed in Sec. 160.103 of the final rule. Consequently, once
protected health information leaves the purview of one of these covered
entities, their business associates, or other related entities (such as
plan sponsors), the information is no longer afforded protection under
this rule. We again highlight the need for comprehensive federal
legislation to eliminate such gaps in privacy protection.
    We also provide the following clarifications with regard to
specific entities.
    We clarify that employers and marketing firms are not covered
entities. However, employers may be plan sponsors of a group health
plan that is a covered entity under the rule. In such a case, specific
requirements apply to the group health plan. See the preamble on
Sec. 164.504 for a discussion of specific ``firewall'' and other
organizational requirements for group health plans and their employer
sponsors. The final rule also contains provisions addressing when an
insurance issuer providing benefits under a group health plan may
disclose summary health information to a plan sponsor.
    With regard to life and casualty insurers, we understand that such
benefit providers may use and disclose individually identifiable health
information. However, Congress did not include life insurers and
casualty insurance carriers as ``health plans'' for the purposes of
this rule and therefore they are not covered entities. See the
discussion regarding the definition of ``health plan'' and excepted
benefits.

[[Page 82568]]

    In addition, we clarify that a PBM is a covered entity only to the
extent that it meets the definition of one or more of the entities
listed in Sec. 160.102. When providing services to patients through
managed care networks, it is likely that a PBM is acting as a business
associate of a health plan, and may thus use and disclose protected
health information pursuant to the relevant provisions of this rule.
PBMs may also be business associates of health care providers. See the
preamble sections on Secs. 164.502, 164.504, and 164.506 for
discussions of the specific requirements related to business associates
and consent.
    Lastly, we clarify that health care providers who do not submit
HIPAA transactions in standard form become covered by this rule when
other entities, such as a billing service or a hospital, transmit
standard electronic transactions on their behalf. The provider could
not circumvent these requirements by assigning the task to a
contractor.
    Comment: Many commenters urged the Department to restrict or
clarify the definition of ``covered entity'' to exclude certain
entities, such as department-operated hospitals (public hospitals);
state Crime Victim Compensation Programs; employers; and certain lines
of insurers, such as workers' compensation insurers, property and
casualty insurers, reinsurers, and stop-loss insurers. One commenter
expressed concern that clergy, religious practitioners, and other
faith-based service providers would have to abide by the rule and asked
that the Department exempt prayer healing and non-medical health care.
    Response: The Secretary provides the following clarifications in
response to these comments. To the extent that a ``department-operated
hospital'' meets the definition of a ``health care provider'' and
conducts any of the standard transactions, it is a covered entity for
the purposes of this rule. We agree that a state Crime Victim
Compensation Program is not a covered entity if it is not a health care
provider that conducts standard transactions, health plan, or health
care clearinghouse. Further, as described above, employers are not
covered entities.
    In addition, we agree that workers' compensation insurers, property
and casualty insurers, reinsurers, and stop-loss insurers are not
covered entities, as they do not meet the statutory definition of
``health plan.'' See further discussion in the preamble on Sec. 160.103
regarding the definition of ``health plan.'' However, activities
related to ceding, securing, or placing a contract for reinsurance,
including stop-loss insurance, are health care operations in the final
rule. As such, reinsurers and stop-loss insurers may obtain protected
health information from covered entities.
    Also, in response to the comment regarding religious practitioners,
the Department clarifies that ``health care'' as defined under the rule
does not include methods of healing that are solely spiritual.
Therefore, clergy or other religious practitioners that provide solely
religious healing services are not health care providers within the
meaning of this rule, and consequently not covered entities for the
purposes of this rule.
    Comment: A few commenters expressed general uncertainty and
requested clarification as to whether certain entities were covered
entities for the purposes of this rule. One commenter was uncertain as
to whether the rule applies to certain social service entities, in
addition to clinical social workers that the commenter believes are
providers. Other commenters asked whether researchers or non-
governmental entities that collect and analyze patient data to monitor
and evaluate quality of care are covered entities. Another commenter
requested clarification regarding the definition's application to
public health agencies that also are health care providers as well as
how the rule affects public health agencies in their data collection
from covered entities.
    Response: Whether the professionals described in these comments are
covered by this rule depends on the activities they undertake, not on
their profession or degree. The definitions in this rule are based on
activities and functions, not titles. For example, a social service
worker whose activities meet this rule's definition of health care will
be a health care provider. If that social service worker also transmits
information in a standard HIPAA transaction, he or she will be a
covered health entity under this rule. Another social service worker
may provide services that do not meet the rule's definition of health
care, or may not transmit information in a standard transaction. Such a
social service worker is not a covered entity under this rule.
Similarly, researchers in and of themselves are not covered entities.
However, researchers may also be health care providers if they provide
health care. In such cases, the persons, or entities in their role as
health care providers may be covered entities if they conduct standard
transactions.
    With regard to public health agencies that are also health care
providers, the health care provider ``component'' of the agency is the
covered entity if that component conducts standard transactions. See
discussion of ``health care components'' below. As to the data
collection activities of a public health agency, the final rule in
Sec. 164.512(b) permits a covered entity to disclose protected health
information to public health authorities under specified circumstances,
and permits public health agencies that are also covered entities to
use protected health information for these purposes. See
Sec. 164.512(b) for further details.
    Comment: A few commenters requested that the Department clarify
that device manufacturers are not covered entities. They stated that
the proposal did not provide enough guidance in cases where the
``manufacturer supplier'' has only one part of its business that acts
as the ``supplier,'' and additional detail is needed about the
relationship of the ``supplier component'' of the company to the rest
of the business. Similarly, another commenter asserted that drug,
biologics, and device manufacturers should not be covered entities
simply by virtue of their manufacturing activities.
    Response: We clarify that if a supplier manufacturer is a Medicare
supplier, then it is a health care provider, and it is a covered entity
if it conducts standard transactions. Further, we clarify that a
manufacturer of supplies related to the health of a particular
individual, e.g., prosthetic devices, is a health care provider because
the manufacturer is providing ``health care'' as defined in the rule.
However, that manufacturer is a covered entity only if it conducts
standard transactions. We do not intend that a manufacturer of supplies
that are generic and not customized or otherwise specifically designed
for particular individuals, e.g., ace bandages for a hospital, is a
health care provider. Such a manufacturer is not providing ``health
care'' as defined in the rule and is therefore not a covered entity. We
note that, even if such a manufacturer is a covered entity, it may be
an ``indirect treatment provider'' under this rule, and thus not
subject to all of the rule's requirements.
    With regard to a ``supplier component,'' the final rule addresses
the status of the unit or unit(s) of a larger entity that constitute a
``health care component.'' See further discussion under Sec. 164.504 of
this preamble.
    Finally, we clarify that drug, biologics, and device manufacturers
are not health care providers simply by virtue of their manufacturing
activities. The manufacturer must be providing health care consistent
with the final

[[Page 82569]]

rule's definition in order to be considered a health care provider.
    Comment: A few commenters asked that the Department clarify that
pharmaceutical manufacturers are not covered entities. It was explained
that pharmaceutical manufacturers provide support and guidance to
doctors and patients with respect to the proper use of their products,
provide free products for doctors to distribute to patients, and
operate charitable programs that provide pharmaceutical drugs to
patients who cannot afford to buy the drugs they need.
    Response: A pharmaceutical manufacturer is only a covered entity if
the manufacturer provides ``health care'' according to the rule's
definition and conducts standard transactions. In the above case, a
pharmaceutical manufacturer that provides support and guidance to
doctors and patients regarding the proper use of their products is
providing ``health care'' for the purposes of this rule, and therefore,
is a health care provider to the extent that it provides such services.
The pharmaceutical manufacturer that is a health care provider is only
a covered entity, however, if it conducts standard transactions. We
note that this rule permits a covered entity to disclose protected
health information to any person for treatment purposes, without
specific authorization from the individual. Therefore, a covered health
care provider is permitted to disclose protected health information to
a pharmaceutical manufacturer for treatment purposes. Providing free
samples to a health care provider does not in itself constitute health
care. For further analysis of pharmacy assistance programs, see
response to comment on Sec. 164.501, definition of ``payment.''
    Comment: Several commenters asked about the definition of ``covered
entity'' and its application to health care entities within larger
organizations.
    Response: A detailed discussion of the final rule's organizational
requirements and firewall restrictions for ``health care components''
of larger entities, as well as for affiliated, and other entities is
found at the discussion of Sec. 164.504 of this preamble. The following
responses to comments provide additional information with respect to
particular ``component entity'' circumstances.
    Comment: Several commenters asked that we clarify the definition of
covered entity to state that with respect to persons or organizations
that provide health care or have created health plans but are primarily
engaged in other unrelated businesses, the term ``covered entity''
encompasses only the health care components of the entity. Similarly,
others recommended that only the component of a government agency that
is a provider, health plan, or clearinghouse should be considered a
covered entity.
    Other commenters requested that we revise proposed Sec. 160.102 to
apply only to the component of an entity that engages in the
transactions specified in the rule. Commenters stated that companies
should remain free to employ licensed health care providers and to
enter into corporate relationships with provider institutions without
fear of being considered to be a covered entity. Another commenter
suggested that the regulation not apply to the provider-employee or
employer when neither the provider nor the company are a covered
entity.
    Some commenters specifically argued that the definition of
``covered entity'' did not contemplate an integrated health care system
and one commenter stated that the proposal would disrupt the multi-
disciplinary, collaborative approach that many take to health care
today by treating all components as separate entities. Commenters,
therefore, recommended that the rule treat the integrated entity, not
its constituent parts, as the covered entity.
    A few commenters asked that the Department further clarify the
definition with respect to the unique organizational models and
relationships of academic medical centers and their parent universities
and the rules that govern information exchange within the institution.
One commenter asked whether faculty physicians who are paid by a
medical school or faculty practice plan and who are on the medical
staff of, but not paid directly by, a hospital are included within the
covered entity. Another commenter stated that it appears that only the
health center at an academic institution is the covered entity.
Uncertainty was also expressed as to whether other components of the
institution that might create protected health information only
incidentally through the conduct of research would also be covered.
    Response: The Department understands that in today's health care
industry, the relationships among health care entities and non-health
care organizations are highly complex and varied. Accordingly, the
final rule gives covered entities some flexibility to segregate or
aggregate its operations for purposes of the application of this rule.
The new component entity provision can be found at Secs. 164.504(b)-
(c). In response to the request for clarification on whether the rule
would apply to a research component of the covered entity, we point out
that if the research activities fall outside of the health care
component they would not be subject to the rule. One organization may
have one or several ``health care component(s)'' that each perform one
or more of the health care functions of a covered entity, i.e., health
care provider, health plan, health care clearinghouse. In addition, the
final rule permits covered entities that are affiliated, i.e., share
common ownership or control, to designate themselves, or their health
care components, together to be a single covered entity for purposes of
the rule.
    It appears from the comments that there is not a common
understanding of the meaning of ``integrated delivery system.''
Arrangements that apply this label to themselves operate and share
information many different ways, and may or may not be financially or
clinically integrated. In some cases, multiple entities hold themselves
out as one enterprise and engage together in clinical or financial
activities. In others, separate entities share information but do not
provide treatment together or share financial risk. Many health care
providers participate in more than one such arrangement.
    Therefore, we do not include a separate category of ``covered
entity'' under this rule for ``integrated delivery systems'' but
instead accommodate the operations of these varied arrangements through
the functional provisions of the rule. For example, covered entities
that operate as ``organized health care arrangements'' as defined in
this rule may share protected health information for the operation of
such arrangement without becoming business associates of one another.
Similarly, the regulation does not require a business associate
arrangement when protected health information is shared for purposes of
providing treatment. The application of this rule to any particular
``integrated system'' will depend on the nature of the common
activities the participants in the system perform. When the
participants in such an arrangement are ``affiliated'' as defined in
this rule, they may consider themselves a single covered entity (see
Sec. 164. 504).
    The arrangements between academic health centers, faculty practice
plans, universities, and hospitals are similarly diverse. We cannot
describe a blanket rule that covers all such arrangements. The
application of this rule will depend on the purposes for which the
participants in such arrangements share protected health information,
whether some or all participants are under common ownership or control,
and similar matters. We note that physicians who have staff privileges
at a covered

[[Page 82570]]

hospital do not become part of that hospital covered entity by virtue
of having such privileges.
    We reject the recommendation to apply the rule only to components
of an entity that engage in the transactions. This would omit as
covered entities, for example, the health plan components that do not
directly engage in the transactions, including components that engage
in important health plan functions such as coverage determinations and
quality review. Indeed, we do not believe that the statute permits this
result with respect to health plans or health care clearinghouses as a
matter of negative implication from section 1172(a)(3). We clarify that
only a health care provider must conduct transactions to be a covered
entity for purposes of this rule.
    We also clarify that health care providers (such as doctors or
nurses) who work for a larger organization and do not conduct
transactions on their own behalf are workforce members of the covered
entity, not covered entities themselves.
    Comment: A few commenters asked the Department to clarify the
definition to provide that a multi-line insurer that sells insurance
coverages, some of which do and others which do not meet the definition
of ``health plan,'' is not a covered entity with respect to actions
taken in connection with coverages that are not ``health plans.''
    Response: The final rule clarifies that the requirements below
apply only to the organizational unit or units of the organization that
are the ``health care component'' of a covered entity, where the
``covered functions'' are not the primary functions of the entity.
Therefore, for a multi-line insurer, the ``health care component'' is
the insurance line(s) that conduct, or support the conduct of, the
health care function of the covered entity. Also, it should be noted
that excepted benefits, such as life insurance, are not included in the
definition of ``health plan.'' (See preamble discussion of
Sec. 164.504).
    Comment: A commenter questioned whether the Health Care Financing
Administration (HCFA) is a covered entity and how HCFA will share data
with Medicare managed care organizations. The commenter also questioned
why the regulation must apply to Medicaid since the existing Medicaid
statute requires that states have privacy standards in place. It was
also requested that the Department provide a definition of ``health
plan'' to clarify that state Medicaid Programs are considered as such.
    Response: HCFA is a covered entity because it administers Medicare
and Medicaid, which are both listed in the statute as health plans.
Medicare managed care organizations are also covered entities under
this regulation. As noted elsewhere in this preamble, covered entities
that jointly administer a health plan, such as Medicare + Choice, are
both covered entities, and are not business associates of each other by
virtue of such joint administration.
    We do not exclude state Medicaid programs. Congress explicitly
included the Medicaid program as a covered health plan in the HIPAA
statute.
    Comment: A commenter asked the Department to provide detailed
guidance as to when providers, plans, and clearinghouses become covered
entities. The commenter provided the following example: if a provider
submits claims only in paper form, and a coordination of benefits (COB)
transaction is created due to other insurance coverage, will the
original provider need to be notified that the claim is now in
electronic form, and that it has become a covered entity? Another
commenter voiced concern as to whether physicians who do not conduct
electronic transactions would become covered entities if another entity
using its records downstream transmits information in connection with a
standard transaction on their behalf.
    Response: We clarify that health care providers who submit the
transactions in standard electronic form, health plans, and health care
clearinghouses are covered entities if they meet the respective
definitions. Health care providers become subject to the rule if they
conduct standard transactions. In the above example, the health care
provider would not be a covered entity if the coordination of benefits
transaction was generated by a payor.
    We also clarify that health care providers who do not submit
transactions in standard form become covered by this rule when other
entities, such as a billing service or a hospital, transmit standard
electronic transactions on the providers' behalf. However, where the
downstream transaction is not conducted on behalf of the health care
provider, the provider does not become a covered entity due to the
downstream transaction.
    Comment: Several commenters discussed the relationship between
section 1179 of the Act and the privacy regulations. One commenter
suggested that HHS retain the statement that a covered entity means
``the entities to which part C of title XI of the Act applies.'' In
particular, the commenter observed that section 1179 of the Act
provides that part C of title XI of the Act does not apply to financial
institutions or to entities acting on behalf of such institutions that
are covered by the section 1179 exemption. Thus, under the definition
of covered entity, they comment that financial institutions and other
entities that come within the scope of the section 1179 exemption are
appropriately not covered entities.
    Other commenters maintained that section 1179 of the Act means that
the Act's privacy requirements do not apply to the request for, or the
use or disclosure of, information by a covered entity with respect to
payment: (a) For transferring receivables; (b) for auditing; (c) in
connection with--(i) a customer dispute; or (ii) an inquiry from or to
a customer; (d) in a communication to a customer of the entity
regarding the customer's transactions payment card, account, check, or
electronic funds transfer; (e) for reporting to consumer reporting
agencies; or (f) for complying with: (i) a civil or criminal subpoena;
or (ii) a federal or state law regulating the entity. These companies
expressed concern that the proposed rule did not include the full text
of section 1179 when discussing the list of activities that were exempt
from the rule's requirements. Accordingly, they recommended including
in the final rule either a full listing of or a reference to section
1179's full list of exemptions. Furthermore, these firms opposed
applying the proposed rule's minimum necessary standard for disclosure
of protected health information to financial institutions because of
section 1179.
    These commenters suggest that in light of section 1179, HHS lacks
the authority to impose restrictions on financial institutions and
other entities when they engage in activities described in that
section. One commenter expressed concern that even though proposed
Sec. 164.510(i) would have permitted covered entities to disclose
certain information to financial institutions for banking and payment
processes, it did not state clearly that financial institutions and
other entities described in section 1179 are exempt from the rule's
requirements.
    Response: We interpret section 1179 of the Act to mean that
entities engaged in the activities of a financial institution, and
those acting on behalf of a financial institution, are not subject to
this regulation when they are engaged in authorizing, processing,
clearing, settling, billing, transferring, reconciling, or collecting
payments for a financial institution. The statutory reference to 12
U.S.C. 3401 indicates that Congress chose to adopt the definition of
financial institutions found

[[Page 82571]]

in the Right to Financial Privacy Act, which defines financial
institutions as any office of a bank, savings bank, card issuer,
industrial loan company, trust company, savings association, building
and loan, homestead association, cooperative bank, credit union, or
consumer finance institution located in the United States or one of its
Territories. Thus, when we use the term ``financial institution'' in
this regulation, we turn to the definition with which Congress provided
us. We interpret this provision to mean that when a financial
institution, or its agent on behalf of the financial institution,
conducts the activities described in section 1179, the privacy
regulation will not govern the activity.
    If, however, these activities are performed by a covered entity or
by another entity, including a financial institution, on behalf of a
covered entity, the activities are subject to this rule. For example,
if a bank operates the accounts payable system or other ``back office''
functions for a covered health care provider, that activity is not
described in section 1179. In such instances, because the bank would
meet the rule's definition of ``business associate,'' the provider must
enter into a business associate contract with the bank before
disclosing protected health information pursuant to this relationship.
However, if the same provider maintains an account through which he/she
cashes checks from patients, no business associate contract would be
necessary because the bank's activities are not undertaken for or on
behalf of the covered entity, and fall within the scope of section
1179. In part to give effect to section 1179, in this rule we do not
consider a financial institution to be acting on behalf of a covered
entity when it processes consumer-conducted financial transactions by
debit, credit or other payment card, clears checks, initiates or
processes electronic funds transfers, or conducts any other activity
that directly facilitates or effects the transfer of funds for
compensation for health care.
    We do not agree with the comment that section 1179 of the Act means
that the privacy regulation's requirements cannot apply to the
activities listed in that section; rather, it means that the entities
expressly mentioned, financial institutions (as defined in the Right to
Financial Privacy Act), and their agents that engage in the listed
activities for the financial institution are not within the scope of
the regulation. Nor do we interpret section 1179 to support an
exemption for disclosures to financial institutions from the minimum
necessary provisions of this regulation.
    Comment: One commenter recommended that HHS include a definition of
``entity'' in the final rule because HIPAA did not define it. The
commenter explained that in a modern health care environment, the
organization acting as the health plan or health care provider may
involve many interrelated corporate entities and that this could lead
to difficulties in determining what ``entities'' are actually subject
to the regulation.
    Response: We reject the commenter's suggestion. We believe it is
clear in the final rule that the entities subject to the regulation are
those listed at Sec. 160.102. However, we acknowledge that how the rule
applies to integrated or other complex health systems needs to be
addressed; we have done so in Sec. 164.504 and in other provisions,
such as those addressing organized health care arrangements.
    Comment: The preamble should clarify that self-insured group health
and workmen's compensation plans are not covered entities or business
partners.
    Response: In the preamble to the proposed rule we stated that
certain types of insurance entities, such as workers' compensation,
would not be covered entities under the rule. We do not change this
position in this final rule. The statutory definition of health plan
does not include workers' compensation products, and the regulatory
definition of the term specifically excludes them. However, HIPAA
specifically includes most group health plans within the definition of
``health plan.''
    Comment: A health insurance issuer asserted that health insurers
and third party administrators are usually required by employers to
submit reports describing the volume, amount, payee, basis for services
rendered, types of claims paid and services for which payment was
requested on behalf of it covered employees. They recommended that the
rule permit the disclosure of protected health information for such
purposes.
    Response: We agree that health plans should be able to disclose
protected health information to employers sponsoring health plans under
certain circumstances. Section 164.504(f) explains the conditions under
which protected health information may be disclosed to plan sponsors.
We believe that this provision gives sponsors access to the information
they need, but protects individual's information to the extent possible
under our legislative authority.

Group Health Plan

    For response to comments relating to ``group health plan,'' see the
response to comments on ``health plan'' below and the response to
comments on Sec. 164.504.

Health Care

    Comment: A number of commenters asked that we include disease
management activities and other similar health improvement programs,
such as preventive medicine, health education services and maintenance,
health and case management, and risk assessment, in the definition of
``health care.'' Commenters maintained that the rule should avoid
limiting technological advances and new health care trends intended to
improve patient ``health care.''
    Response: Review of these and other comments, and our fact-finding,
indicate that there are multiple, different, understandings of the
definition of these terms. Therefore, rather than create a blanket rule
that includes such terms in or excludes such terms from the definition
of ``health care,'' we define health care based on the underlying
activities that constitute health care. The activities described by
these commenters are considered ``health care'' under this rule to the
extent that they meet this functional definition. Listing activities by
label or title would create the risk that important activities would be
left out and, given the lack of consensus on what these terms mean,
could also create confusion.
    Comment: Several commenters urged that the Department clarify that
the activities necessary to procure and distribute eyes and eye tissue
will not be hampered by the rule. Some of these commenters explicitly
requested that we include ``eyes and eye tissue'' in the list of
procurement biologicals as well as ``eye procurement'' in the
definition of ``health care.'' In addition, it was argued that
``administration to patients'' be excluded in the absence of a clear
definition. Also, commenters recommended that the definition include
other activities associated with the transplantation of organs, such as
processing, screening, and distribution.
    Response: We delete from the definition of ``health care''
activities related to the procurement or banking of blood, sperm,
organs, or any other tissue for administration to patients. We do so
because persons who make such donations are not seeking to be treated,
diagnosed, or assessed or otherwise seeking health care for themselves,
but are seeking to contribute to the health care of others. In
addition, the nature of

[[Page 82572]]

these activities entails a unique kind of information sharing and
tracking necessary to safeguard the nation's organ and blood supply,
and those seeking to donate are aware that this information sharing
will occur. Consequently, such procurement or banking activities are
not considered health care and the organizations that perform such
activities are not considered health care providers for purposes of
this rule.
    With respect to disclosure of protected health information by
covered entities to facilitate cadaveric organ and tissue donation, the
final rule explicitly permits a covered entity to disclose protected
health information without authorization, consent, or agreement to
organ procurement organizations or other entities engaged in the
procurement, banking, or transplantation of cadaveric organs, eyes, or
tissue for the purpose of facilitating donation and transplantation.
See Sec. 164.512(h). We do not include blood or sperm banking in this
provision because, for those activities, there is direct contact with
the donor, and thus opportunity to obtain the individual's
authorization.
    Comment: A large number of commenters urged that the term
``assessment'' be included in the list of services in the definition,
as ``assessment'' is used to determine the baseline health status of an
individual. It was explained that assessments are conducted in the
initial step of diagnosis and treatment of a patient. If assessment is
not included in the list of services, they pointed out that the
services provided by occupational health nurses and employee health
information may not be covered.
    Response: We agree and have added the term ``assessment'' to the
definition to clarify that this activity is considered ``health care''
for the purposes of the rule.
    Comment: One commenter asked that we revise the definition to
explicitly exclude plasmapheresis from paragraph (3) of the definition.
It was explained that plasmapheresis centers do not have direct access
to health care recipients or their health information, and that the
limited health information collected about plasma donors is not used to
provide health care services as indicated by the definition of health
care.
    Response: We address the commenters' concerns by removing the
provision related to procurement and banking of human products from the
definition.

Health Care Clearinghouse

    Comment: The largest set of comments relating to health care
clearinghouses focused on our proposal to exempt health care
clearinghouses from the patient notice and access rights provisions of
the regulation. In our NPRM, we proposed to exempt health care
clearinghouses from certain provisions of the regulation that deal with
the covered entities' notice of information practices and consumers'
rights to inspect, copy, and amend their records. The rationale for
this exemption was based on our belief that health care clearinghouses
engage primarily in business-to-business transactions and do not
initiate or maintain direct relationships with individuals. We proposed
this position with the caveat that the exemptions would be void for any
health care clearinghouse that had direct contact with individuals in a
capacity other than that of a business partner. In addition, we
indicated that, in most instances, clearinghouses also would be
considered business partners under this rule and would be bound by
their contracts with covered plans and providers. They also would be
subject to the notice of information practices developed by the plans
and providers with whom they contract.
    Commenters stated that, although health care clearinghouses do not
have direct contact with individuals, they do have individually
identifiable health information that may be subject to misuse or
inappropriate disclosure. They expressed concern that we were proposing
to exempt health care clearinghouses from all or many aspects of the
regulation. These commenters suggested that we either delete the
exemption or make it very narrow, specific and explicit in the final
regulatory text.
    Clearinghouse commenters, on the other hand, were in agreement with
our proposal, including the exemption provision and the provision that
the exemption is voided when the entity does have direct contact with
individuals. They also stated that a health care clearinghouse that has
a direct contact with individuals is no longer a health care
clearinghouse as defined and should be subject to all requirements of
the regulation.
    Response: In the final rule, where a clearinghouse creates or
receives protected health information as a business associate of
another covered entity, we maintain the exemption for health care
clearinghouses from certain provisions of the regulation dealing with
the notice of information practices and patient's direct access rights
to inspect, copy and amend records (Secs. 164.524 and 164.526), on the
grounds that a health care clearinghouse is engaged in business-to-
business operations, and is not dealing directly with individuals.
Moreover, as business associates of plans and providers, health care
clearinghouses are bound by the notices of information practices of the
covered entities with whom they contract.
    Where a health care clearinghouse creates or receives protected
health information other than as a business associate, however, it must
comply with all the standards, requirements, and implementation
specifications of the rule. We describe and delimit the exact nature of
the exemption in the regulatory text. See Sec. 164.500(b). We will
monitor developments in this sector should the basic business-to-
business relationship change.
    Comment: A number of comments relate to the proposed definition of
health care clearinghouse. Many commenters suggested that we expand the
definition. They suggested that additional types of entities be
included in the definition of health care clearinghouse, specifically
medical transcription services, billing services, coding services, and
``intermediaries.'' One commenter suggested that the definition be
expanded to add entities that receive standard transactions, process
them and clean them up, and then send them on, without converting them
to any standard format. Another commenter suggested that the health
care clearinghouse definition be expanded to include entities that do
not perform translation but may receive protected health information in
a standard format and have access to that information. Another
commenter stated that the list of covered entities should include any
organization that receives or maintains individually identifiable
health information. One organization recommended that we expand the
health care clearinghouse definition to include the concept of a
research data clearinghouse, which would collect individually
identifiable health information from other covered entities to generate
research data files for release as de-identified data or with
appropriate confidentiality safeguards. One commenter stated that HHS
had gone beyond Congressional intent by including billing services in
the definition.
    Response: We cannot expand the definition of ``health care
clearinghouse'' to cover entities not covered by the definition of this
term in the statute. In the final regulation, we

[[Page 82573]]

make a number of changes to address public comments relating to
definition. We modify the definition of health care clearinghouse to
conform to the definition published in the Transactions Rule (with the
addition of a few words, as noted above). We clarify in the preamble
that, while the term ``health care clearinghouse'' may have other
meanings and connotations in other contexts, for purposes of this
regulation an entity is considered a health care clearinghouse only to
the extent that it actually meets the criteria in our definition.
Entities performing other functions but not meeting the criteria for a
health care clearinghouse are not clearinghouses, although they may be
business associates. Billing services are included in the regulatory
definition of ``health care clearinghouse,'' if they perform the
specified clearinghouse functions. Although we have not added or
deleted any entities from our original definition, we will monitor
industry practices and may add other entities in the future as changes
occur in the health system.
    Comment: Several commenters suggested that we clarify that an
entity acting solely as a conduit through which individually
identifiable health information is transmitted or through which
protected health information flows but is not stored is not a covered
entity, e.g., a telephone company or Internet Service Provider. Other
commenters indicated that once a transaction leaves a provider or plan
electronically, it may flow through several entities before reaching a
clearinghouse. They asked that the regulation protect the information
in that interim stage, just as the security NPRM established a chain of
trust arrangement for such a network. Others noted that these
``conduit'' entities are likely to be business partners of the
provider, clearinghouse or plan, and we should clarify that they are
subject to business partner obligations as in the proposed Security
Rule.
    Response: We clarify that entities acting as simple and routine
communications conduits and carriers of information, such as telephone
companies and Internet Service Providers, are not clearinghouses as
defined in the rule unless they carry out the functions outlined in our
definition. Similarly, we clarify that value added networks and
switches are not health care clearinghouses unless they carry out the
functions outlined in the definition, and clarify that such entities
may be business associates if they meet the definition in the
regulation.
    Comment: Several commenters, including the large clearinghouses and
their trade associations, suggested that we not treat health care
clearinghouses as playing a dual role as covered entity and business
partner in the final rule because such a dual role causes confusion as
to which rules actually apply to clearinghouses. In their view, the
definition of health care clearinghouse is sufficiently clear to stand
alone and identify a health care clearinghouse as a covered entity, and
allows health care clearinghouses to operate under one consistent set
of rules.
    Response: For reasons explained in Sec. 164.504 of this preamble,
we do not create an exception to the business associate requirements
when the business associate is also a covered entity. We retain the
concept that a health care clearinghouse may be a covered entity and a
business associate of a covered entity under the regulation. As
business associates, they would be bound by their contracts with
covered plans and providers.

Health Care Provider

    Comment: One commenter pointed out that the preamble referred to
the obligations of providers and did not use the term, ``covered
entity,'' and thus created ambiguity about the obligations of health
care providers who may be employed by persons other than covered
entities, e.g., pharmaceutical companies. It was suggested that a
better reading of the statute and rule is that where neither the
provider nor the company is a covered entity, the rule does not impose
an obligation on either the provider-employee or the employer.
    Response: We agree. We use the term ``covered entity'' whenever
possible in the final rule, except for the instances where the final
rule treats the entities differently, or where use of the term ``health
care provider'' is necessary for purposes of illustrating an example.
    Comment: Several commenters stated that the proposal's definition
was broad, unclear, and/or confusing. Further, we received many
comments requesting clarification as to whether specific entities or
persons were ``health care providers'' for the purposes of our rule.
One commenter questioned whether affiliated members of a health care
group (even though separate legal entities) would be considered as one
primary health care provider.
    Response: We permit legally distinct covered entities that share
common ownership or control to designate themselves together to be a
single covered entity. Such organizations may promulgate a single
shared notice of information practices and a consent form. For more
detailed information, see the preamble discussion of Sec. 164.504(d).
    We understand the need for additional guidance on whether specific
entities or persons are health care providers under the final rule. We
provide guidance below and will provide additional guidance as the rule
is implemented.
    Comment: One commenter observed that sections 1171(3), 1861(s) and
1861(u) of the Act do not include pharmacists in the definition of
health care provider or pharmacist services in the definition of
``medical or other health services,'' and questioned whether
pharmacists were covered by the rule.
    Response: The statutory definition of ``health care provider'' at
section 1171(3) includes ``any other person or organization who
furnishes, bills, or is paid for health care in the normal course of
business.'' Pharmacists' services are clearly within this statutory
definition of ``health care.'' There is no basis for excluding
pharmacists who meet these statutory criteria from this regulation.
    Comment: Some commenters recommended that the scope of the
definition be broadened or clarified to cover additional persons or
organizations. Several commenters argued for expanding the reach of the
health care provider definition to cover entities such as state and
local public health agencies, maternity support services (provided by
nutritionists, social workers, and public health nurses and the Special
Supplemental Nutrition Program for Women, Infants and Children), and
those companies that conduct cost-effectiveness reviews, risk
management, and benchmarking studies. One commenter queried whether
auxiliary providers such as child play therapists, and speech and
language therapists are considered to be health care providers. Other
commenters questioned whether ``alternative'' or ``complementary''
providers, such as naturopathic physicians and acupuncturists would be
considered health care providers covered by the rule.
    Response: As with other aspects of this rule, we do not define
``health care provider'' based on the title or label of the
professional. The professional activities of these kinds of providers
vary; a person is a ``health care provider'' if those activities are
consistent with the rule's definition of ``health care provider.''
Thus, health care providers include persons, such as those noted by the
commenters, to the extent that they meet the definition. We note that
health care providers are only

[[Page 82574]]

subject to this rule if they conduct certain transactions. See the
definition of ``covered entity.''
    However companies that conduct cost-effectiveness reviews, risk
management, and benchmarking studies are not health care providers for
the purposes of this rule unless they perform other functions that meet
the definition. These entities would be business associates if they
perform such activities on behalf of a covered entity.
    Comment: Another commenter recommended that the Secretary expand
the definition of health care provider to cover health care providers
who transmit or ``or receive'' any health care information in
electronic form.
    Response: We do not accept this suggestion. Section 1172(a)(3)
states that providers that ``transmit'' health information in
connection with one of the HIPAA transactions are covered, but does not
use the term ``receive'' or a similar term.
    Comment: Some comments related to online companies as health care
providers and covered entities. One commenter argued that there was no
reason ``why an Internet pharmacy should not also be covered'' by the
rule as a health care provider. Another commenter stated that online
health care service and content companies, including online medical
record companies, should be covered by the definition of health care
provider. Another commenter pointed out that the definitions of covered
entities cover ``Internet providers who `bill' or are `paid' for health
care services or supplies, but not those who finance those services in
other ways, such as through sale of identifiable health information or
advertising.'' It was pointed out that thousands of Internet sites use
information provided by individuals who access the sites for marketing
or other purposes.
    Response: We agree that online companies are covered entities under
the rule if they otherwise meet the definition of health care provider
or health plan and satisfy the other requirements of the rule, i.e.,
providers must also transmit health information in electronic form in
connection with a HIPAA transaction. We restate here the language in
the preamble to the proposed rule that ``An individual or organization
that bills and/or is paid for health care services or supplies in the
normal course of business, such as * * * an ``online'' pharmacy
accessible on the Internet, is also a health care provider for purposes
of this statute'' (64 FR 59930).
    Comment: We received many comments related to the reference to
``health clinic or licensed health care professional located at a
school or business in the preamble's discussion of ``health care
provider.'' It was stated that including ``licensed health care
professionals located at a school or business'' highlights the need for
these individuals to understand they have the authority to disclose
information to the Social Security Administration (SSA) without
authorization.
    However, several commenters urged HHS to create an exception for or
delete that reference in the preamble discussion to primary and
secondary schools because of employer or business partner
relationships. One federal agency suggested that the reference
``licensed health care professionals located at a [school]'' be deleted
from the preamble because the definition of health care provider does
not include a reference to schools. The commenter also suggested that
the Secretary consider: adding language to the preamble to clarify that
the rules do not apply to clinics or school health care providers that
only maintain records that have been excepted from the definition of
protected health information, adding an exception to the definition of
covered entities for those schools, and limiting paperwork requirements
for these schools. Another commenter argued for deleting references to
schools because the proposed rule appeared to supersede or create
ambiguity as to the Family Educational Rights and Privacy Act (FERPA),
which gives parents the right to access ``education'' and health
records of their unemancipated minor children. However, in contrast,
one commenter supported the inclusion of health care professionals who
provide services at schools or businesses.
    Response: We realize that our discussion of schools in the NPRM may
have been confusing. Therefore, we address these concerns and set forth
our policy regarding protected health information in educational
agencies and institutions in the ``Relationship to Other Federal Laws''
discussion of FERPA, above.
    Comment: Many commenters urged that direct contact with the patient
be necessary for an entity to be considered a health care provider.
Commenters suggested that persons and organizations that are remote to
the patient and have no direct contact should not be considered health
care providers. Several commenters argued that the definition of health
care provider covers a person that provides health care services or
supplies only when the provider furnishes to or bills the patient
directly. It was stated that the Secretary did not intend that
manufacturers, such as pharmaceutical, biologics, and device
manufacturers, health care suppliers, medical-surgical supply
distributors, health care vendors that offer medical record
documentation templates and that typically do not deal directly with
the patient, be considered health care providers and thus covered
entities. However, in contrast, one commenter argued that, as an in
vitro diagnostics manufacturer, it should be covered as a health care
provider.
    Response: We disagree with the comments that urged that direct
dealings with an individual be a prerequisite to meeting the definition
of health care provider. Many providers included in the statutory
definition of provider, such as clinical labs, do not have direct
contact with patients. Further, the use and disclosure of protected
health information by indirect treatment providers can have a
significant effect on individuals' privacy. We acknowledge, however,
that providers who treat patients only indirectly need not have the
full array of responsibilities as direct treatment providers, and
modify the NPRM to make this distinction with respect to several
provisions (see, for example Sec. 164.506 regarding consent). We also
clarify that manufacturers and health care suppliers who are considered
providers by Medicare are providers under this rule.
    Comment: Some commenters suggested that blood centers and plasma
donor centers that collect and distribute source plasma not be
considered covered health care providers because the centers do not
provide ``health care services'' and the blood donors are not
``patients'' seeking health care. Similarly, commenters expressed
concern that organ procurement organizations might be considered health
care providers.
    Response: We agree and have deleted from the definition of ``health
care'' the term ``procurement or banking of blood, sperm, organs, or
any other tissue for administration to patients.'' See prior discussion
under ``health care.''
    Comment: Several commenters proposed to restrict coverage to only
those providers who furnished and were paid for services and supplies.
It was argued that a salaried employee of a covered entity, such as a
hospital-based provider, should not be covered by the rule because that
provider would be subject both directly to the rule as a covered entity
and indirectly as an employee of a covered entity.
    Response: The ``dual'' direct and indirect situation described in
these comments can arise only when a health

[[Page 82575]]

care provider conducts standard HIPAA transactions both for itself and
for its employer. For example, when the services of a provider such as
a hospital-based physician are billed through a standard HIPAA
transaction conducted for the employer, in this example the hospital,
the physician does not become a covered provider. Only when the
provider uses a standard transaction on its own behalf does he or she
become a covered health care provider. Thus, the result is typically as
suggested by this commenter. When a hospital-based provider is not paid
directly, that is, when the standard HIPAA transaction is not on its
behalf, it will not become a covered provider.
    Comment: Other commenters argued that an employer who provides
health care services to its employees for whom it neither bills the
employee nor pays for the health care should not be considered health
care providers covered by the proposed rule.
    Response: We clarify that the employer may be a health care
provider under the rule, and may be covered by the rule if it conducts
standard transactions. The provisions of Sec. 164.504 may also apply.
    Comment: Some commenters were confused about the preamble
statement: ``in order to implement the principles in the Secretary's
Recommendations, we must impose any protections on the health care
providers that use and disclose the information, rather than on the
researcher seeking the information,'' with respect to the rule's policy
that a researcher who provides care to subjects in a trial will be
considered a health care provider. Some commenters were also unclear
about whether the individual researcher providing health care to
subjects in a trial would be considered a health care provider or
whether the researcher's home institution would be considered a health
care provider and thus subject to the rule.
    Response: We clarify that, in general, a researcher is also a
health care provider if the researcher provides health care to subjects
in a clinical research study and otherwise meets the definition of
``health care provider'' under the rule. However, a health care
provider is only a covered entity and subject to the rule if that
provider conducts standard transactions. With respect to the above
preamble statement, we meant that our jurisdiction under the statute is
limited to covered entities. Therefore, we cannot apply any
restrictions or requirements on a researcher in that person's role as a
researcher. However, if a researcher is also a health care provider
that conducts standard transactions, that researcher/provider is
subject to the rule with regard to its provider activities.
    As to applicability to a researcher/provider versus the
researcher's home institution, we provide the following guidance. The
rule applies to the researcher as a covered entity if the researcher is
a health care provider who conducts standard transactions for services
on his or her own behalf, regardless of whether he or she is part of a
larger organization. However, if the services and transactions are
conducted on behalf of the home institution, then the home institution
is the covered entity for purposes of the rule and the researcher/
provider is a workforce member, not a covered entity.
    Comment: One commenter expressed confusion about those instances
when a health care provider was a covered entity one day, and one who
``works under a contract'' for a manufacturer the next day.
    Response: If persons are covered under the rule in one role, they
are not necessarily covered entities when they participate in other
activities in another role. For example, that person could be a covered
health care provider in a hospital one day but the next day read
research records for a different employer. In its role as researcher,
the person is not covered, and protections do not apply to those
research records.
    Comment: One commenter suggested that the Secretary modify proposed
Sec. 160.102, to add the following clause at the end (after (c))
(regarding health care provider), ``With respect to any entity whose
primary business is not that of a health plan or health care provider
licensed under the applicable laws of any state, the standards,
requirements, and implementation specifications of this subchapter
shall apply solely to the component of the entity that engages in the
transactions specified in [Sec. ] 160.103.'' (Emphasis added.) Another
commenter also suggested that the definition of ``covered entity'' be
revised to mean entities that are ``primarily or exclusively engaged in
health care-related activities as a health plan, health care provider,
or health care clearinghouse.''
    Response: The Secretary rejects these suggestions because they will
impermissibly limit the entities covered by the rule. An entity that is
a health plan, health care provider, or health care clearinghouse meets
the statutory definition of covered entity regardless of how much time
is devoted to carrying out health care-related functions, or regardless
of what percentage of their total business applies to health care-
related functions.
    Comment: Several commenters sought to distinguish a health care
provider from a business partner as proposed in the NPRM. For example,
a number of commenters argued that disease managers that provide
services ``on behalf of'' health plans and health care providers, and
case managers (a variation of a disease management service) are
business partners and not ``health care providers.'' Another commenter
argued that a disease manager should be recognized (presumably as a
covered entity) because of its involvement from the physician-patient
level through complex interactions with health care providers.
    Response: To the extent that a disease or case manager provides
services on behalf of or to a covered entity as described in the rule's
definition of business associate, the disease or case manager is a
business associate for purposes of this rule. However, if services
provided by the disease or case manager meet the definition of
treatment and the person otherwise meets the definition of ``health
care provider,'' such a person is a health care provider for purposes
of this rule.
    Comment: One commenter argued that pharmacy employees who assist
pharmacists, such as technicians and cashiers, are not business
partners.
    Response: We agree. Employees of a pharmacy that is a covered
entity are workforce members of that covered entity for purposes of
this rule.
    Comment: A number of commenters requested that we clarify the
definition of health care provider (``* * * who furnishes, bills, or is
paid for health care services or supplies in the normal course of
business'') by defining the various terms ``furnish'', ``supply'', and
``in the normal course of business.'' For instance, it was stated that
this would help employers recognize when services such as an employee
assistance program constituted health care covered by the rule.
    Response: Although we understand the concern expressed by the
commenters, we decline to follow their suggestion to define terms at
this level of specificity. These terms are in common use today, and an
attempt at specific definition would risk the inadvertent creations of
conflict with industry practices. There is a significant variation in
the way employers structure their employee assistance programs (EAPs)
and the type of services that they provide. If the EAP provides direct
treatment to individuals, it may be a health care provider.

[[Page 82576]]

Health Information

    The response to comments on health information is included in the
response to comments on individually identifiable health information,
in the preamble discussion of Sec. 164.501.

Health Plan

    Comment: One commenter suggested that to eliminate any ambiguity,
the Secretary should clarify that the catch-all category under the
definition of health plan includes ``24-hour coverage plans'' (whether
insured or self-insured) that integrate traditional employee health
benefits coverage and workers' compensation coverage for the treatment
of on-the-job injuries and illnesses under one program. It was stated
that this clarification was essential if the Secretary persisted in
excluding workers' compensation from the final rule.
    Response: We understand concerns that such plans may use and
disclose individually identifiable health information. We therefore
clarify that to the extent that 24-hour coverage plans have a health
care component that meets the definition of ``health plan'' in the
final rule, such components must abide by the provisions of the final
rule. In the final rule, we have added a new provision to Sec. 164.512
that permits covered entities to disclose information under workers'
compensation and similar laws. A health plan that is a 24-hour plan is
permitted to make disclosures as necessary to comply with such laws.
    Comment: A number of commenters urged that certain types of
insurance entities, such as workers' compensation and automobile
insurance carriers, property and casualty insurance health plans, and
certain forms of limited benefits coverage, be included in the
definition of ``health plan.'' It was argued that consumers deserve the
same protection with respect to their health information, regardless of
the entity using it, and that it would be inequitable to subject health
insurance carriers to more stringent standards than other types of
insurers that use individually identifiable health information.
    Response: The Congress did not include these programs in the
definition of a ``health plan'' under section 1171 of the Act. Further,
HIPAA's legislative history shows that the House Report's (H. Rep. 104-
496) definition of ``health plan'' originally included certain benefit
programs, such as workers' compensation and liability insurance, but
was later amended to clarify the definition and remove these programs.
Thus, since the statutory definition of a health plan both on its face
and through legislative history evidence Congress' intention to exclude
such programs, we do not have the authority to require that these
programs comply with the standards. We have added explicit language to
the final rule which excludes the excepted benefit programs, as defined
in section 2971(c)(1) of the PHS Act, 42 U.S.C. 300gg-91(c)(1).
    Comment: Some commenters urged HHS to include entities such as stop
loss insurers and reinsurers in the definition of ``health plan.'' It
was observed that such entities have come to play important roles in
managed care delivery systems. They asserted that increasingly,
capitated health plans and providers contract with their reinsurers and
stop loss carriers to medically manage their high cost outlier cases
such as organ and bone marrow transplants, and therefore should be
specifically cited as subject to the regulations.
    Response: Stop-loss and reinsurers do not meet the statutory
definition of health plan. They do not provide or pay for the costs of
medical care, as described in the statute, but rather insure health
plans and providers against unexpected losses. Therefore, we cannot
include them as health plans in the regulation.
    Comment: A commenter asserted that there is a significant
discrepancy between the effect of the definition of ``group health
plan'' as proposed in Sec. 160.103, and the anticipated impact in the
cost estimates of the proposed rule at 64 FR 60014. Paragraph (1) of
the proposed definition of ``health plan'' defined a ``group health
plan'' as an ERISA-defined employee welfare benefit plan that provides
medical care and that: ``(i) Has 50 or more participants, or (ii) Is
administered by an entity other than the employer that established and
maintains the plan[.]'' (emphasis added) According to this commenter,
under this definition, the only insured or self-insured ERISA plans
that would not be regulated ``health plans'' would be those that have
less than 50 participants and are self administered.
    The commenter presumed that the we had intended to exclude from the
definition of ``health plan'' (and from coverage under the proposed
rule) all ERISA plans that are small (less than 50 participants) or are
administered by a third party, whether large or small, based on the
statement at 64 FR 60014, note 18. That footnote stated that the
Department had ``not included the 3.9 million `other' employer-health
plans listed in HCFA's administrative simplification regulations
because these plans are administered by a third party. The proposed
regulation will not regulate the employer plans but will regulate the
third party administrators of the plan.'' The commenter urged us not to
repeat the statutory definition, and to adopt the policy implied in the
footnote.
    Response: We agree with the commenter's observation that footnote
18 (64 FR 60014) was inconsistent with the proposed definition. We
erred in drafting that note. The definition of ``group health plan'' is
adopted from the statutory definition at section 1171(5)(A), and
excludes from the rule as ``health plans'' only the few insured or
self-insured ERISA plans that have less than 50 participants and are
self administered. We reject the commenter's proposed change to the
definition as inconsistent with the statute.
    Comment: A number of insurance companies asked that long term care
insurance policies be excluded from the definition of ``health plan.''
It was argued that such policies do not provide sufficiently
comprehensive coverage of the cost of medical care, and are limited
benefit plans that provide or pay for the cost of custodial and other
related services in connection with a long term, chronic illness or
disability.
    These commenters asserted that HIPAA recognizes this nature of long
term care insurance, observing that, with respect to HIPAA's
portability requirements, Congress enacted a series of exclusions for
certain defined types of health plan arrangements that do not typically
provide comprehensive coverage. They maintained that Congress
recognized that long term care insurance is excluded, so long as it is
not a part of a group health plan. Where a long term care policy is
offered separately from a group health plan it is considered an
excepted benefit and is not subject to the portability and guarantee
issue requirements of HIPAA. Although this exception does not appear in
the Administrative Simplification provisions of HIPAA, it was asserted
that it is guidance with respect to the treatment of long term care
insurance as a limited benefit coverage and not as coverage that is so
``sufficiently comprehensive'' that it is to be treated in the same
manner as a typical, comprehensive major medical health plan
arrangement.
    Another commenter offered a different perspective observing that
there are some long-term care policies--that do not pay for medical
care and therefore are not ``health plans.'' It was noted that most
long-term care policies are reimbursement policies--that is,

[[Page 82577]]

they reimburse the policyholder for the actual expenses that the
insured incurs for long-term care services. To the extent that these
constitute ``medical care,'' this commenter presumed that these
policies would be considered ``health plans.'' Other long-term care
policies, they pointed out, simply pay a fixed dollar amount when the
insured becomes chronically ill, without regard to the actual cost of
any long-term care services received, and thus are similar to fixed
indemnity critical illness policies. The commenter suggested that while
there was an important distinction between indemnity based long-term
care policies and expenses based long-term care policies, it may be
wise to exclude all long-term care policies from the scope of the rule
to achieve consistency with HIPAA.
    Response: We disagree. The statutory language regarding long-term
care policies in the portability title of HIPAA is different from the
statutory language regarding long-term care policies in the
Administrative Simplification title of HIPAA. Section 1171(5)(G) of the
Act means that issuers of long-term care policies are considered health
plans for purposes of administrative simplification. We also interpret
the statute as authorizing the Secretary to exclude nursing home fixed-
indemnity policies, not all long-term care policies, from the
definition of ``health plan,'' if she determines that these policies do
not provide ``sufficiently comprehensive coverage of a benefit'' to be
treated as a health plan (see section 1171 of the Act). We interpret
the term ``comprehensive'' to refer to the breadth or scope of coverage
of a policy. ``Comprehensive'' policies are those that cover a range of
possible service options. Since nursing home fixed indemnity policies
are, by their own terms, limited to payments made solely for nursing
facility care, we have determined that they should not be included as
health plans for the purposes of the HIPAA regulations. The Secretary,
therefore, explicitly excluded nursing home fixed-indemnity policies
from the definition of ``health plan'' in the Transactions Rule, and
this exclusion is thus reflected in this final rule. Issuers of other
long-term care policies are considered to be health plans under this
rule and the Transactions Rule.
    Comment: One commenter was concerned about the potential impact of
the proposed regulations on ``unfunded health plans,'' which the
commenter described as programs used by smaller companies to provide
their associates with special employee discounts or other membership
incentives so that they can obtain health care, including prescription
drugs, at reduced prices. The commenter asserted that if these discount
and membership incentive programs were covered by the regulation, many
smaller employers might discontinue offering them to their employees,
rather than deal with the administrative burdens and costs of complying
with the rule.
    Response: Only those special employee discounts or membership
incentives that are ``employee welfare benefit plans'' as defined in
section 3(1) of the Employee Retirement Income Security Act of 1974, 29
U.S.C. 1002(1), and provide ``medical care'' (as defined in section
2791(a)(2) of the Public Health Service Act, 42 U.S.C. 300gg-91(a)(2)),
are health plans for the purposes of this rule. Discount or membership
incentive programs that are not group health plans are not covered by
the rule.
    Comment: Several commenters agreed with the proposal to exclude
``excepted benefits'' such as disability income insurance policies,
fixed indemnity critical illness policies, and per diem long-term care
policies from the definition of ``health plan,'' but were concerned
that the language of the proposed rule did not fully reflect this
intent. They asserted that clarification was necessary in order to
avoid confusion and costs to both consumers and insurers.
    One commenter stated that, while HHS did not intend for the rule to
apply to every type of insurance coverage that paid for medical care,
the language of the proposed rule did not bear this out. The problem,
it was asserted, is that under the proposed rule any insurance policy
that pays for ``medical care'' would technically be a ``health plan.''
It was argued that despite the statements in the narrative, there are
no provisions that would exempt any of the ``excepted benefits'' from
the definition of ``health care.'' It was stated that:

    Although (with the exception of long-term care insurance), the
proposed rule does not include the `excepted benefits' in its list
of sixteen examples of a health plan (proposed 45 CFR 160.104), it
does not explicitly exclude them either. Because these types of
policies in some instances pay benefits that could be construed as
payments for medical care, we are concerned by the fact that they
are not explicitly excluded from the definition of `health plan' or
the requirements of the proposed rule.''

    Several commenters proposed that HHS adopt the same list of
``excepted benefits'' contained in 29 U.S.C. 1191b, suggesting that
they could be adopted either as exceptions to the definition of
``health plan'' or as exceptions to the requirements imposed on
``health plans.'' They asserted that this would promote consistency in
the federal regulatory structure for health plans.
    It was suggested that HHS clarify whether the definition of health
plan, particularly the ``group health plan'' and ``health insurance
issuer'' components, includes a disability plan or disability insurer.
It was noted that a disability plan or disability insurer may cover
only income lost from disability and, as mentioned above, some
rehabilitation services, or a combination of lost income,
rehabilitation services and medical care. The commenter suggested that
in addressing this coverage issue, it may be useful to refer to the
definitions of group health plan, health insurance issuer and medical
care set forth in Part I of HIPAA, which the statutory provisions of
the Administrative Simplification subtitle expressly reference. See 42
U.S.C. 1320d(5)(A) and (B).
    Response: We agree that the NPRM may have been ambiguous regarding
the types of plans the rule covers. To remedy this confusion, we have
added language that specifically excludes from the definition any
policy, plan, or program providing or paying the cost of the excepted
benefits, as defined in section 2971(c)(1) of the PHS Act, 42 U.S.C.
300gg-91(c)(1). As defined in the statute, this includes but is not
limited to benefits under one or more (or any combination thereof) of
the following: coverage only for accident, or disability income
insurance, or any combination thereof; liability insurance, including
general liability insurance and automobile liability insurance; and
workers' compensation or similar insurance.
    However, the other excepted benefits as defined in section
2971(c)(2) of the PHS Act, 42 U.S.C. 300gg-91(c)(2), such as limited
scope dental or vision benefits, not explicitly excepted from the
regulation could be considered ``health plans'' under paragraph
(1)(xvii) of the definition of ``health plan'' in the final rule if and
to the extent that they meet the criteria for the definition of
``health plan.'' Such plans, unlike the programs and plans listed at
section 2971(c)(1), directly and exclusively provide health insurance,
even if limited in scope.
    Comment: One commenter recommended that the Secretary clarify that
``health plan'' does not include property and casualty benefit
providers. The commenter stated that the clarifying language is needed
given the ``catchall'' category of entities defined as ``any other
individual plan or group health plan, or combination thereof, that

[[Page 82578]]

provides or pays for the cost of medical care,'' and asserted that
absent clarification there could be serious confusion as to whether
property and casualty benefit providers are ``health plans'' under the
rule.
    Response: We agree and as described above have added language to
the final rule to clarify that the ``excepted benefits'' as defined
under 42 U.S.C. 300gg-91(c)(1), which includes liability programs such
as property and casualty benefit providers, are not health plans for
the purposes of this rule.
    Comment: Some commenters recommended that the Secretary replace the
term ``medical care'' with ``health care.'' It was observed that
``health care'' was defined in the proposal, and that this definition
was used to define what a health care provider does. However, they
observed that the definition of ``health plan'' refers to the provision
of or payment for ``medical care,'' which is not defined. Another
commenter recommended that HHS add the parenthetical phrase ``as such
term is defined in section 2791 of the Public Health Service Act''
after the phrase ``medical care.''
    Response: We disagree with the first recommendation. We understand
that the term ``medical care'' can be easily confused with the term
``health care.'' However, the two terms are not synonymous. The term
``medical care'' is a statutorily defined term and its use is critical
in making a determination as to whether a health plan is considered a
``health plan'' for purposes of administrative simplification. In
addition, since the term ``medical care'' is used in the regulation
only in the context of the definition of ``health plan'' and we believe
that its inclusion in the regulatory text may cause confusion, we did
not add a definition of ``medical care'' in the final rule. However,
consistent with the second recommendation above, the statutory cite for
``medical care'' was added to the definition of ``health plan'' in the
Transactions Rule, and thus is reflected in this final rule.
    Comment: A number of commenters urged that the Secretary define
more narrowly what characteristics would make a government program that
pays for specific health care services a ``health plan.'' Commenters
argued that there are many ``payment'' programs that should not be
included, as discussed below, and that if no distinctions were made,
``health plan'' would mean the same as ``purchaser'' or even ``payor.''
    Commenters asserted that there are a number of state programs that
pay for ``health care'' (as defined in the rule) but that are not
health plans. They said that examples include the WIC program (Special
Supplemental Nutrition Program for Women, Infants, and Children) which
pays for nutritional assessment and counseling, among other services;
the AIDS Client Services Program (including AIDS prescription drug
payment) under the federal Ryan White Care Act and state law; the
distribution of federal family planning funds under Title X of the
Public Health Services Act; and the breast and cervical health program
which pays for cancer screening in targeted populations. Commenters
argued that these are not insurance plans and do not fall within the
``health plan'' definition's list of examples, all of which are either
insurance or broad-scope programs of care under a contract or statutory
entitlement. However, paragraph (16) in that list opens the door to
broader interpretation through the catchall phrase, ``any other
individual or group plan that provides or pays for the cost of medical
care.'' Commenters assert that clarification is needed.
    A few commenters stated that other state agencies often work in
partnership with the state Medicaid program to implement certain
Medicaid benefits, such as maternity support services and prenatal
genetics screening. They concluded that while this probably makes parts
of the agency the ``business partner'' of a covered entity, they were
uncertain whether it also makes the same agency parts a ``health plan''
as well.
    Response: We agree with the commenters that clarification is needed
as to the rule's application to government programs that pay for health
care services. Accordingly, in the final rule we have excepted from the
definition of ``health plan'' a government funded program which does
not have as its principal purpose the provision of, or payment for, the
cost of health care or which has as its principal purpose the
provision, either directly or by grant, of health care. For example,
the principal purpose of the WIC program is not to provide or pay for
the cost of health care, and thus, the WIC program is not a health plan
for purposes of this rule. The program of health care services for
individuals detained by the INS provides health care directly, and so
is not a health plan. Similarly, the family planning program authorized
by Title X of the Public Health Service Act pays for care exclusively
through grants, and so is not a health plan under this rule. These
programs (the grantees under the Title X program) may be or include
health care providers and may be covered entities if they conduct
standard transactions.
    We further clarify that, where a public program meets the
definition of ``health plan,'' the government agency that administers
the program is the covered entity. Where two agencies administer a
program jointly, they are both a health plan. For example, both the
Health Care Financing Administration and the insurers that offers a
Medicare+Choice plan are ``health plans'' with respect to Medicare
beneficiaries. An agency that does not administer a program but which
provides services for such a program is not a covered entity by virtue
of providing such services. Whether an agency providing services is a
business associate of the covered entity depends on whether its
functions for the covered entity meet the definition of business
associate in Sec. 164.501 and, in the example described by this
comment, in particular on whether the arrangement falls into the
exception in Sec. 164.504(e)(1)(ii)(C) for government agencies that
collect eligibility or enrollment information for covered government
programs.
    Comment: Some commenters expressed support for retaining the
category in paragraph (16) of the proposal's definition: ``Any other
individual or group health plan, or combination thereof, that provides
or pays for the cost of medical care.'' Others asked that the Secretary
clarify this category. One commenter urged that the final rule clearly
define which plans would meet the criteria for this category.
    Response: As described in the proposed rule, this category
implements the language at the beginning of the statutory definition of
the term ``health plan'': ``The term `health plan' means an individual
or group plan that provides, or pays the cost of, medical care * * *
Such term includes the following, and any combination thereof * * *''
This statutory language is general, not specific, and as such, we are
leaving it general in the final rule. However, as described above, we
add explicit language which excludes certain ``excepted benefits'' from
the definition of ``health plan'' in an effort to clarify which plans
are not health plans for the purposes of this rule. Therefore, to the
extent that a certain benefits plan or program otherwise meets the
definition of ``health plan'' and is not explicitly excepted, that
program or plan is considered a ``health plan'' under paragraph
(1)(xvii) of the final rule.
    Comment: A commenter explained that HIPAA defines a group health
plan by expressly cross-referencing the statutory sections in the PHS
Act and the Employee Retirement Income

[[Page 82579]]

Security Act of 1974 (ERISA), 29 U.S.C. 1001, et seq., which define the
terms ``group health plan,'' ``employee welfare benefit plan'' and
``participant.'' See 29 U.S.C. 1002(l) (definition of ``employee
welfare benefit plan,'' which is the core of the definition of group
health plan under both ERISA and the PHS Act); 29 U.S.C. 100217)
(definition of participant); 29 U.S.C. 1193(a) (definition of ``group
health plan,'' which is identical to that in section 2791(a) of the PHS
Act).
    It was pointed out that the preamble and the text of the proposed
rule both limit the definition of all three terms to their current
definitions. The commenter reasoned that since the ERISA definitions
may change over time through statutory amendment, Department of Labor
regulations or judicial interpretation, it would not be clear what
point in time is to be considered current. Therefore, they suggested
deleting references to ``current'' or ``currently'' in the preamble and
in the regulation with respect to these three ERISA definitions.
    In addition, the commenter stated that as the preamble to the NPRM
correctly reflected, HIPAA expressly cross-references ERISA's
definition of ``participant'' in section 3(7) of ERISA, 29 U.S.C.
1002(7). 42 U.S.C. 1320d(5)(A). The text of the privacy regulation,
however, omits this cross-reference. It was suggested that the
reference to section 3(7) of ERISA, defining ``participant,'' be
included in the regulation.
    Finally, HIPAA incorporates the definition of a group health plan
as set forth in section 2791(a) of the PHS Act, 42 U.S.C. 300gg-
91(a)(l). That definition refers to the provision of medical care
``directly or through insurance, reimbursement, or otherwise.'' The
word ``reimbursement'' is omitted in both the preamble and the text of
the regulation; the commenter suggested restoring it to both.
    Response: We agree. These changes were made to the definition of
``health plan'' as promulgated in the Transactions Rule, and are
reflected in this final rule.

Small Health Plan

    Comment: One commenter recommended that we delete the reference to
$5 million in the definition and instead define a ``small health plan''
as a health plan with fewer than 50 participants. It was stated that
using a dollar limitation to define a ``small health plan'' is not
meaningful for self-insured plans and some other types of health plan
coverage arrangements. A commenter pointed out that the general
definition of a health plan refers to ``50 or more participants,'' and
that using a dollar factor to define a ``small health plan'' would be
inconsistent with this definition.
    Response: We disagree. The Small Business Administration (SBA)
promulgates size standards that indicate the maximum number of
employees or annual receipts allowed for a concern (13 CFR 121.105) and
its affiliates to be considered ``small.'' The size standards
themselves are expressed either in number of employees or annual
receipts (13 CFR 121.201). The size standards for compliance with
programs of other agencies are those for SBA programs which are most
comparable to the programs of such other agencies, unless otherwise
agreed by the agency and the SBA (13 CFR 121.902). With respect to the
insurance industry, the SBA has specified that annual receipts of $5
million is the maximum allowed for a concern and its affiliates to be
considered small (13 CFR 121.201). Consequently, we retain the
proposal's definition in the final rule to be consistent with SBA
requirements.
    We understand there may be some confusion as to the meaning of
``annual receipts'' when applied to a health plan. For our purposes,
therefore, we consider ``pure premiums'' to be equivalent to ``annual
receipts.''

Workforce

    Comment: Some commenters requested that we exclude ``volunteers''
from the definition of workforce. They stated that volunteers are
important contributors within many covered entities, and in particular
hospitals. They argued that it was unfair to ask that these people
donate their time and at the same time subject them to the penalties
placed upon the paid employees by these regulations, and that it would
discourage people from volunteering in the health care setting.
    Response: We disagree. We believe that differentiating those
persons under the direct control of a covered entity who are paid from
those who are not is irrelevant for the purposes of protecting the
privacy of health information, and for a covered entity's management of
its workforce. In either case, the person is working for the covered
entity. With regard to implications for the individual, persons in a
covered entity's workforce are not held personally liable for violating
the standards or requirements of the final rule. Rather, the Secretary
has the authority to impose civil monetary penalties and in some cases
criminal penalties for such violations on only the covered entity.
    Comment: One commenter asked that the rule clarify that employees
administering a group health or other employee welfare benefit plan on
their employers' behalf are considered part of the covered entity's
workforce.
    Response: As long as the employees have been identified by the
group health plan in plan documents as performing functions related to
the group health plan (consistent with the requirements of
Sec. 164.504(f)), those employees may have access to protected health
information. However, they are not permitted to use or disclose
protected health information for employment-related purposes or in
connection with any other employee benefit plan or employee benefit of
the plan sponsor.

Part 160--Subpart B--Preemption of State Law

    We summarize and respond below to comments received in the
Transactions rulemaking on the issue of preemption, as well as those
received on this topic in the Privacy rulemaking. Because no process
was proposed in the Transactions rulemaking for granting exceptions
under section 1178(a)(2)(A), a process for making exception
determinations was not adopted in the Transactions Rule. Instead, since
a process for making exception determinations was proposed in the
Privacy rulemaking, we decided that the comments received in the
Transactions rulemaking should be considered and addressed in
conjunction with the comments received on the process proposed in the
Privacy rulemaking. See 65 FR 50318 for a fuller discussion.
Accordingly, we discuss the preemption comments received in the
Transactions rulemaking where relevant below.
    Comment: The majority of comments on preemption addressed the
subject in general terms. Numerous comments, particularly from plans
and providers, argued that the proposed preemption provisions were
burdensome, ineffective, or insufficient, and that complete federal
preemption of the ``patchwork'' of state privacy laws is needed. They
also argued that the proposed preemption provisions are likely to
invite litigation. Various practical arguments in support of this
position were made. Some of these comments recognized that the
Secretary's authority under section 1178 of the Act is limited and
acknowledged that the Secretary's proposals were within her statutory
authority. One commenter suggested that the exception determination
process would result in a very costly and laborious and sometimes
inconsistent analysis of the occasions in which state law would

[[Page 82580]]

survive federal preemption, and thus suggested the final privacy
regulations preempt state law with only limited exceptions, such as
reporting child abuse. Many other comments, however, recommended
changing the proposed preemption provisions to preempt state privacy
laws on as blanket a basis as possible.
    One comment argued that the assumption that more stringent privacy
laws are better is not necessarily true, citing a 1999 GAO report
finding evidence that the stringent state confidentiality laws of
Minnesota halted the collection of comparative information on health
care quality.
    Several comments in this vein were also received in the
Transactions rulemaking. The majority of these comments took the
position that exceptions to the federal standards should either be
prohibited or discouraged. It was argued that granting exceptions to
the standards, particularly the transactions standards, would be
inconsistent with the statute's objective of promoting administrative
simplification through the use of uniform transactions.
    Many other commenters, however, endorsed the ``federal floor''
approach of the proposed rules. (These comments were made in the
context of the proposed privacy regulations.) These comments argued
that this approach was preferable because it would not impair the
effectiveness of state privacy laws that are more protective of
privacy, while raising the protection afforded medical information in
states that do not enact laws that are as protective as the rules
below. Some comments argued, however, that the rules should give even
more deference to state law, questioning in particular the definitions
and the proposed addition to the ``other purposes'' criterion for
exception determinations in this regard.
    Response: With respect to the exception process provided for by
section 1178(a)(2)(A), the contention that the HIPAA standards should
uniformly control is an argument that should be addressed to the
Congress, not this agency. Section 1178 of the Act expressly gives the
Secretary authority to grant exceptions to the general rule that the
HIPAA standards preempt contrary state law in the circumstances she
determines come within the provisions at section 1178(a)(2)(A). We
agree that the underlying statutory goal of standardizing financial and
administrative health care transactions dictates that exceptions should
be granted only on narrow grounds. Nonetheless, Congress clearly
intended to accommodate some state laws in these areas, and the
Department is not free to disregard this Congressional choice. As is
more fully explained below, we have interpreted the statutory criteria
for exceptions under section 1178(a)(2)(A) to balance the need for
relative uniformity with respect to the HIPAA standards with state
needs to set certain policies in the statutorily defined areas.
    The situation is different with respect to state laws relating to
the privacy of protected health information. Many of the comments
arguing for uniform standards were particularly concerned with
discrepancies between the federal privacy standards and various state
privacy requirements. Unlike the situation with respect to the
transactions standards, where states have generally not entered the
field, all states regulate the privacy of some medical information to a
greater or lesser extent. Thus, we understand the private sector's
concern at having to reconcile differing state and federal privacy
requirements.
    This is, however, likewise an area where the policy choice has been
made by Congress. Under section 1178(a)(2)(B) of the Act and section
264(c)(2) of HIPAA, provisions of state privacy laws that are contrary
to and more stringent than the corresponding federal standard,
requirement, or implementation specification are not preempted. The
effect of these provisions is to let the law that is most protective of
privacy control (the ``federal floor'' approach referred to by many
commenters), and this policy choice is one with which we agree. Thus,
the statute makes it impossible for the Secretary to accommodate the
requests to establish uniformly controlling federal privacy standards,
even if doing so were viewed as desirable.
    Comment: Numerous comments stated support for the proposal at
proposed Subpart B to issue advisory opinions with respect to the
preemption of state laws relating to the privacy of individually
identifiable health information. A number of these comments appeared to
assume that the Secretary's advisory opinions would be dispositive of
the issue of whether or not a state law was preempted. Many of these
commenters suggested what they saw as improvements to the proposed
process, but supported the proposal to have the Department undertake
this function.
    Response: Despite the general support for the advisory opinion
proposal, we decided not to provide specifically for the issuance of
such opinions. The following considerations led to this decision.
First, the assumption by commenters that an advisory opinion would
establish what law applied in a given situation and thereby simplify
the task of ascertaining what legal requirements apply to a covered
entity or entities is incorrect. Any such opinion would be advisory
only. Although an advisory opinion issued by the Department would
indicate to covered entities how the Department would resolve the legal
conflict in question and would apply the law in determining compliance,
it would not bind the courts. While we assume that most courts would
give such opinions deference, the outcome could not be guaranteed.
    Second, the thousands of questions raised in the public comment
about the interpretation, implications, and consequences of all of the
proposed regulatory provisions have led us to conclude that significant
advice and technical assistance about all of the regulatory
requirements will have to be provided on an ongoing basis. We recognize
that the preemption concerns that would have been addressed by the
proposed advisory opinions were likely to be substantial. However,
there is no reason to assume that they will be the most substantial or
urgent of the questions that will most likely need to be addressed. It
is our intent to provide as much technical advice and assistance to the
regulated community as we can with the resources available. Our concern
is that setting up an advisory opinion process for just one of the many
types of issues that will have to be addressed will lead to a non-
optimal allocation of those resources. Upon careful consideration,
therefore, we have decided that we will be better able to prioritize
our workload and be better able to be responsive to the most urgent and
substantial questions raised to the Department, if we do not provide
for a formal advisory opinion process on preemption as proposed.
    Comment: A few commenters argued that the Privacy Rule should
preempt state laws that would impose more stringent privacy
requirements for the conduct of clinical trials. One commenter asserted
that the existing federal regulations and guidelines for patient
informed consent, together with the proposed rule, would adequately
protect patient privacy.
    Response: The Department does not have the statutory authority
under HIPAA to preempt state laws that would impose more stringent
privacy requirements on covered entities. HIPAA provides that the rule
promulgated by the Secretary may not preempt state laws that are in
conflict

[[Page 82581]]

with the regulatory requirements and that provide greater privacy
protections.

Section 160.201--Applicability

    Comment: Several commenters indicated that the guidance provided by
the definitions at proposed Sec. 160.202 would be of substantial
benefit both to regulated entities and to the public. However, these
commenters argued that the applicability of such definitions would be
too limited as drafted, since proposed Sec. 160.201 provided that the
definitions applied only to ``determinations and advisory opinions
issued by the Secretary pursuant to 42 U.S.C. 1320d-7.'' The commenters
stated that it would be far more helpful to make the definitions in
proposed Sec. 160.202 more broadly applicable, to provide general
guidance on the issue of preemption.
    Response: We agree with the comments on this issue, and have
revised the applicability provision of subpart B below accordingly.
Section 160.201 below sets out that Subpart B implements section 1178.
This means, in our view, that the definitions of the statutory terms at
Sec. 160.202 are legislative rules that apply when those statutory
terms are employed, whether by HHS, covered entities, or the courts.

Section 160.202--Definitions

Contrary

    Comment: Some commenters asserted that term ``contrary'' as defined
at Sec. 160.202 was overly broad and that its application would be
time-consuming and confusing for states. These commenters argued that,
under the proposed definition, a state would be required to examine all
of its laws relating to health information privacy in order to
determine whether or not its law were contrary to the requirements
proposed. It was also suggested that the definition contain examples of
how it would work in practical terms.
    A few commenters, however, argued that the definition of
``contrary'' as proposed was too narrow. One commenter argued that the
Secretary erred in her assessment of the case law analyzing what is
known as ``conflict preemption'' and which is set forth in shorthand in
the tests set out at Sec. 160.202.
    Response: We believe that the definition proposed represents a
policy that is as clear as is feasible and which can be applied
nationally and uniformly. As was noted in the preamble to the proposed
rules (at 64 FR 59997), the tests in the proposed definition of
``contrary'' are adopted from the jurisprudence of ``conflict
preemption.'' Since preemption is a judicially developed doctrine, it
is reasonable to interpret this term as indicating that the statutory
analysis should tie in to the analytical formulations employed by the
courts. Also, while the court-developed tests may not be as clear as
commenters would like, they represent a long-term, thoughtful
consideration of the problem of defining when a state/federal conflict
exists. They will also, we assume, generally be employed by the courts
when conflict issues arise under the rules below. We thus see no
practical alternative to the proposed definition and have retained it
unchanged. With respect to various suggestions for shorthand versions
of the proposed tests, such as the arguably broader term ``inconsistent
with,'' we see no operational advantages to such terms.
    Comment: One comment asked that the Department clarify that if
state law is not preempted, then the federal law would not also apply.
    Response: This comment raises two issues, both of which deserve
discussion. First, a state law may not be preempted because there is no
conflict with the analogous federal requirement; in such a situation,
both laws can, and must, be complied with. We thus do not accept this
suggestion, to the extent that it suggests that the federal law would
give way in this situation. Second, a state law may also not be
preempted because it comes within section 1178(a)(2)(B), section
1178(b), or section 1178(c); in this situation, a contrary federal law
would give way.
    Comment: One comment urged the Department to take the position that
where state law exists and no analogous federal requirement exists, the
state requirement would not be ``contrary to'' the federal requirement
and would therefore not trigger preemption.
    Response: We agree with this comment.
    Comment: One commenter criticized the definition as unhelpful in
the multi-state transaction context. For example, it was asked whether
the issue of whether a state law was ``contrary to'' should be
determined by the law of the state where the treatment is provided,
where the claim processor is located, where the payment is issued, or
the data maintained, assuming all are in different states.
    Response: This is a choice of law issue, and, as is discussed more
fully below, is a determination that is routinely made today in
connection with multi-state transactions. See discussion below under
Exception Determinations (Criteria for Exception Determinations).

State Law

    Comment: Comments noted that the definition of ``state law'' does
not explicitly include common law and recommended that it be revised to
do so or to clarify that the term includes evidentiary privileges
recognized at state law. Guidance concerning the impact of state
privileges was also requested.
    Response: As requested, we clarify that the definition of ``state
law'' includes common law by including the term ``common law.'' In our
view, this phrase encompasses evidentiary privileges recognized at
state law (which may also, we note, be embodied in state statutes).
    Comment: One comment criticized this definition as unwieldy, in
that locating state laws pertaining to privacy is likely to be
difficult. It was noted that Florida, for example, has more than 60
statutes that address health privacy.
    Response: To the extent that state laws currently apply to covered
entities, they have presumably determined what those laws require in
order to comply with them. Thus, while determining which laws are
``contrary'' to the federal requirements will require additional work
in terms of comparing state law with the federal requirements, entities
should already have acquired the knowledge of state law needed for this
task in the ordinary course of doing business.
    Comment: The New York City Department of Health noted that in many
cases, provisions of New York State law are inapplicable within New
York City, because the state legislature has recognized that the local
code is tailored to the particular needs of the City. It urged that the
New York City Code be treated as state law, for preemption purposes.
    Response: We agree that, to the extent a state treats local law as
substituting for state law it could be considered to be ``state law''
for purposes of this definition. If, however, a local law is local in
scope and effect, and a tier of state law exists over the same subject
matter, we do not think that the local law could or should be treated
as ``state law'' for preemption purposes. We do not have sufficient
information to assess the situation raised by this comment with respect
to this principle, and so express no opinion thereon.

More Stringent

    Comment: Many commenters supported the policy in the proposed
definition of ``individual'' at proposed Sec. 164.502, which would have
permitted unemancipated minors to exercise, on

[[Page 82582]]

their own behalf, rights granted to individuals in cases where they
consented to the underlying health care. Commenters stated, however,
that the proposed preemption provision would leave in place state laws
authorizing or prohibiting disclosure to parents of the protected
health information of their minor children and would negate the
proposed policy for the treatment of minors under the rule. The
comments stated that such state laws should be treated like other state
laws, and preempted to the extent that they are less protective of the
privacy of minors.
    Other commenters supported the proposed preemption provision--not
to preempt a state law to the extent it authorizes or prohibits
disclosure of protected health information regarding a minor to a
parent.
    Response: Laws regarding access to health care for minors and
confidentiality of their medical records vary widely; this regulation
recognizes and respects the current diversity of state law in this
area. Where states have considered the balance involved in protecting
the confidentiality of minors' health information and have explicitly
acted, for example, to authorize disclosure, defer the decision to
disclose to the discretion of the health care provider, or prohibit
disclosure of minor's protected health information to a parent, the
rule defers to these decisions to the extent that they regulate such
disclosures.
    Comment: The proposed definition of ``more stringent'' was
criticized as affording too much latitude to for granting exceptions
for state laws that are not protective of privacy. It was suggested
that the test should be ``most protective of the individual's
privacy.''
    Response: We considered adopting this test. However, for the
reasons set out at 64 FR 59997, we concluded that this test would not
provide sufficient guidance. The comments did not address the concerns
we raised in this regard in the preamble to the proposed rules, and we
continue to believe that they are valid.
    Comment: A drug company expressed concern with what it saw as the
expansive definition of this term, arguing that state governments may
have less experience with the special needs of researchers than federal
agencies and may unknowingly adopt laws that have a deleterious effect
on research. A provider group expressed concern that allowing stronger
state laws to prevail could result in diminished ability to get enough
patients to complete high quality clinical trials.
    Response: These concerns are fundamentally addressed to the
``federal floor'' approach of the statute, not to the definition
proposed: even if the definition of ``more stringent'' were narrowed,
these concerns would still exist. As discussed above, since the
``federal floor'' approach is statutory, it is not within the
Secretary's authority to change the dynamics that are of concern.
    Comment: One comment stated that the proposed rule seemed to
indicate that the ``more stringent'' and ``contrary to'' definitions
implied that these standards would apply to ERISA plans as well as to
non-ERISA plans.
    Response: The concern underlying this comment is that ERISA plans,
which are not now subject to certain state laws because of the
``field'' preemption provision of ERISA but which are subject to the
rules below, will become subject to state privacy laws that are ``more
stringent'' than the federal requirements, due to the operation of
section 1178(a)(2)(B), together with section 264(c)(2). We disagree
that this is the case. While the courts will have the final say on
these questions, it is our view that these sections simply leave in
place more stringent state laws that would otherwise apply; to the
extent that such state laws do not apply to ERISA plans because they
are preempted by ERISA, we do not think that section 264(c)(2)
overcomes the preemption effected by section 514(a) of ERISA. For more
discussion of this point, see 64 FR 60001.
    Comment: The Lieutenant Governor's Office of the State of Hawaii
requested a blanket exemption for Hawaii from the federal rules, on the
ground that its recently enacted comprehensive health privacy law is,
as a whole, more stringent than the proposed federal standards. It was
suggested that, for example, special weight should be given to the
severity of Hawaii's penalties. It was suggested that a new definition
(``comprehensive'') be added, and that ``more stringent'' be defined in
that context as whether the state act or code as a whole provides
greater protection.
    An advocacy group in Vermont argued that the Vermont legislature
was poised to enact stronger and more comprehensive privacy laws and
stated that the group would resent a federal prohibition on that.
    Response: The premise of these comments appears to be that the
provision-by-provision approach of Subpart B, which is expressed in the
definition of the term ``contrary'', is wrong. As we explained in the
preamble to the proposed rules (at 64 FR 59995), however, the statute
dictates a provision-by-provision comparison of state and federal
requirements, not the overall comparison suggested by these comments.
We also note that the approach suggested would be practically and
analytically problematic, in that it would be extremely difficult, if
not impossible, to determine what is a legitimate stopping point for
the provisions to be weighed on either the state side or the federal
side of the scale in determining which set of laws was the ``more
stringent.'' We accordingly do not accept the approach suggested by
these comments.
    With respect to the comment of the Vermont group, nothing in the
rules below prohibits or places any limits on states enacting stronger
or more comprehensive privacy laws. To the extent that states enact
privacy laws that are stronger or more comprehensive than contrary
federal requirements, they will presumably not be preempted under
section 1178(a)(2)(B). To the extent that such state laws are not
contrary to the federal requirements, they will act as an overlay on
the federal requirements and will have effect.
    Comment: One comment raised the issue of whether a private right of
action is a greater penalty, since the proposed federal rule has no
comparable remedy.
    Response: We have reconsidered the proposed ``penalty'' provision
of the proposed definition of ``more stringent'' and have eliminated
it. The HIPAA statute provides for only two types of penalties: fines
and imprisonment. Both types of penalties could be imposed in addition
to the same type of penalty imposed by a state law, and should not
interfere with the imposition of other types of penalties that may be
available under state law. Thus, we think it is unlikely that there
would be a conflict between state and federal law in this respect, so
that the proposed criterion is unnecessary and confusing. In addition,
the fact that a state law allows an individual to file a lawsuit to
protect privacy does not conflict with the HIPAA penalty provisions.

Relates to the Privacy of Individually Identifiable Health Information

    Comment: One comment criticized the definition of this term as too
narrow in scope and too uncertain. The commenter argued that
determining the specific purpose of a state law may be difficult and
speculative, because many state laws have incomplete, inaccessible, or
non-existent legislative histories. It was suggested that the
definition be revised by deleting the word ``specific'' before the word
``purpose.'' Another commenter argued

[[Page 82583]]

that the definition of this term should be narrowed to minimize reverse
preemption by more stringent state laws. One commenter generally
supported the proposed definition of this term.
    Response: We are not accepting the first comment. The purpose of a
given state enactment should be ascertainable, if not from legislative
history or a purpose statement, then from the statute viewed as a
whole. The same should be true of state regulations or rulings. In any
event, it seems appropriate to restrict the field of state laws that
may potentially trump the federal standards to those that are clearly
intended to establish state public policy and operate in the same area
as the federal standards. To the extent that the definition in the
rules below does this, we have accommodated the second comment. We
note, however, that we do not agree that the definition should be
further restricted to minimize ``reverse preemption,'' as suggested by
this comment, as we believe that state laws that are more protective of
privacy than contrary federal standards should remain, in order to
ensure that the privacy of individuals' health information receives the
maximum legal protection available.

Sections 160.203 and 160.204--Exception Determinations and Advisory
Opinions

    Most of the comments received on proposed Subpart B lumped together
the proposed process for exception determinations under section
1178(a)(2)(A) with the proposed process for issuing advisory opinions
under section 1178(a)(2)(B), either because the substance of the
comment applied to both processes or because the commenters did not
draw a distinction between the two processes. We address these general
comments in this section.
    Comment: Numerous commenters, particularly providers and provider
groups, recommended that exception determinations and advisory opinions
not be limited to states and advocated allowing all covered entities
(including individuals, providers and insurers), or private sector
organizations, to request determinations and opinions with respect to
preemption of state laws. Several commenters argued that limiting
requests to states would deny third party stakeholders, such as life
and disability income insurers, any means of resolving complex
questions as to what rule they are subject to. One commenter noted that
because it is an insurer who will be liable if it incorrectly analyzes
the interplay between laws and reaches an incorrect conclusion, there
would be little incentive for the states to request clarification. It
would also cause large administrative burdens which, it was stated,
would be costly and confusing. It was also suggested that the request
for the exception be made to the applicable state's attorney general or
chief legal officer, as well as the Secretary. Various changes to the
language were suggested, such as adding that ``a covered entity, or any
other entity impacted by this rule'' be allowed to submit the written
request.
    Response: We agree, and have changed Sec. 164.204(a) below
accordingly.
    The decision to eliminate advisory opinions makes this issue moot
with respect to those opinions.
    Comment: Several commenters noted that it was unclear under the
proposed rule which state officials would be authorized to request a
determination.
    Response: We agree that the proposed rule was unclear in this
respect. The final rule clarifies who may make the request for a state,
with respect to exception determinations. See, Sec. 160.204(a). The
language adopted should ensure that the Secretary receives an
authoritative statement from the state. At the same time, this language
provides states with flexibility, in that the governor or other chief
elected official may choose to designate other state officials to make
such requests.
    Comment: Many commenters recommended that a process be established
whereby HHS performs an initial state-by-state critical analysis to
provide guidance on which state laws will not be preempted; most
suggested that such an analysis (alternatively referred to as a
database or clearinghouse) should be completed before providers would
be required to come into compliance. Many of these comments argued that
the Secretary should bear the cost for the analyses of state law,
disagreeing with the premise stated in the preamble to the proposed
rules that it is more efficient for the private market to complete the
state-by-state review. Several comments also requested that HHS
continue to maintain and monitor the exception determination process,
and update the database over time in order to provide guidance and
certainty on the interaction of the federal rules with newly enacted or
amended state laws that are produced after the final rule. Some
comments recommended that each state be required to certify agreement
with the HHS analyses.
    In contrast, one hospital association noted concerns that the
Secretary would conduct a nationwide analysis of state laws. The
comment stated that implementation would be difficult since much of the
law is a product of common law, and such state-specific research should
only be attempted by experienced health care attorneys in each
jurisdiction.
    Response: These comments seem to be principally concerned with
potential conflicts between state privacy laws and the privacy
standards, because, as is more fully explained below, preemption of
contrary state laws not relating to privacy is automatic unless the
Secretary affirmatively acts under section 1178(a)(2)(A) to grant an
exception. We recognize that the provisions of sections 1178(b) (state
public health laws), and 1178(c) (state regulation of health plans)
similarly preserve state laws in those areas, but very little of the
public comment appeared to be concerned with these latter statutory
provisions. Accordingly, we respond below to what we see as the
commenters' main concern.
    The Department will not do the kind of global analysis requested by
many of these comments. What these comments are in effect seeking is a
global advisory opinion as to when the federal privacy standards will
control and when they will not. We understand the desire for certainty
underlying these comments. Nonetheless, the reasons set out above as
the basis for our decision not to establish a formal advisory opinion
process apply equally to these requests. We also do not agree that the
task of evaluating the requirements below in light of existing state
law is unduly burdensome or unreasonable. Rather, it is common for new
federal requirements to necessitate an examination by the regulated
entities of the interaction between existing state law and the federal
requirements incident to coming into compliance.
    We agree, however, that the case is different where the Secretary
has affirmatively acted, either through granting an exception under
section 1178(a)(2)(A) or by making a specific determination about the
effect of a particular state privacy law in, for example, the course of
determining an entity's compliance with the privacy standards. As is
discussed below, the Department intends to make notice of exception
determinations that it makes routinely available.
    We do not agree with the comments suggesting that compliance by
covered entities be delayed pending completion of an analysis by the
Secretary and that states be required to certify agreement with the
Secretary's analysis, as we are not institutionalizing the advisory
opinion/analysis process upon which these comments are predicated.

[[Page 82584]]

Furthermore, with respect to the suggestion regarding delaying the
compliance date, Congress provided in section 1175(b) of the Act for a
delay in when compliance is required to accommodate the needs of
covered entities to address implementation issues such as those raised
by these comments. With respect to the suggestion regarding requiring
states to certify their agreement with the Secretary's analysis, we
have no authority to do this.
    Comment: Several commenters criticized the proposed provision for
annual publication of determinations and advisory opinions in the
Federal Register as inadequate. They suggested that more frequent
notices should be made and the regulation be changed accordingly, to
provide for publication either quarterly or within a few days of a
determination. A few commenters suggested that any determinations made,
or opinions issued, by the Secretary be published on the Department's
website within 10 days or a few days of the determination or opinion.
    Response: We agree that the proposed provision for annual
publication was inadequate and have accordingly deleted it. Subpart B
contains no express requirement for publication, as the Department is
free to publish its determinations absent such a requirement. It is our
intention to publish notice of exception determinations on a periodic
basis in the Federal Register. We will also consider other avenues of
making such decisions publicly available as we move into the
implementation process.
    Comment: A few commenters argued that the process for obtaining an
exception determination or an advisory opinion from the Secretary will
result in a period of time in which there is confusion as to whether
state or federal law applies. The proposed regulations say that the
federal provisions will remain effective until the Secretary makes a
determination concerning the preemption issue. This means that, for
example, a state law that was enacted and enforced for many years will
be preempted by federal law for the period of time during which it
takes the Secretary to make a determination. Then if the Secretary
determines that the state law is not preempted, the state law will
again become effective. Such situations will result in confusion and
unintended violations of the law. One of the commenters suggested that
requests for exceptions be required only when a challenge is brought
against a particular state law, and that a presumption of validity
should lie with state laws. Another commenter, however, urged that
``instead of the presumption of preemption, the state laws in question
would be presumed to be subject to the exception unless or until the
Secretary makes a determination to the contrary.''
    Response: It is true that the effect of section 1178(a)(2)(A) is
that the federal standards will preempt contrary state law and that
such preemption will not be removed unless and until the Secretary acts
to grant an exception under that section (assuming, of course, that
another provision of section 1178 does not apply). We do not agree,
however, that confusion should result, where the issue is whether a
given state law has been preempted under section 1178(a)(2)(A). Because
preemption is automatic with respect to state laws that do not come
within the other provisions of section 1178 (i.e., sections
1178(a)(2)(B), 1178(b), and 1178(c)), such state laws are preempted
until the Secretary affirmatively acts to preserve them from preemption
by granting an exception under section 1178(a)(2)(A).
    We cannot accept the suggestion that a presumption of validity
attach to state laws, and that states not be required to request
exceptions except in very narrow circumstances. The statutory scheme is
the opposite: The statute effects preemption in the section
1178(a)(2)(A) context unless the Secretary affirmatively acts to except
the contrary state law in question.
    With respect to preemption under sections 1178(b) and 1178(c) (the
carve-outs for state public health laws and state regulation of health
plans), we do not agree that preemption is likely to be a major cause
of uncertainty. We have deferred to Congressional intent by crafting
the permissible releases for public health, abuse, and oversight
broadly. See, Secs. 164.512(b)--(d) below. Since there must first be a
conflict between a state law and a federal requirement in order for an
issue of preemption to even arise, we think that, as a practical
matter, few preemption questions should arise with respect to sections
1178(b) and 1178(c).
    With respect to preemption of state privacy laws under section
1178(a)(2)(B), however, we agree that the situation may be more
difficult to ascertain, because the Secretary does not determine the
preemption status of a state law under that section, unlike the
situation with respect to section 1178(a)(2)(A). We have tried to
define the term ``more stringent'' to identify and particularize the
factors to be considered by courts to those relevant to privacy
interests. The more specific (than the statute) definition of this term
at Sec. 160.202 below should provide some guidance in making the
determination as to which law prevails. Ambiguity in the state of the
law might also be a factor to be taken into account in determining
whether a penalty should be applied.
    Comment: Several comments recommended that exception determinations
or advisory opinions encompass a state act or code in its entirety (in
lieu of a provision-specific evaluation) if it is considered more
stringent as a whole than the regulation. It was argued that since the
provisions of a given law are typically interconnected and related,
adopting or overriding them on a provision-by-provision basis would
result in distortions and/or unintended consequences or loopholes. For
example, when a state law includes authorization provisions, some of
which are consistent with the federal requirements and some which are
not, the cleanest approach is to view the state law as inconsistent
with the federal requirements and thus preempted in its entirety.
Similarly, another comment suggested that state confidentiality laws
written to address the specific needs of individuals served within a
discreet system of care be considered as a whole in assessing whether
they are as stringent or more stringent than the federal requirements.
Another comment requested explicit clarification that state laws with a
broader scope than the regulation will be viewed as more stringent and
be allowed to stand.
    Response: We have not adopted the approach suggested by these
comments. As discussed above with respect to the definition of the term
``more stringent,'' it is our view that the statute precludes the
approach suggested. We also suggest that this approach ignores the fact
that each separate provision of law usually represents a nuanced policy
choice to, for example, permit this use or prohibit that disclosure;
the aggregated approach proposed would fail to recognize and weigh such
policy choices.
    Comment: One comment recommended that the final rule: permit
requests for exception determinations and advisory opinions as of the
date of publication of the final rule, require the Secretary to notify
the requestor within a specified short period of time of all additional
information needed, and prohibit enforcement action until the Secretary
issues a response.
    Response: With respect to the first recommendation, we clarify that
requests for exception determinations may be made at any time; since
the process for issuing advisory opinions has not been adopted, this
recommendation is moot as it pertains

[[Page 82585]]

to advisory opinions. With respect to the second recommendation, we
will undertake to process exception requests as expeditiously as
possible, but, for the reasons discussed below in connection with the
comments relating to setting deadlines for those determinations, we
cannot commit at this time to a ``specified short period of time''
within which the Secretary may request additional information. We see
no reason to agree to the third recommendation. Because contrary state
laws for which an exception is available only under section
1178(a)(2)(A) will be preempted by operation of law unless and until
the Secretary acts to grant an exception, there will be an
ascertainable compliance standard for compliance purposes, and
enforcement action would be appropriate where such compliance did not
occur.

Sections 160.203(a) and 160.204(a)--Exception Determinations

Section 160.203(a)--Criteria for Exception Determinations

    Comment: Numerous comments criticized the proposed criteria for
their substance or lack thereof. A number of commenters argued that the
effectiveness language that was added to the third statutory criterion
made the exception so massive that it would swallow the rule. These
comments generally expressed concern that laws that were less
protective of privacy would be granted exceptions under this language.
Other commenters criticized the criteria generally as creating a large
loophole that would let state laws that do not protect privacy trump
the federal privacy standards.
    Response: We agree with these comments. The scope of the statutory
criteria is ambiguous, but they could be read so broadly as to largely
swallow the federal protections. We do not think that this was
Congress's intent. Accordingly, we have added language to most of the
statutory criteria clarifying their scope. With respect to the criteria
at 1178(a)(2)(A)(i), this clarifying language generally ties the
criteria more specifically to the concern with protecting and making
more efficient the health care delivery and payment system that
underlies the Administrative Simplification provisions of HIPAA, but,
with respect to the catch-all provision at section
1178(a)(2)(A)(i)(IV), also requires that privacy interests be balanced
with such concerns, to the extent relevant. We require that exceptions
for rules to ensure appropriate state regulation of insurance and
health plans be stated in a statute or regulation, so that such
exceptions will be clearly tied to statements of priorities made by
publicly accountable bodies (e.g., through the public comment process
for regulations, and by elected officials through statutes). With
respect to the criterion at section 1178(a)(2)(A)(ii), we have further
delineated what ``addresses controlled substances'' means. The language
provided, which builds on concepts at 21 U.S.C. 821 and the Medicare
regulations at 42 CFR 1001.2, delineates the area within which the
government traditionally regulates controlled substances, both civilly
and criminally; it is our view that HIPAA was not intended to displace
such regulation.
    Comment: Several commenters urged that the request for
determination by the Secretary under proposed Sec. 160.204(a) be
limited to cases where an exception is absolutely necessary, and that
in making such a determination, the Secretary should be required to
make a determination that the benefits of granting an exception
outweigh the potential harm and risk of disclosure in violation of the
regulation.
    Response: We have not further defined the statutory term
``necessary'', as requested. We believe that the determination of what
is ``necessary'' will be fact-specific and context dependent, and
should not be further circumscribed absent such specifics. The state
will need to make its case that the state law in question is
sufficiently ``necessary'' to accomplish the particular statutory
ground for exception that it should trump the contrary federal
standard, requirement, or implementation specification.
    Comment: One commenter noted that a state should be required to
explain whether it has taken any action to correct any less stringent
state law for which an exception has been requested. This commenter
recommended that a section be added to proposed Sec. 160.204(a) stating
that ``a state must specify what, if any, action has been taken to
amend the state law to comply with the federal regulations.'' Another
comment, received in the Transactions rulemaking, took the position
that exception determinations should be granted only if the state
standards in question exceeded the national standards.
    Response: The first and last comments appear to confuse the ``more
stringent'' criterion that applies under section 1178(a)(2)(B) of the
Act with the criteria that apply to exceptions under section
1178(a)(2)(A). We are also not adopting the language suggested by the
first comment, because we do not agree that states should necessarily
have to try to amend their state laws as a precondition to requesting
exceptions under section 1178(a)(2)(A). Rather, the question should be
whether the state has made a convincing case that the state law in
question is sufficiently necessary for one of the statutory purposes
that it should trump the contrary federal policy.
    Comment: One commenter stated that exceptions for state laws that
are contrary to the federal standards should not be preempted where the
state and federal standards are found to be equal.
    Response: This suggestion has not been adopted, as it is not
consistent with the statute. With respect to the administrative
simplification standards in general, it is clear that the intent of
Congress was to preempt contrary state laws except in the limited areas
specified as exceptions or carve-outs. See, section 1178. This
statutory approach is consistent with the underlying goal of
simplifying health care transactions through the adoption of uniform
national standards. Even with respect to state laws relating to the
privacy of medical information, the statute shields such state laws
from preemption by the federal standards only if they are ``more''
stringent than the related federal standard or implementation
specification.
    Comment: One commenter noted that determinations would apply only
to transactions that are wholly intrastate. Thus, any element of a
health care transaction that would implicate more than one state's law
would automatically preclude the Secretary's evaluation as to whether
the laws were more or less stringent than the federal requirement.
Other commenters expressed confusion about this proposed requirement,
noting that providers and plans operate now in a multi-state
environment.
    Response: We agree with the commenters and have dropped the
proposed requirement. As noted by the commenters, health care entities
now typically operate in a multi-state environment, so already make the
choice of law judgements that are necessary in multi-state
transactions. It is the result of that calculus that will have to be
weighed against the federal standards, requirements, and implementation
specifications in the preemption analysis.
    Comment: One comment received in the Transactions rulemaking
suggested that the Department should allow exceptions to the standard
transactions to accommodate abbreviated transactions between state
agencies, such as claims between a public health department and the
state Medicaid

[[Page 82586]]

agency. Another comment requested an exception for Home and Community
Based Waiver Services from the transactions standards.
    Response: The concerns raised by these comments would seem to be
more properly addressed through the process established for maintaining
and modifying the transactions standards. If the concerns underlying
these comments cannot be addressed in this manner, however, there is
nothing in the rules below to preclude states from requesting
exceptions in such cases. They will then have to make the case that one
or more grounds for exception applies.

Section 160.204(a)--Process for Exception Determinations--Comments and
Responses

    Comment: Several comments received in the Transactions rulemaking
stated that the process for applying for and granting exception
determinations (referred to as ``waivers'' by some) needed to be
spelled out in the final rule.
    Response: We agree with these comments. As noted above, since no
process was proposed in the Transactions rulemaking, a process for
making exception determinations was not adopted in those final rules.
Subpart B below adopts a process for making exception determinations,
which responds to these comments.
    Comment: Comments stated that the exception process would be
burdensome, unwieldy, and time-consuming for state agencies as well as
the Department. One comment took the position that states should not be
required to submit exception requests to the Department under proposed
Sec. 160.203(a), but could provide documentation that the state law
meets one of the conditions articulated in proposed Sec. 160.203.
    Response: We disagree that the process adopted at Sec. 164.204
below will be burdensome, unwieldy, or time-consuming. The only thing
the regulation describes is the showings that a requestor must make as
part of its submission, and all are relevant to the issue to be
determined by the Secretary. How much information is submitted is,
generally speaking, in the requestor's control, and the regulation
places no restrictions on how the requestor obtains it, whether by
acting directly, by working with providers and/or plans, or by working
with others. With respect to the suggestion that states not be required
to submit exception requests, we disagree that this suggestion is
either statutorily authorized or advisable. We read this comment as
implicitly suggesting that the Secretary must proactively identify
instances of conflict and evaluate them. This suggestion is, thus, at
bottom the same as the many suggestions that we create a database or
compendium of controlling law, and it is rejected for the same reasons.
    Comment: Several comments urged that all state requests for non-
preemption include a process for public participation. These comments
believe that members of the public and other interested stakeholders
should be allowed to submit comments on a state's request for
exception, and that these comments should be reviewed and considered by
the Secretary in determining whether the exception should be granted.
One comment suggested that the Secretary at least give notice to the
citizens of the state prior to granting an exception.
    Response: The revision to Sec. 160.204(a), to permit requests for
exception determinations by any person, responds to these comments.
    Comment: Many commenters noted that the lack of a clear and
reasonable time line for the Secretary to issue an exception
determination would not provide sufficient assurance that the questions
regarding what rules apply will be resolved in a time frame that will
allow business to be conducted properly, and argued that this would
increase confusion and uncertainty about which statutes and regulations
should be followed. Timeframes of 60 or 90 days were suggested. One
group suggested that, if a state does not receive a response from HHS
within 60 days, the waiver should be deemed approved.
    Response: The workload prioritization and management considerations
discussed above with respect to advisory opinions are also relevant
here and make us reluctant to agree to a deadline for making exception
determinations. This is particularly true at the outset, since we have
no experience with such requests. We therefore have no basis for
determining how long processing such requests will take, how many
requests we will need to process, or what resources will be available
for such processing. We agree that states and other requesters should
receive timely responses and will make every effort to make
determinations as expeditiously as possible, but we cannot commit to
firm deadlines in this initial rule. Once we have experience in
handling exception requests, we will consult with states and others in
regard to their experiences and concerns and their suggestions for
improving the Secretary's expeditious handling of such requests.
    We are not accepting the suggestion that requests for exception be
deemed approved if not acted upon in some defined time period. Section
1178(a)(2)(A) requires a specific determination by the Secretary. The
suggested policy would not be consistent with this statutory
requirement. It is also inadvisable from a policy standpoint, in that
it would tend to maximize exceptions. This would be contrary to the
underlying statutory policy in favor of uniform federal standards.
    Comment: One commenter took exception to the requirement for states
to seek a determination from the Department that a provision of state
law is necessary to prevent fraud and abuse or to ensure appropriate
state regulation of insurance plans, contending that this mandate could
interfere with the Insurance Commissioners' ability to do their jobs.
Another commenter suggested that the regulation specifically recognize
the broad scope of state insurance department activities, such as
market conduct examinations, enforcement investigations, and consumer
complaint handling.
    Response: The first comment raises an issue that lies outside our
legal authority to address, as section 1178(a)(2)(A) clearly mandates
that the Secretary make a determination in these areas. With respect to
the second comment, to the extent these concerns pertain to health
plans, we believe that the provisions at Sec. 164.512 relating to
oversight and disclosures required by law should address the concerns
underlying this comment.

Section 160.204(a)(4)--Period of Effectiveness of Exception
Determinations

    Comment: Numerous commenters stated that the proposed three year
limitation on the effectiveness of exception determinations would pose
significant problems and should be limited to one year, since a one
year limitation would provide more frequent review of the necessity for
exceptions. The commenters expressed concern that state laws which
provide less privacy protection than the federal regulation would be
given exceptions by the Secretary and thus argued that the exceptions
should be more limited in duration or that the Secretary should require
that each request, regardless of duration, include a description of the
length of time such an exception would be needed.
    One state government commenter, however, argued that the 3 year
limit should be eliminated entirely, on the ground that requiring a
redetermination

[[Page 82587]]

every three years would be burdensome for the states and be a waste of
time and resources for all parties. Other commenters, including two
state agencies, suggested that the exemption should remain effective
until either the state law or the federal regulation is changed.
Another commenter suggested that the three year sunset be deleted and
that the final rule provide for automatic review to determine if
changes in circumstance or law would necessitate amendment or deletion
of the opinion. Other recommendations included deeming the state law as
continuing in effect upon the submission of a state application for an
exemption rather than waiting for a determination by the Secretary that
may not occur for a substantial period of time.
    Response: We are persuaded that the proposed 3 year limit on
exception determinations does not make sense where neither law
providing the basis for the exception has changed in the interim. We
also agree that where either law has changed, a previously granted
exception should not continue. Section 160.205(a) below addresses these
concerns.

Sections 160.203(b) and 160.204(b)--Advisory Opinions

Section 160.203(b)--Effect of Advisory Opinions

    Comment: Several commenters questioned whether or not DHHS has
standing to issue binding advisory opinions and recommended that the
Department clarify this issue before implementation of this regulation.
One respondent suggested that the Department clarify in the final rule
the legal issues on which it will opine in advisory opinion requests,
and state that in responding to requests for advisory opinions the
Department will not opine on the preemptive force of ERISA with respect
to state laws governing the privacy of individually identifiable health
information, since interpretations as to the scope and extent of
ERISA's preemption provisions are outside of the Department's
jurisdictional authority.
    One commenter asked whether a state could enforce a state law which
the Secretary had indicated through an advisory opinion is preempted by
federal law. This commenter also asked whether the state would be
subject to penalties if it chose to continue to enforce its own laws.
    Response: As discussed above, in part for reasons raised by these
comments, the Department has decided not to have a formal process for
issuing advisory opinions, as proposed.
    Several of these concerns, however, raise issues of broader concern
that need to be addressed. First, we disagree that the Secretary lacks
legal authority to opine on whether or not state privacy laws are
preempted. The Secretary is charged by law with determining compliance,
and where state law and the federal requirements conflict, a
determination of which law controls will have to be made in order to
determine whether the federal standard, requirement, or implementation
specification at issue has been violated. Thus, the Secretary cannot
carry out her enforcement functions without making such determinations.
It is further reasonable that, if the Secretary makes such
determinations, she can make those determinations known, for whatever
persuasive effect they may have.
    The questions as to whether a state could enforce, or would be
subject to penalties if it chose to continue to enforce, its own laws
following a denial by the Secretary of an exception request under
Sec. 160.203 or a holding by a court of competent jurisdiction that a
state privacy law had been preempted by a contrary federal privacy
standard raise several issues. First, a state law is preempted under
the Act only to the extent that it applies to covered entities; thus, a
state is free to continue to enforce a ``preempted'' state law against
non-covered entities to which the state law applies. If there is a
question of coverage, states may wish to establish processes to
ascertain which entities within their borders are covered entities
within the meaning of these rules. Second, with respect to covered
entities, if a state were to try to enforce a preempted state law
against such entities, it would presumably be acting without legal
authority in so doing. We cannot speak to what remedies might be
available to covered entities to protect themselves against such
wrongful state action, but we assume that covered entities could seek
judicial relief, if all else failed. With respect to the issue of
imposing penalties on states, we do not see this as likely. The only
situation that we can envision in which penalties might be imposed on a
state would be if a state agency were itself a covered entity and
followed a preempted state law, thereby violating the contrary federal
standard, requirement, or implementation specification.

Section 160.204(b)--Process for Advisory Opinions

    Comment: Several commenters stated that it was unclear whether a
state would be required to submit a request for an advisory opinion in
order for the law to be considered more stringent and thus not
preempted. The Department should clarify whether a state law could be
non-preempted even without such an advisory opinion. Another commenter
requested that the final rule explicitly state that the stricter rule
always applies, whether it be state or federal, and regardless of
whether there is any conflict between state and federal law.
    Response: The elimination of the proposed process for advisory
opinions renders moot the first question. Also, the preceding response
clarifies that which law preempts in the privacy context (assuming that
the state law and federal requirement are ``contrary'') is a matter of
which one is the ``more stringent.'' This is not a matter which the
Secretary will ultimately determine; rather, this is a question about
which the courts will ultimately make the final determination. With
respect to the second comment, we believe that Sec. 160.203(b) below
responds to this issue, but we would note that the statute already
provides for this.
    Comment: Several commenters supported the decision to limit the
parties who may request advisory opinions to the state. These
commenters did not believe that insurers should be allowed to request
an advisory opinion and open every state law up to challenge and
review.
    Several commenters requested that guidance on advisory opinions be
provided in all circumstances, not only at the Secretary's discretion.
It was suggested that proposed Sec. 160.204(b)(2)(iv) be revised to
read as follows: ``A state may submit a written request to the
Secretary for an advisory opinion under this paragraph. The request
must include the following information: the reasons why the state law
should or should not be preempted by the federal standard, requirement,
or implementation specification, including how the state law meets the
criteria at Sec. 160.203(b).''
    Response: The decision not to have a formal process for issuing
advisory opinions renders these issues moot.

Sections 160.203(c) and 160.203(d)--Statutory Carve-Outs

    Comment: Several commenters asked that the Department provide more
specific examples itemizing activities traditionally regulated by the
state that could constitute ``carve-out'' exceptions. These commenters
also requested that the Department include language in the regulation
stating that if a state law falls within several different exceptions,
the state chooses which determination exception shall apply.

[[Page 82588]]

    Response: We are concerned that itemizing examples in this way
could leave out important state laws or create inadvertent negative
implications that laws not listed are not included. However, as
explained above, we have designed the types of activities that are
permissive disclosures for public health under Sec. 164.512(b) below in
part to come within the carve-out effected by section 1178(b); while
the state regulatory activities covered by section 1178(c) will
generally come within Sec. 164.512(d) below. With respect to the
comments asking that a state get to ``choose'' which exception it comes
under, we have in effect provided for this with respect to exceptions
under section 1178(a)(2)(A), by giving the state the right to request
an exception under that section. With respect to exceptions under
section 1178(a)(2)(B), those exceptions occur by operation of law, and
it is not within the Secretary's power to ``let'' the state choose
whether an exception occurs under that section.
    Comment: Several commenters took the position that the Secretary
should not limit the procedural requirements in proposed
Sec. 160.204(a) to only those applications under proposed
Sec. 160.203(a). They urged that the requirements of proposed
Sec. 160.204(a) should also apply to preemption under sections
1178(a)(2)(B), 1178(b) and 1178(c). It was suggested that the rules
should provide for exception determinations with respect to the matters
covered by these provisions of the statute; such additional provisions
would provide clear procedures for states to follow and ensure that
requests for exceptions are adequately documented.
    A slightly different approach was taken by several commenters, who
recommended that proposed Sec. 160.204(b) be amended to clarify that
the Secretary will also issue advisory opinions as to whether a state
law constitutes an exception under proposed Secs. 160.203(c) and
160.203(d). This change would, they argued, give states the same
opportunity for guidance that they have under Sec. 160.203(a) and (b),
and as such, avoid costly lawsuits to preserve state laws.
    Response: We are not taking either of the recommended courses of
action. With respect to the recommendation that we expand the exception
determination process to encompass exceptions under sections
1178(a)(2)(B), 1178(b), and 1178(c), we do not have the authority to
grant exceptions under these sections. Under section 1178, the
Secretary has authority to make exception determinations only with
respect to the matters covered by section 1178(a)(2)(A); contrary state
laws coming within section 1178(a)(2)(B) are preempted if not more
stringent, while if a contrary state law comes within section 1178(b)
or section 1178(c), it is not preempted. These latter statutory
provisions operate by their own terms. Thus, it is not within the
Secretary's authority to establish the determination process which
these comments seek.
    With respect to the request seeking advisory opinions in the
section 1178(b) and 1178(c) situations, we agree that we have the
authority to issue such opinions. However, the considerations described
above that have led us not to adopt a formal process for issuing
advisory opinions in the privacy context apply with equal force and
effect here.
    Comment: One commenter argued that it would be unnecessarily
burdensome for state health data agencies (whose focus is on the cost
of healthcare or improving Medicare, Medicaid, or the healthcare
system) to obtain a specific determination from the Department for an
exception under proposed Sec. 160.203(c). States should be required
only to notify the Secretary of their own determination that such
collection is necessary. It was also argued that cases where the
statutory carve-outs apply should not require a Secretarial
determination.
    Response: We clarify that no Secretarial determination is required
for activities that fall into one of the statutory carve-outs. With
respect to data collections for state health data agencies, we note
that provision has been made for many of these activities in several
provisions of the rules below, such as the provisions relating to
disclosures required by law (Sec. 164.512(a)), disclosures for
oversight (Sec. 164.512(d)), and disclosures for public health
(Sec. 164.512(b)). Some disclosures for Medicare and Medicaid purposes
may also come within the definition of health care operations. A fuller
discussion of this issue appears in connection with Sec. 164.512 below.

Constitutional Comments and Responses

    Comment: Several commenters suggested that as a general matter the
rule is unconstitutional.
    Response: We disagree that the rule is unconstitutional. The
particular grounds for this conclusion are set out with respect to
particular constitutional issues in the responses below. With respect
to the comments that simply made this general assertion, the lack of
detail of the comments makes a substantive response impossible.

Article II

    Comment: One commenter contended that the Secretary improperly
delegated authority to private entities by requiring covered entities
to enter into contracts with, monitor, and take action for violations
of the contract against their business partners. These comments assert
that the selection of these entities to ``enforce'' the regulations
violates the Executive Powers Clause and the Appointments and Take Care
Clauses.
    Response: We reject the assertion that the business associate
provisions constitute an improper delegation of executive power to
private entities. HIPAA provides HHS with authority to enforce the
regulation against covered entities. The rules below regulate only the
conduct of the covered entity; to the extent a covered entity chooses
to conduct its funding through a business associate, those functions
are still functions of the covered entity. Thus, no improper delegation
has occurred because what is being regulated are the actions of the
covered entity, not the actions of the business associate in its
independent capacity.
    We also reject the suggestion that the business associates
provisions constitute an improper appointment of covered entities to
enforce the regulation and violate the Take Care Clause. Because the
Secretary has not delegated authority to covered entities, the
inference that she has appointed covered entities to exercise such
authority misses the mark.

Commerce Clause

    Comment: A few commenters suggested that the privacy regulation
regulates activities that are not in interstate commerce and which are,
therefore, beyond the powers the U.S. Constitution gives the federal
government.
    Response: We disagree. Health care providers, health plans, and
health care clearinghouses are engaged in economic and commercial
activities, including the exchange of individually identifiable health
information electronically across state lines. These activities
constitute interstate commerce. Therefore, they come within the scope
of Congress' power to regulate interstate commerce.

Nondelegation Doctrine

    Comment: Some commenters objected to the manner by which Congress
provided the Secretary authority to promulgate this regulation. These
comments asserted that Congress violated the nondelegation doctrine by
(1) not providing an ``intelligible principle'' to guide the agency,
(2) not

[[Page 82589]]

establishing ``ascertainable standards,'' and (3) improperly permitting
the Secretary to make social policy decisions.
    Response: We disagree. HIPAA clearly delineates Congress' general
policy to establish strict privacy protections for individually
identifiable health information to encourage electronic transactions.
Congress also established boundaries limiting the Secretary's
authority. Congress established these limitations in several ways,
including by calling for privacy standards for ``individually
identifiable health information''; specifying that privacy standards
must address individuals' rights regarding their individually
identifiable health information, the procedures for exercising those
rights, and the particular uses and disclosures to be authorized or
required; restricting the direct application of the privacy standards
to ``covered entities,'' which Congress defined; requiring consultation
with the National Committee on Vital and Health Statistics and the
Attorney General; specifying the circumstances under which the federal
requirements would supersede state laws; and specifying the civil and
criminal penalties the Secretary could impose for violations of the
regulation. These limitations also serve as ``ascertainable standards''
upon which reviewing courts can rely to determine the validity of the
exercise of authority.
    Although Congress could have chosen to impose expressly an
exhaustive list of specifications that must be met in order to achieve
the protective purposes of the HIPAA, it was entirely permissible for
Congress to entrust to the Secretary the task of providing these
specifications based on her experience and expertise in dealing with
these complex and technical matters.
    We disagree with the comments that Congress improperly delegated
Congressional policy choices to her. Congress clearly decided to create
federal standards protecting the privacy of ``individually identifiable
health information'' and not to preempt state laws that are more
stringent. Congress also determined over whom the Secretary would have
authority, the type of information protected, and the minimum level of
regulation.

Separation of Powers

    Comment: Some commenters asserted that the federal government may
not preempt state laws that are not as strict as the privacy regulation
because to do so would violate the separation of powers in the U.S.
Constitution. One comment suggested that the rules raised a substantial
constitutional issue because, as proposed, they permitted the Secretary
to make determinations on preemption, which is a role reserved for the
judiciary.
    Response: We disagree. We note that this comment only pertains to
determinations under section 1178(a)(2)(A); as discussed above, the
rules below provide for no Secretarial determinations with respect to
state privacy laws coming within section 1178(a)(2)(B). With respect to
determinations under section 1178(a)(2)(A), however, the final rules,
like the proposed rules, provide that at a state's request the
Secretary may make certain determinations regarding the preemptive
effect of the rules on a particular state law. As usually the case with
any administrative decisions, these are subject to judicial review
pursuant to the Administrative Procedure Act.

First Amendment

    Comment: Some comments suggested that the rules violated the First
Amendment. They asserted that if the rule included Christian Science
practitioners as covered entities it would violate the separation of
church and state doctrine.
    Response: We disagree. The First Amendment does not always prohibit
the federal government from regulating secular activities of religious
organizations. However, we address concerns relating to Christian
Science practitioners more fully in the response to comments discussion
of the definition of ``covered entity'' in Sec. 160.103.

Fourth Amendment

    Comment: Many comments expressed Fourth Amendment concerns about
various proposed provisions. These comments fall into two categories--
general concerns about warrantless searches and specific concerns about
administrative searches. Several comments argued that the proposed
regulations permit law enforcement and government officials access to
protected health information without first requiring a judicial search
warrant or an individual's consent. These comments rejected the
applicability of any of the existing exceptions permitting warrantless
searches in this context. Another comment argued that federal and state
police should be able to obtain personal medical records only with the
informed consent of an individual. Many of these comments also
expressed concern that protected health information could be provided
to government or private agencies for inclusion in a governmental
health data system.
    Response: We disagree that the provisions of these rules that
permit disclosures for law enforcement purposes and governmental health
data systems generally violate the Fourth Amendment. The privacy
regulation does not create new access rights for law enforcement.
Rather, it refrains from placing a significant barrier in front of
access rights that law enforcement currently has under existing legal
authority. While the regulation may permit a covered entity to make
disclosures in specified instances, it does not require the covered
entity make the disclosure. Thus, because we are not modifying existing
law regarding disclosures to law enforcement officials, except to
strengthen the requirements related to requests already authorized
under law, and are not requiring any such disclosures, the privacy
regulation does not infringe upon individual's Fourth Amendment rights.
We discuss the rationale underlying the permissible disclosures to law
enforcement officials more fully in the preamble discussion relating to
Sec. 164.512(f).
    We note that the proposed provision relating to disclosures to
government health data systems has been eliminated in the final rule.
However, to the extent that the comments can be seen as raising concern
over disclosure of protected health information to government agencies
for public health, health oversight, or other purposes permitted by the
final rule, the reasoning in the previous paragraph applies.
    Comment: One commenter suggested that the rules violate the Fourth
Amendment by requiring covered entities to provide access to the
Secretary to their books, records, accounts, and facilities to ensure
compliance with these rules. The commenter also suggested that the
requirement that covered entities enter into agreements with their
business partners to make their records available to the Secretary for
inspection as well also violates the warrant requirement of the Fourth
Amendment.
    Response: We disagree. These requirements are consistent with U.S.
Supreme Court cases holding that warrantless administrative searches of
commercial property are not per se violations of the Fourth Amendment.
The provisions requiring that covered entities provide access to
certain material to determine compliance with the regulation come
within the well-settled exception regarding closely regulated
businesses and industries to the warrant requirement. From state and
local licensure laws to the federal fraud and abuse statutes and
regulations, the health care industry is one of the most

[[Page 82590]]

tightly regulated businesses in the country. Because the industry has
such an extensive history of government oversight and involvement,
those operating within it have no reasonable expectation of privacy
from the government such that a warrant would be required to determine
compliance with the rules.
    In addition, the cases cited by the commenters concern unannounced
searches of the premises and facilities of particular entities. Because
our enforcement provisions only provide for the review of books,
records, and other information and only during normal business hours
with notice, except for exceptional situations, this case law does not
apply.
    As for business associates, they voluntarily enter into their
agreements with covered entities. This agreement, therefore, functions
as knowing and voluntary consents to the search (even assuming it could
be understood to be a search) and obviates the need for a warrant.

Fifth Amendment

    Comment: Several comments asserted that the proposed rules violated
the Fifth Amendment because in the commenters' views they authorized
the taking of privacy property without just compensation or due process
of law.
    Response: We disagree. The rules set forth below do not address the
issue of who owns an individual's medical record. Instead, they address
what uses and disclosures of protected health information may be made
by covered entities with or without a consent or authorization. As
described in response to a similar comment, medical records have been
the property of the health care provider or medical facility that
created them, historically. In some states, statutes directly provide
these entities with ownership. These laws are limited by laws that
provide patients or their representatives with access to the records or
that provide the patient with an ownership interest in the information
within the records. As we discuss, the final rule is consistent with
current state law that provides patients access to protected health
information, but not ownership of medical records. State laws that
provide patients with greater access would remain in effect. Therefore,
because patients do not own their records, no taking can occur. As for
their interest in the information, the final rule retains their rights.
As for covered entities, the final rule does not take away their
ownership rights or make their ownership interest in the protected
health information worthless. Therefore, no taking has occurred in
these situations either.

Ninth and Tenth Amendments

    Comment: Several comments asserted that the proposed rules violated
the Ninth and Tenth Amendments. One commenter suggested that the Ninth
Amendment prohibits long and complicated regulations. Other commenters
suggested that the proposed rules authorized the compelled disclosure
of individually identifiable health information in violation of State
constitutional provisions, such as those in California and Florida.
Similarly, a couple of commenters asserted that the privacy rules
violate the Tenth Amendment.
    Response: We disagree. The Ninth and Tenth Amendments address the
rights retained by the people and acknowledge that the States or the
people are reserved the powers not delegated to the federal government
and not otherwise prohibited by the Constitution. Because HHS is
regulating under a delegation of authority from Congress in an area
that affects interstate commerce, we are within the powers provided to
Congress in the Constitution. Nothing in the Ninth Amendment, or any
other provision of the Constitution, restricts the length or complexity
of any law. Additionally, we do not believe the rules below
impermissibly authorize behavior that violates State constitutions.
This rule requires disclosure only to the individual or to the
Secretary to enforce this rule. As noted in the preamble discussion of
``Preemption,'' these rules do not preempt State laws, including
constitutional provisions, that are contrary to and more stringent, as
defined at Sec. 160.502, than these rules. See the discussion of
``Preemption'' for further clarification. Therefore, if these State
constitutions are contrary to the rule below and provide greater
protection, they remain in full force; if they do not, they are
preempted, in accordance with the Supremacy Clause of the Constitution.

Right to Privacy

    Comment: Several comments suggested that the proposed regulation
would violate the right to privacy guaranteed by the First, Fourth,
Fifth, and Ninth Amendments because it would permit covered entities to
disclose protected health information without the consent of the
individual.
    Response: These comments did not provide specific facts or legal
basis for the claims. We are, thus, unable to provide a substantive
response to these particular comments. However, we note that the rule
requires disclosures only to the individual or to the Secretary to
determine compliance with this rule. Other uses or disclosures under
this rule are permissive, not required. Therefore, if a particular use
or disclosure under this rule is viewed as interfering with a right
that prohibited the use or disclosure, the rule itself is not what
requires the use or disclosure.

Void for Vagueness

    Comment: One comment suggested that the Secretary's use of a
``reasonableness'' standard is unconstitutionally vague. Specifically,
this comment objected to the requirement that covered entities use
``reasonable'' efforts to use or disclose the minimum amount of
protected health information, to ensure that business partners comply
with the privacy provisions of their contracts, to notify business
partners of any amendments or corrections to protected health
information, and to verify the identity of individuals requesting
information, as well as charge only a ``reasonable'' fee for inspecting
and copying health information. This comment asserted that the
Secretary provided ``inadequate guidance'' as to what qualifies as
``reasonable.''
    Response: We disagree with the comment's suggestion that by
applying a ``reasonableness'' standard, the regulation has failed to
provide for ``fair warning'' or ``fair enforcement.'' The
``reasonableness'' standard is well-established in law; for example, it
is the foundation of the common law of torts. Courts also have
consistently held as constitutional statutes that rely upon a
``reasonableness'' standard. Our reliance upon a ``reasonableness''
standard, thus, provides covered entities with constitutionally
sufficient guidance.

Criminal Intent

    Comment: One comment argued that the regulation's reliance upon a
``reasonableness'' standard criminalizes ``unreasonable efforts''
without requiring criminal intent or mens rea.
    Response: We reject this suggestion because HIPAA clearly provides
the criminal intent requirement. Specifically, HIPPA provides that a
``person who knowingly and in violation of this part--(1) uses or
causes to be used a unique health identifier; (2) obtains individually
identifiable health information relating to an individual; or (3)
discloses individually identifiable health information to another
person, shall be punished as provided in subsection (b).'' HIPAA
section 1177 (emphasis added). Subsection (b) also relies on a
knowledge standard in

[[Page 82591]]

outlining the three levels of criminal sanctions. Thus, Congress, not
the Secretary, established the mens rea by including the term
``knowingly'' in the criminal penalty provisions of HIPAA.

Data Collection

    Comment: One commenter suggested that the U.S. Constitution
authorized the collection of data on individuals only for the purpose
of the census.
    Response: While it might be true that the U.S. Constitution
expressly discusses the national census, it does not forbid federal
agencies from collecting data for other purposes. The ability of
agencies to collect non-census data has been upheld by the courts.

Relationship to Other Federal Laws

    Comment: We received several comments that sought clarification of
the interaction of various federal laws and the privacy regulation.
Many of these comments simply listed federal laws and regulations with
which the commenter currently must comply. For example, commenters
noted that they must comply with regulations relating to safety, public
health, and civil rights, including Medicare and Medicaid, the
Americans with Disabilities Act, the Family and Medical Leave Act, the
Federal Aviation Administration regulations, the Department of
Transportation regulations, the Federal Highway Administration
regulations, the Occupational Safety and Health Administration
regulations, and the Environmental Protection Agency regulations, and
alcohol and drug free workplace rules. These commenters suggested that
the regulation state clearly and unequivocally that uses or disclosures
of protected health information for these purposes were permissible.
Some suggested modifying the definition of health care operations to
include these uses specifically. Another suggestion was to add a
section that permitted the transmission of protected health information
to employers when reasonably necessary to comply with federal, state,
or municipal laws and regulations, or when necessary for public or
employee safety and health.
    Response: Although we sympathize with entities' needs to evaluate
the existing laws with which they must comply in light of the
requirements of the final regulation, we are unable to respond
substantially to comments that do not pose specific questions. We
offer, however, the following guidance: if an covered entity is
required to disclose protected health information pursuant to a
specific statutory or regulatory scheme, the covered entity generally
will be permitted under Sec. 164.512(a) to make these disclosures
without a consent or authorization; if, however, a statute or
regulation merely suggests a disclosure, the covered entity will need
to determine if the disclosure comes within another category of
permissible disclosure under Secs. 164.510 or 164.512 or,
alternatively, if the disclosure would otherwise come within
Sec. 164.502. If not, the entity will need to obtain a consent or
authorization for the disclosure.
    Comment: One commenter sought clarification as to when a disclosure
is considered to be ``required'' by another law versus ``permitted'' by
that law.
    Responses: We use these terms according to their common usage. By
``required by law,'' we mean that a covered entity has a legal
obligation to disclose the information. For example, if a statute
states that a covered entity must report the names of all individuals
presenting with gun shot wounds to the emergency room or else be fined
$500 for each violation, a covered entity would be required by law to
disclose the protected health information necessary to comply with this
mandate. The privacy regulation permits this type of disclosure, but
does not require it. Therefore, if a covered entity chose not to comply
with the reporting statute it would violate only the reporting statute
and not the privacy regulation.
    On the other hand, if a statute stated that a covered entity may or
is permitted to report the names of all individuals presenting with gun
shot wounds to the emergency room and, in turn, would receive $500 for
each month it made these reports, a covered entity would not be
permitted by Sec. 164.512(a) to disclose the protected health
information. Of course, if another permissible provision applied to
these facts, the covered entity could make the disclosure under that
provision, but it would not be considered to be a disclosure. See
discussion under Sec. 164.512(a) below.
    Comment: Several commenters suggested that the proposed rule was
unnecessarily duplicative of existing regulations for federal programs,
such as Medicare, Medicaid, and the Federal Employee Health Benefit
Program.
    Response: Congress specifically subjected certain federal programs,
including Medicare, Medicaid, and the Federal Employee Health Benefit
Program to the privacy regulation by including them within the
definition of ``health plan.'' Therefore, covered entities subject to
requirements of existing federal programs will also have to comply with
the privacy regulation.
    Comment: One comment asserts that the regulation would not affect
current federal requirements if the current requirements are weaker
than the requirements of the privacy regulation. This same commenter
suggested that current federal requirements will trump both state law
and the proposed regulation, even if Medicaid transactions remain
wholly intrastate.
    Response: We disagree. As noted in our discussion of ``Relationship
to Other Federal Laws,'' each law or regulation will need to be
evaluated individually. We similarly disagree with the second assertion
made by the commenter. The final rule will preempt state laws only in
specific instances. For a more detailed analysis, see the preamble
discussion of ``Preemption.''

Administrative Subpoenas

    Comment: One comment stated that the final rule should not impose
new standards on administrative subpoenas that would conflict with
existing laws or administrative or judicial rules that establish
standards for issuing subpoenas. Nor should the final rule conflict
with established standards for the conduct of administrative, civil, or
criminal proceedings, including the rules regarding the discovery of
evidence. Other comments sought further restrictions on access to
protected health information in this context.
    Response: Section 164.512(e) below addresses disclosures for
judicial and administrative proceedings. The final rules generally do
not interfere with these existing processes to the extent an individual
served with a subpoena, court order, or other similar process is able
to raise objections already available. See the discussion below under
Sec. 164.512(e) for a fuller response.

Americans with Disabilities Act

    Comment: Several comments discussed the intersection between the
proposed Privacy Rule and the Americans with Disabilities Act (``ADA'')
and sections 503 and 504 of the Rehabilitation Act of 1973. One comment
suggested that the final rule explicitly allows disclosures authorized
by the Americans with Disabilities Act without an individual's
authorization, because this law, in the commenter's view, provides more
than adequate protection for the confidentiality of medical records in
the employment context. The comment noted that under these laws
employers may receive information related to fitness for duty, pre-
employment physicals, routine examinations, return to work
examinations, examinations following other types of absences,
examinations triggered by specific events, changes in

[[Page 82592]]

circumstances, requests for reasonable accommodations, leave requests,
employee wellness programs, and medical monitoring.
    Other commenters suggested that the ADA requires the disclosure of
protected health information to employers so that the employee may take
advantage of the protections of these laws. They suggested that the
final rules clarify that employment may be conditioned on obtaining an
authorization for disclosure of protected health information for lawful
purposes and provide guidance concerning the interaction of the ADA
with the final regulation's requirements. Several commenters wanted
clarification that the privacy regulation would not permit employers to
request or use protected health information in violation of the ADA.
    Response: We disagree with the comment that the final rule should
allow disclosures of protected health information authorized by the ADA
without the individual's authorization. We learned from the comments
that access to and use of protected health information by employers is
of particular concern to many people. With regard to employers, we do
not have statutory authority to regulate them. Therefore, it is beyond
the scope of this regulation to prohibit employers from requesting or
obtaining protected health information. Covered entities may disclose
protected health information about individuals who are members of an
employer's workforce with an authorization. Nothing in the privacy
regulation prohibits employers from obtaining that authorization as a
condition of employment. We note, however, that employers must comply
with other laws that govern them, such as nondiscrimination laws. For
example, if an employer receives a request for a reasonable
accommodation, the employer may require reasonable documentation about
the employee's disability and the functional limitations that require
the reasonable accommodation, if the disability and the limitations are
not obvious. If the individual provides insufficient documentation and
does not provide the missing information in a timely manner after the
employer's subsequent request, the employer may require the individual
to go to an appropriate health professional of the employer's choice.
In this situation, the employee does not authorize the disclosure of
information to substantiate the disability and the need for reasonable
accommodation, the employer need not provide the accommodation.
    We agree that this rule does not permit employers to request or use
protected health information in violation of the ADA or other
antidiscrimination laws.

Appropriations Laws

    Comment: One comment suggested that the penalty provisions of
HIPAA, if extended to the privacy regulation, would require the
Secretary to violate ``Appropriations Laws'' because the Secretary
could be in the position of assessing penalties against her own and
other federal agencies in their roles as covered entities. Enforcing
penalties on these entities would require the transfer of agency funds
to the General Fund.
    Response: We disagree. Although we anticipate achieving voluntary
compliance and resolving any disputes prior to the actual assessment of
penalties, the Department of Justice's Office of Legal Counsel has
determined in similar situations that federal agencies have authority
to assess penalties against other federal agencies and that doing so is
not in violation of the Anti-Deficiency Act, 31 U.S.C. 1341.

Balanced Budget Act of 1997

    Comment: One comment expressed concern that the regulation would
place tremendous burdens on providers already struggling with the
effects of the Balanced Budget Act of 1997.
    Response: We appreciate the costs covered entities face when
complying with other statutory and regulatory requirements, such as the
Balanced Budget Act of 1997. However, HHS cannot address the impact of
the Balanced Budget Act or other statutes in the context of this
regulation.
    Comment: Another comment stated that the regulation is in direct
conflict with the Balanced Budget Act of 1997 (``BBA''). The comment
asserts that the regulation's compliance date conflicts with the BBA,
as well as Generally Acceptable Accounting Principles. According to the
comment, covered entities that made capital acquisitions to ensure
compliance with the year 2000 (``Y2K'') problem would not be able to
account for the full depreciation of these systems until 2005. Because
HIPAA requires compliance before that time, the regulation would force
premature obsolescence of this equipment because while it is Y2K
compliant, it may be HIPAA non-compliant.
    Response: This comment raises two distinct issues--(1) the
investment in new equipment and (2) the compliance date. With regard to
the first issue, we reject the comment's assertion that the regulation
requires covered entities to purchase new information systems or
information technology equipment, but realize that some covered
entities may need to update their equipment. We have tried to minimize
the costs, while responding appropriately to Congress' mandate for
privacy rules. We have dealt with the cost issues in detail in the
``Regulatory Impact Analysis'' section of this Preamble. With regard to
the second issue, Congress, not the Secretary, established the
compliance data at section 1175(b) of the Act.

Civil Rights of Institutionalized Persons Act

    Comment: A few comments expressed concern that the privacy
regulation would inadvertently hinder the Department of Justice Civil
Rights Divisions' investigations under the Civil Rights of
Institutionalized Persons Act (``CRIPA''). These comments suggested
clearly including civil rights enforcement activities as health care
oversight.
    Response: We agree with this comment. We do not intend for the
privacy rules to hinder CRIPA investigations. Thus, the final rule
includes agencies that are authorized by law to ``enforce civil rights
laws for which health information is relevant'' in the definition of
``health oversight agency'' at Sec. 164.501. Covered entities are
permitted to disclose protected health information to health oversight
agencies under Sec. 164.512(d) without an authorization. Therefore, we
do not believe the final rule should hinder the Department of Justice's
ability to conduct investigations pursuant to its authority in CRIPA.

Clinical Laboratory Improvement Amendments

    Comment: One comment expressed concern that the proposed definition
of health care operations did not include activities related to the
quality control clinical studies performed by laboratories to
demonstrate the quality of patient test results. Because the Clinical
Laboratory Improvement Amendments of 1988 (``CLIA'') requires these
studies that the comment asserted require the use of protected health
information, the comment suggested including this specific activity in
the definition of ``health care operations.''
    Response: We do not intend for the privacy regulation to impede the
ability of laboratories to comply with the requirements of CLIA.
Quality control activities come within the definition of ``health care
operations'' in Sec. 164.501 because they come within the meaning of
the term ``quality assurance activities.'' To the extent they would not
come within health care operations, but

[[Page 82593]]

are required by CLIA, the privacy regulation permits clinical
laboratories that are regulated by CLIA to comply with mandatory uses
and disclosures of protected health information pursuant to
Sec. 164.512(a).
    Comment: One comment stated that the proposed regulation's right of
access for inspection and copying provisions were contrary to CLIA in
that CLIA permits laboratories to disclose lab test results only to
``authorized persons.'' This comment suggested that the final rule
include language adopting this restriction to ensure that patients not
obtain laboratory test results before the appropriate health care
provider has reviewed and explained those results to the patients.
    A similar comment stated that the lack of preemption of state laws
could create problems for clinical laboratories under CLIA.
Specifically, this comment noted that CLIA permits clinical
laboratories to perform tests only upon the written or electronic
request of, and to provide the results to, an ``authorized person.''
State laws define who is an ``authorized person.'' The comment
expressed concern as to whether the regulation would preempt state laws
that only permit physicians to receive test results.
    Response: We agree that CLIA controls in these cases. Therefore, we
have amended the right of access, Sec. 164.524(a), so that a covered
entity that is subject to CLIA does not have to provide access to the
individual to the extent such access would be prohibited by law.
Because of this change, we believe the preemption concern is moot.

Controlled Substance Act

    Comment: One comment expressed concern that the privacy regulation
as proposed would restrict the Drug Enforcement Agency's (``the DEA'')
enforcement of the Controlled Substances Act (``CSA''). The comment
suggested including enforcement activities in the definition of
``health oversight agency.''
    Response: In our view, the privacy regulation should not impede the
DEA's ability to enforce the CSA. First, to the extent the CSA requires
disclosures to the DEA, these disclosures would be permissible under
Sec. 164.512(a). Second, some of the DEA's CSA activities come within
the exception for health oversight agencies which permits disclosures
to health oversight agencies for:

    Activities authorized by law, including audits; civil,
administrative, or criminal investigations; inspections * * * civil,
administrative, or criminal proceedings or actions; and other
activity necessary for appropriate oversight of the health care
system.

    Therefore, to the extent the DEA is enforcing the CSA, disclosures
to it in its capacity as a health oversight agency are permissible
under Sec. 164.512(d). Alternatively, CSA required disclosures to the
DEA for law enforcement purposes are permitted under Sec. 164.512(f).
When acting as a law enforcement agency under the CSA, the DEA may
obtain the information pursuant to Sec. 164.512(f). Thus, we do not
agree that the privacy regulation will impede the DEA's enforcement of
the CSA. See the preamble discussion of Sec. 164.512 for further
explanation.
    Comment: One commenter suggested clarifying the provisions allowing
disclosures that are ``required by law'' to ensure that the mandatory
reporting requirements the CSA imposes on covered entities, including
making available reports, inventories, and records of transactions, are
not preempted by the regulation.
    Response: We agree that the privacy regulation does not alter
covered entities' obligations under the CSA. Because the CSA requires
covered entities manufacturing, distributing, and/or dispensing
controlled substances to maintain and provide to the DEA specific
records and reports, the privacy regulation permits these disclosures
under Sec. 164.512(a). In addition, when the DEA seeks documents to
determine an entity's compliance with the CSA, such disclosures are
permitted under Sec. 164.512(d).
    Comment: The same commenter expressed concern that the proposed
privacy regulation inappropriately limits voluntary reporting and would
prevent or deter employees of covered entities from providing the DEA
with information about violations of the CSA.
    Response: We agree with the general concerns expressed in this
comment. We do not believe the privacy rules will limit voluntary
reporting of violations of the CSA. The CSA requires certain entities
to maintain several types of records that may include protected health
information. Although reports that included protected health
information may be restricted under these rules, reporting the fact
that an entity is not maintaining proper reports is not. If it were
necessary to obtain protected health information during the
investigatory stages following such a voluntary report, the DEA would
be able to obtain the information in other ways, such as by following
the administrative procedures outlined in Sec. 164.512(e).
    We also agree that employees of covered entities who report
violations of the CSA should not be subjected to retaliation by their
employers. Under Sec. 164.502(j), we specifically state that a covered
entity is not considered to have violated the regulation if a workforce
member or business associate in good faith reports violations of laws
or professional standards by covered entities to appropriate
authorities. See discussion of Sec. 164.502(j) below.

Department of Transportation

    Comment: Several commenters stated that the Secretary should
recognize in the preamble that it is permissible for employers to
condition employment on an individual's delivering a consent to certain
medical tests and/or examinations, such as drug-free workplace programs
and Department of Transportation (``DOT'')-required physical
examinations. These comments also suggested that employers should be
able to receive certain information, such as pass/fail test and
examination results, fitness-to-work assessments, and other legally
required or permissible physical assessments without obtaining an
authorization. To achieve this goal, these comments suggested defining
``health information'' to exclude information such as information about
how much weight a specific employee can lift.
    Response: We reject the suggestion to define ``health
information,'' which Congress defined in HIPAA, so that it excludes
individually identifiable health information that may be relevant to
employers for these types of examinations and programs. We do not
regulate employers. Nothing in the rules prohibit employers from
conditioning employment on an individual signing the appropriate
consent or authorization. By the same token, however, the rules below
do not relieve employers from their obligations under the ADA and other
laws that restrict the disclosure of individually identifiable health
information.
    Comment: One commenter asserted that the proposed regulation
conflicts with the DOT guidelines regarding positive alcohol and drug
tests that require the employer be notified in writing of the results.
This document contains protected health information. In addition, the
treatment center records must be provided to the Substance Abuse
Professional (``SAP'') and the employer must receive a report from SAP
with random drug testing recommendations.
    Response: It is our understanding that DOT requires drug testing of
all applicants for employment in safety-sensitive positions or
individuals being transferred to such positions.

[[Page 82594]]

Employers, pursuant to DOT regulations, may condition an employee's
employment or position upon first obtaining an authorization for the
disclosure of results of these tests to the employer. Therefore, we do
not believe the final rules conflict with the DOT requirements, which
do not prohibit obtaining authorizations before such information is
disclosed to employers.

Developmental Disabilities Act

    Comment: One commenter urged HHS to ensure that the regulation
would not impede access to individually identifiable health information
to entities that are part of the Protection and Advocacy System to
investigate abuse and neglect as authorized by the Developmental
Disabilities Bill of Rights Act.
    Response: The Developmental Disabilities Assistance and Bill of
Rights Act of 2000 (``DD Act'') mandates specific disclosures of
individually identifiable health information to Protection and Advocacy
systems designated by the chief elected official of the states and
Territories. Therefore, covered entities may make these disclosures
under Sec. 164.512(a) without first obtaining an individual's
authorization, except in those circumstances in which the DD Act
requires the individual's authorization. Therefore, the rules below
will not impede the functioning of the existing Protection and Advocacy
System.

Employee Retirement Income Security Act of 1974

    Comment: Several commenters objected to the fact that the NPRM did
not clarify the scope of preemption of state laws under the Employee
Retirement Income Security Act of 1974 (ERISA). These commenters
asserted that the final rule must state that ERISA preempts all state
laws (including those relating to the privacy of individually
identifiable health information) so that multistate employers could
continue to administer their group health plans using a single set of
rules. In contrast, other commenters criticized the Department for its
analysis of the current principles governing ERISA preemption of state
law, pointing out that the Department has no authority to interpret
ERISA.
    Response: This Department has no authority to issue regulations
under ERISA as requested by some of these commenters, so the rule below
does not contain the statement requested. See the discussion of this
point under ``Preemption'' above.
    Comment: One commenter requested that the final rule clarify that
section 264(c)(2) of HIPAA does not save state laws that would
otherwise be preempted by the Federal Employees Health Benefits
Program. The commenter noted that in the NPRM this statement was made
with respect to Medicare and ERISA, but not the law governing the
FEHBP.
    Response: We agree with this comment. The preemption analysis set
out above with respect to ERISA applies equally to the Federal
Employees Health Benefit Program.
    Comment: One commenter noted that the final rule should clarify the
interplay between state law, the preemption standards in Subtitle A of
Title I of HIPAA (Health Care Access, Portability and Renewability),
and the preemption standards in the privacy requirements in Subtitle F
of Title II of HIPAA (Administrative Simplification).
    Response: The NPRM described only the preemption standards that
apply with respect to the statutory provisions of HIPAA that were
implemented by the proposed rule. We agree that the preemption
standards in Subtitle A of Title I of HIPAA are different. Congress
expressly provided that the preemption provisions of Title I apply only
to Part 7, which addresses portability, access, and renewability
requirements for Group Health Plans. To the extent state laws contain
provisions regarding portability, access, or renewability, as well as
privacy requirements, a covered entity will need to evaluate the
privacy provisions under the Title II preemption provisions, as
explained in the preemption provisions of the rules, and the other
provisions under the Title I preemption requirements.

European Union Privacy Directive and U.S. Safe Harbors

    Comment: Several comments stated that the privacy regulation should
be consistent with the European Union's Directive on Data Protection.
Others sought guidance as to how to comply with both the E.U. Directive
on Data Protection and the U.S. Safe Harbor Privacy Principles.
    Response: We appreciate the need for covered entities obtaining
personal data from the European Union to understand how the privacy
regulation intersects with the Data Protection Directive. We have
provided guidance as to this interaction in the ``Other Federal Laws''
provisions of the preamble.
    Comment: A few comments expressed concern that the proposed
definition of ``individual'' excluded foreign military and diplomatic
personnel and their dependents, as well as overseas foreign national
beneficiaries. They noted that the distinctions are based on
nationality and are inconsistent with the stance of the E.U. Directive
on Data Protection and the Department of Commerce's assurances to the
European Commission.
    Response: We agree with the general principle that privacy
protections should protect every person, regardless of nationality. As
noted in the discussion of the definition of ``individual,'' the final
regulation's definition does not exclude foreign military and
diplomatic personnel, their dependents, or overseas foreign national
beneficiaries from the definition of individual. As described in the
discussion of Sec. 164.512 below, the final rule applies to foreign
diplomatic personnel and their dependents like all other individuals.
Foreign military personnel receive the same treatment under the final
rule as U.S. military personnel do, as discussed with regard to
Sec. 164.512 below. Overseas foreign national beneficiaries to the
extent they receive care for the Department of Defense or a source
acting on behalf of the Department of Defense remain generally excluded
from the final rules protections. For a more detailed explanation, see
Sec. 164.500.

Fair Credit Reporting Act

    Comment: A few commenters requested that we exclude information
maintained, used, or disclosed pursuant to the Fair Credit Reporting
Act (``FCRA'') from the requirements of the privacy regulation. These
commenters noted that the protection in the privacy regulation
duplicate those in the FCRA.
    Response: Although we realize that some overlap between FCRA and
the privacy rules may exist, we have chosen not to remove information
that may come within the purview of FCRA from the scope of our rules
because FCRA's focus is not the same as our Congressional mandate to
protect individually identifiable health information.
    To the extent a covered entity seeks to engage in collection
activities or other payment-related activities, it may do so pursuant
to the requirements of this rule related to payment. See discussion of
Secs. 164.501 and 164.502 below.
    We understand that some covered entities may be part of, or contain
components that are, entities which meet the definition of ``consumer
reporting agencies.'' As such, these entities are subject to the FCRA.
As described in the preamble to Sec. 164.504, covered entities must
designate what parts of their organizations will be treated as covered
entities for the

[[Page 82595]]

purpose of these privacy rules. The covered entity component will need
to comply with these rules, while the components that are consumer
reporting agencies will need to comply with FCRA.
    Comment: One comment suggested that the privacy regulation would
conflict with the FCRA if the regulation's requirement applied to
information disclosed to consumer reporting agencies.
    Response: To the extent a covered entity is required to disclose
protected health information to a consumer reporting agency, it may do
so under Sec. 164.512(a). See also discussion under the definition of
``payment'' below.

Fair Debt Collection and Practices Act

    Comment: Several comments expressed concern that health plans and
health care providers be able to continue using debt collectors in
compliance with the Fair Debt Collections Practices Act and related
laws.
    Response: In our view, health plans and health care providers will
be able to continue using debt collectors. Using the services of a debt
collector to obtain payment for the provision of health care comes
within the definition of ``payment'' and is permitted under the
regulation. Thus, so long as the use of debt collectors is consistent
with the regulatory requirements (such as, providers obtain the proper
consents, the disclosure is of the minimum amount of information
necessary to collect the debt, the provider or health plan enter into a
business associate agreement with the debt collector, etc.), relying
upon debt collectors to obtain reimbursement for the provision of
health care would not be prohibited by the regulation.

Family Medical Leave Act

    Comment: One comment suggested that the proposed regulation
adversely affects the ability of an employer to determine an employee's
entitlement to leave under the Family Medical Leave Act (``FMLA'') by
affecting the employer's right to receive medical certification of the
need for leave, additional certifications, and fitness for duty
certification at the end of the leave. The commenter sought
clarification as to whether a provider could disclose information to an
employer without first obtaining an individual's consent or
authorization. Another commenter suggested that the final rule
explicitly exclude from the rule disclosures authorized by the FMLA,
because, in the commenter's view, it provides more than adequate
protection for the confidentiality of medical records in the employment
context.
    Response: We disagree that the FMLA provides adequate privacy
protections for individually identifiable health information. As we
understand the FMLA, the need for employers to obtain protected health
information under the statute is analogous to the employer's need for
protected health information under the ADA. In both situations,
employers may need protected health information to fulfill their
obligations under these statutes, but neither statute requires covered
entities to provide the information directly to the employer. Thus,
covered entities in these circumstances will need an individual's
authorizations before the disclosure is made to the employer.

Federal Common Law

    Comment: One commenter did not want the privacy rules to interfere
with the federal common law governing collective bargaining agreements
permitting employers to insist on the cooperation of employees with
medical fitness evaluations.
    Response: We do not seek to interfere with legal medical fitness
evaluations. These rules require a covered entity to have an
individual's authorization before the information resulting from such
evaluations is disclosed to the employer unless another provision of
the rule applies. We do not prohibit employers from conditioning
employment, accommodations, or other benefits, when legally permitted
to do so, upon the individual/employee providing an authorization that
would permit the disclosure of protected health information to
employers by covered entities. See Sec. 164.508(b)(4) below.

Federal Educational Rights and Privacy Act

    Comment: A few commenters supported the exclusion of ``education
records'' from the definition of ``protected health information.''
However, one commenter requested that ``treatment records'' of students
who are 18 years or older attending post-secondary education
institutions be excluded from the definition of ``protected health
information'' as well to avoid confusion.
    Response: We agree with these commenters. See ``Relationship to
Other Federal Laws'' for a description of our exclusion of FERPA
``education records'' and records defined at 20 U.S.C.
1232g(a)(4)(B)(iv), commonly referred to as ``treatment records,'' from
the definition of ``protected health information.''
    Comment: One comment suggested that the regulation should not apply
to any health information that is part of an ``education record'' in
any educational agency or institution, regardless of its FERPA status.
    Response: We disagree. As noted in our discussion of ``Relationship
of Other Federal Laws,'' we exclude education records from the
definition of protected health information because Congress expressly
provided privacy protections for these records and explained how these
records should be treated in FERPA.
    Comment: One commenter suggested eliminating the preamble language
that describes school nurses and on-site clinics as acting as providers
and subject to the privacy regulation, noting that this language is
confusing and inconsistent with the statements provided in the preamble
explicitly stating that HIPAA does not preempt FERPA.
    Response: We agree that this language may have been confusing. We
have provided a clearer expression of when schools may be required to
comply with the privacy regulation in the ``Relationship to Other
Federal Laws'' section of the preamble.
    Comment: One commenter suggested adding a discussion of FERPA to
the ``Relationship to Other Federal Laws'' section of the preamble.
    Response: We agree and have added FERPA to the list of federal laws
discussed in ``Relationship to Other Federal Laws'' section of the
preamble.
    Comment: One commenter stated that school clinics should not have
to comply with the ``ancillary'' administrative requirements, such as
designating a privacy official, maintaining documentation of their
policies and procedures, and providing the Secretary of HHS with
access.
    Response: We disagree. Because we have excluded education records
and records described at 20 U.S.C. 1232g(a)(4)(B)(iv) held by
educational agencies and institutions subject to FERPA from the
definition of protected health information, only non-FERPA schools
would be subject to the administrative requirements. Most of these
school clinics will also not be covered entities because they are not
engaged in HIPAA transactions and these administrative requirements
will not apply to them. However, to the extent a school clinic is
within the definition of a health care provider, as Congress defined
the term, and the school clinic is engaged in HIPAA transactions, it
will be a covered entity and must comply with the rules below.

[[Page 82596]]

    Comment: Several commenters expressed concern that the privacy
regulation would eliminate the parents' ability to have access to
information in their children's school health records. Because the
proposed regulation suggests that school-based clinics keep health
records separate from other educational files, these comments argued
that the regulation is contrary to the spirit of FERPA, which provides
parents with access rights to their children's educational files.
    Response: As noted in the ``Relationship to Other Federal Laws''
provision of the preamble, to the extent information in school-based
clinics is not protected health information because it is an education
record, the FERPA access requirements apply and this regulation does
not. For more detail regarding the rule's application to unemancipated
minors, see the preamble discussion about ``Personal Representatives.''

Federal Employees Compensation Act

    Comment: One comment noted that the Federal Employees Compensation
Act (``FECA'') requires claimants to sign a release form when they file
a claim. This commenter suggested that the privacy regulation should
not place additional restrictions on this type of release form.
    Response: We agree. In the final rule, we have added a new
provision, Sec. 164.512(l), that permits covered entities to make
disclosures authorized under workers' compensation and similar laws.
This provision would permit covered entities to make disclosures
authorized under FECA and not require a different release form.

Federal Employees Health Benefits Program

    Comment: A few comments expressed concern about the preemption
effect on FEHBP and wanted clarification that the privacy regulation
does not alter the existing preemptive scope of the program.
    Response: We do not intend to affect the preemptive scope of the
FEHBP. The Federal Employee Health Benefit Act of 1998 preempts any
state law that ``relates to'' health insurance or plans. 5 U.S.C.
8902(m). The final rule does not attempt to alter the preemptive scope
Congress has provided to the FEHBP.
    Comment: One comment suggested that in the context of FEHBP HHS
should place the enforcement responsibilities of the privacy regulation
with Office of Personnel Management, as the agency responsible for
administering the program.
    Response: We disagree. Congress placed enforcement with the
Secretary. See section 1176 of the Act.

Federal Rules of Civil Procedure

    Comment: A few comments suggested revising proposed Sec. 164.510(d)
so that it is consistent with the existing discovery procedure under
the Federal Rules of Civil Procedure or local rules.
    Response: We disagree that the rules regarding disclosures and uses
of protected health information for judicial and administrative
procedures should provide only those protections that exist under
existing discovery rules. Although the current process may be
appropriate for other documents and information requested during the
discovery process, the current system, as exemplified by the Federal
Rules of Civil Procedure, does not provide sufficient protection for
protected health information. Under current discovery rules, private
attorneys, government officials, and others who develop such requests
make the initial determinations as to what information or documentation
should be disclosed. Independent third-party review, such as that by a
court, only becomes necessary if a person of whom the request is made
refuses to provide the information. If this happens, the person seeking
discovery must obtain a court order or move to compel discovery. In our
view this system does not provide sufficient protections to ensure that
unnecessary and unwarranted disclosures of protected health information
does not occur. For a related discuss, see the preamble regarding
``Disclosures for Judicial and Administrative Proceedings'' under
Sec. 164.512(e).

Federal Rules of Evidence

    Comment: Many comments requested clarification that the privacy
regulation does not conflict or interfere with the federal or state
privileges. In particular, one of these comments suggested that the
final regulation provide that disclosures for a purpose recognized by
the regulation not constitute a waiver of federal or state privileges.
    Response: We do not intend for the privacy regulation to interfere
with federal or state rules of evidence that create privileges.
Consistent with The Uniform Health-Care Information Act drafted by the
National Conference of Commissioners on Uniform State Laws, we do not
view a consent or an authorization to function as a waiver of federal
or state privileges. For further discussion of the effect of consent or
authorization on federal or state privileges, see preamble discussions
in Secs. 164.506 and 164.508.
    Comment: Other comments applauded the Secretary's references to
Jaffee v. Redman, 518 U.S. 1 (1996), which recognized a
psychotherapist-patient privilege, and asked the Secretary to
incorporate expressly this privilege into the final regulation.
    Response: We agree that the psychotherapist-patient relationship is
an important one that deserves protection. However, it is beyond the
scope our mandate to create specific evidentiary privileges. It is also
unnecessary because the United States Supreme Court has adopted this
privilege.
    Comment: A few comments discussed whether one remedy for violating
the privacy regulation should be to exclude or suppress evidence
obtained in violation of the regulation. One comment supported using
this penalty, while another opposed it.
    Response: We do not have the authority to mandate that courts apply
or not apply the exclusionary rule to evidence obtained in violation of
the regulation. This issue is in the purview of the courts.

Federal Tort Claims Act

    Comment: One comment contended that the proposed regulation's
requirement mandating covered entities to name the subjects of
protected health information disclosed under a business partner
contract as third party intended beneficiaries under the contract would
have created an impermissible right of action against the government
under the Federal Tort Claims Act (``FTCA'').
    Response: Because we have deleted the third party beneficiary
provisions from the final rules, this comment is moot.
    Comment: Another comment suggested the regulation would hamper the
ability of federal agencies to disclose protected health information to
their attorneys, the Department of Justice, during the initial stages
of the claims brought under the FTCA.
    Response: We disagree. The regulation applies only to federal
agencies that are covered entities. To the extent an agency is not a
covered entity, it is not subject to the regulation; to the extent an
agency is a covered entity, it must comply with the regulation. A
covered entity that is a federal agency may disclose relevant
information to its attorneys, who are business associates, for purposes
of health care operations, which includes uses or disclosures for legal
functions. See Sec. 164.501 (definitions of ``business associate'' and
``health care operations''). The final rule provides specific
provisions describing how federal agencies may provide

[[Page 82597]]

adequate assurances for these types of disclosures of protected health
information. See Sec. 164.504(e)(3).

Food and Drug Administration

    Comment: A few comments expressed concerns about the use of
protected health information for reporting activities to the Food and
Drug Administration (``FDA''). Their concern focused on the ability to
obtain or disclose protected health information for pre-and post-
marketing adverse event reports, device tracking, and post-marketing
safety and efficacy evaluation.
    Response: We agree with this comment and have provided that covered
entities may disclose protected health information to persons subject
to the jurisdiction of the FDA, to comply with the requirements of, or
at the direction of, the FDA with regard to reporting adverse events
(or similar reports with respect to dietary supplements), the tracking
of medical devices, other post-marketing surveillance, or other similar
requirements described at Sec. 164.512(b).

Foreign Standards

    Comment: One comment asked how the regulation could be enforced
against foreign countries (or presumably entities in foreign countries)
that solicit medical records from entities in the United States.
    Response: We do not regulate solicitations of information. To the
extent a covered entity wants to comply with a request for disclosure
of protected health information to foreign countries or entities within
foreign countries, it will need to comply with the privacy rules before
making the disclosure. If the covered entity fails to comply with the
rules, it will be subject to enforcement proceedings.

Freedom of Information Act

    Comment: One comment asserted that the proposed privacy regulation
conflicts with the Freedom of Information Act (``FOIA''). The comment
argued that the proposed restriction on disclosures by agencies would
not come within one of the permissible exemptions to the FOIA. In
addition, the comment noted that only in exceptional circumstances
would the protected health information of deceased individuals come
within an exemption because, for the most part, death extinguishes an
individual's right to privacy.
    Response: Section 164.512(a) below permits covered entities to
disclose protected health information when such disclosures are
required by other laws as long as they follow the requirements of those
laws. Therefore, the privacy regulation will not interfere with the
ability of federal agencies to comply with FOIA, when it requires the
disclosure.
    We disagree, however, that most protected health information will
not come within Exemption 6 of FOIA. See the discussion above under
``Relationship to Other Federal Laws'' for our review of FOIA.
Moreover, we disagree with the comment's assertion that the protected
health information of deceased individuals does not come within
Exemption 6. Courts have recognized that a deceased individual's
surviving relatives may have a privacy interest that federal agencies
may consider when balancing privacy interests against the public
interest in disclosure of the requested information. Federal agencies
will need to consider not only the privacy interests of the subject of
the protected health information in the record requested, but also,
when appropriate, those of a deceased individual's family consistent
with judicial rulings.
    If an agency receives a FOIA request for the disclosure of
protected health information of a deceased individual, it will need to
determine whether or not the disclosure comes within Exemption 6. This
evaluation must be consistent with the court's rulings in this area. If
the exemption applies, the federal agency will not have to release the
information. If the federal agency determines that the exemption does
not apply, may release it under Sec. 164.512(a) of this regulation.
    Comment: One commenter expressed concern that our proposal to
protect the individually identifiable health information about the
deceased for two years following death would impede public interest
reporting and would be at odds with many state Freedom of Information
laws that make death records and autopsy reports public information.
The commenter suggested permitting medical information to be available
upon the death of an individual or, at the very least, that an appeals
process be permitted so that health information trustees would be
allowed to balance the interests in privacy and in public disclosure
and release or not release the information accordingly.
    Response: These rules permit covered entities to make disclosures
that are required by state Freedom of Information Act (FOIA) laws under
Sec. 164.512(a). Thus, if a state FOIA law designates death records and
autopsy reports as public information that must be disclosed, a covered
entity may disclose it without an authorization under the rule. To the
extent that such information is required to be disclosed by FOIA or
other law, such disclosures are permitted under the final rule. In
addition, to the extent that death records and autopsy reports are
obtainable from non-covered entities, such as state legal authorities,
access to this information is not impeded by this rule.
    If another law does not require the disclosure of death records and
autopsy reports generated and maintained by a covered entity, which are
protected health information, covered entities are not allowed to
disclose such information except as permitted or required by the final
rule, even if another entity discloses them.
    Comment: One comment sought clarification of the relationship
between the Freedom of Information Act, the Privacy Act, and the
privacy rules.
    Response: We have provided this analysis in the ``Relationship to
Other Federal Laws'' section of the preamble in our discussion of the
Freedom of Information Act.

Gramm-Leach-Bliley

    Comments: One commenter noted that the Financial Services
Modernization Act, also known as Gramm-Leach-Bliley (``GLB''), requires
financial institutions to provide detailed privacy notices to
individuals. The commenter suggested that the privacy regulation should
not require financial institutions to provide additional notice.
    Response: We disagree. To the extent a covered entity is required
to comply with the notice requirements of GLB and those of our rules,
the covered entity must comply with both. We will work with the FTC and
other agencies implementing GLB to avoid unnecessary duplication. For a
more detailed discussion of GLB and the privacy rules, see the
``Relationship to Other Federal Laws'' section of the preamble.
    Comment: A few commenters asked that the Department clarify that
financial institutions, such as banks, that serve as payors are covered
entities. The comments explained that with the enactment of the Gramm-
Leach-Bliley Act, banks are able to form holding companies that will
include insurance companies (that may be covered entities). They
recommended that banks be held to the rule's requirements and be
required to obtain authorization to conduct non-payment activities,
such as for the marketing of health and non-health items and services
or the use and disclosure to non-health related divisions of the
covered entity.

[[Page 82598]]

    Response: These comments did not provide specific facts that would
permit us to provide a substantive response. An organization will need
to determine whether it comes within the definition of ``covered
entity.'' An organization may also need to consider whether or not it
contains a health care component. Organizations that are uncertain
about the application of the regulation to them will need to evaluate
their specific facts in light of this rule.

Inspector General Act

    Comment: One comment requested the Secretary to clarify in the
preamble that the privacy regulation does not preempt the Inspector
General Act.
    Response: We agree that to the extent the Inspector General Act
requires uses or disclosures of protected health information, the
privacy regulation does not preempt it. The final rule provides that to
the extent required under section 201(a)(5) of the Act, nothing in this
subchapter should be construed to diminish the authority of any
Inspector General, including the authority provided in the Inspector
General Act of 1978. See discussion of Sec. 160.102 above.

Medicare and Medicaid

    Comment: One comment suggested possible inconsistencies between the
regulation and Medicare/Medicaid requirements, such as those under the
Quality Improvement System for Managed Care. This commenter asked that
HHS expand the definition of health care operations to include health
promotion activities and avoid potential conflicts.
    Response: We disagree that the privacy regulation would prohibit
managed care plans operating in the Medicare or Medicaid programs from
fulfilling their statutory obligations. To the extent a covered entity
is required by law to use or disclose protected health information in a
particular manner, the covered entity may make such a use or disclosure
under Sec. 164.512(a). Additionally, quality assessment and improvement
activities come within the definition of ``health care operations.''
Therefore, the specific example provided by the commenter would seem to
be a permissible use or disclosure under Sec. 164.502, even if it were
not a use or disclosure ``required by law.''
    Comment: One commenter stated that Medicare should not be able to
require the disclosure of psychotherapy notes because it would destroy
a practitioner's ability to treat patients effectively.
    Response: If the Title XVIII of the Social Security Act requires
the disclosure of psychotherapy notes, the final rule permits, but does
not require, a covered entity to make such a disclosure under
Sec. 164.512(a). If, however, the Social Security Act does not require
such disclosures, Medicare does not have the discretion to require the
disclosure of psychotherapy notes as a public policy matter because the
final rule provides that covered entities, with limited exceptions,
must obtain an individual's authorization before disclosing
psychotherapy notes. See Sec. 164.508(a)(2).

National Labor Relations Act

    Comment: A few comments expressed concern that the regulation did
not address the obligation of covered entities to disclose protected
health information to collective bargaining representatives under the
National Labor Relations Act.
    Response: The final rule does not prohibit disclosures that covered
entities must make pursuant to other laws. To the extent a covered
entity is required by law to disclose protected health information to
collective bargaining representatives under the NLRA, it may to so
without an authorization. Also, the definition of ``health care
operations'' at Sec. 164.501 permits disclosures to employee
representatives for purposes of grievance resolution.

Organ Donation

    Comment: One commenter expressed concern about the potential impact
of the regulation on the organ donation program under 42 CFR part 482.
    Response: In the final rule, we add provisions allowing the use or
disclosure of protected health information to organ procurement
organizations or other entities engaged in the procurement, banking, or
transplantation of cadaveric organs, eyes, or tissue for the purpose of
facilitating donation and transplantation. See Sec. 164.512(h).

Privacy Act Comments

    Comment: One comment suggested that the final rule unambiguously
permit the continued operation of the statutorily established or
authorized discretionary routine uses permitted under the Privacy Act
for both law enforcement and health oversight.
    Response: We disagree. See the discussion of the Privacy Act in
``Relationship to Other Federal Laws'' above.

Public Health Services Act

    Comment: One comment suggested that the Public Health Service Act
places more stringent rules regarding the disclosure of information on
Federally Qualified Health Centers than the proposed privacy regulation
suggested. Therefore, the commenter suggested that the final rule
exempt Federally Qualified Health Centers from the rules requirements
    Response: We disagree. Congress expressly included Federally
Qualified Health Centers, a provider of medical or other health
services under the Social Security Act section 1861(s), within its
definition of health care provider in section 1171 of the Act;
therefore, we cannot exclude them from the regulation.
    Comment: One commenter noted that no conflicts existed between the
proposed rule and the Public Health Services Act.
    Response: As we discuss in the ``Relationship to Other Federal
Laws'' section of the preamble, the Public Health Service Act contains
explicit confidentiality requirements that are so general as not to
create problems of inconsistency. We recognized, however, that in some
cases, that law or its accompanying regulations may contain greater
restrictions. In those situations, a covered entity's ability to make
what are permissive disclosures under this privacy regulation would be
limited by those laws.

Reporting Requirement

    Comment: One comment noted that federal agencies must provide
information to certain entities pursuant to various federal statutes.
For example, federal agencies must not withhold information from a
Congressional oversight committee or the General Accounting Office.
Similarly, some federal agencies must provide the Bureau of the Census
and the National Archives and Records Administration with certain
information. This comment expressed concern that the privacy regulation
would conflict with these requirements. Additionally, the commenter
asked whether the privacy notice would need to contain these uses and
disclosures and recommended that a general statement that these federal
agencies would disclose protected health information when required by
law be considered sufficient to meet the privacy notice requirements.
    Response: To the extent a federal agency acting as a covered entity
is required by federal statute to disclose protected health
information, the regulation permits the disclosure as required by law
under Sec. 164.512(a). The notice provisions at
Sec. 164.520(b)(1)(ii)(B) require covered entities to provide a brief
description of the purposes for which the covered

[[Page 82599]]

entity is permitted or required by the rules to use or disclose
protected health information without an individual's written
authorization. If these statutes require the disclosures, covered
entities subject to the requirement may make the disclosure pursuant to
Sec. 164.512(a). Thus, their notice must include a description of the
category of these disclosures. For example, a general statement such as
the covered entity ``will disclose your protected health information to
comply with legal requirements'' should suffice.
    Comment: One comment stressed that the final rule should not
inadvertently preempt mandatory reporting laws duly enacted by federal,
state, or local legislative bodies. This commenter also suggested that
the final rule not prevent the reporting of violations to law
enforcement agencies.
    Response: We agree. Like the proposed rule, the final rule permits
covered entities to disclose protected health information when required
by law under Sec. 164.512(a). To the extent a covered entity is
required by law to make a report to law enforcement agencies or is
otherwise permitted to make a disclosure to a law enforcement agency as
described in Sec. 164.512(f), it may do so without an authorization.
Alternatively, a covered entity may always request that individuals
authorize these disclosures.

Security Standards

    Comment: One comment called for HHS to consider the privacy
regulation in conjunction with the other HIPAA standards. In
particular, this comment focused on the belief that the security
standards should be compatible with the existing and emerging health
care and information technology industry standards.
    Response: We agree that the security standards and the privacy
rules should be compatible with one another and are working to ensure
that the final rules in both areas function together. Because we are
addressing comments regarding the privacy rules in this preamble, we
will consider the comment about the security standard as we finalize
that set of rules.

Substance Abuse Confidentiality Statute and Regulations

    Comment: Several commenters noted that many health care providers
are bound by the federal restrictions governing alcohol and drug abuse
records. One commenter noted that the NPRM differed substantially from
the substance abuse regulations and would have caused a host of
practical problems for covered entities. Another commenter, however,
supported the NPRM's analysis that stated that more stringent
provisions of the substance abuse provisions would apply. This
commenter suggested an even stronger approach of including in the text
a provision that would preserve existing federal law. Yet, one comment
suggested that the regulation as proposed would confuse providers by
making it difficult to determine when they may disclose information to
law enforcement because the privacy regulation would permit disclosures
that the substance abuse regulations would not.
    Response: We appreciate the need of some covered entities to
evaluate the privacy rules in light of federal requirements regarding
alcohol and drug abuse records. Therefore, we provide a more detailed
analysis in the ``Relationship to Other Federal Laws'' section of the
preamble.
    Comment: Some of these commenters also noted that state laws
contain strict confidentiality requirements. A few commenters suggested
that HHS reassess the regulations to avoid inconsistencies with state
privacy requirements, implying that problems exist because of conflicts
between the federal and state laws regarding the confidentiality of
substance abuse information.
    Response: As noted in the preamble section discussing preemption,
the final rules do not preempt state laws that provide more privacy
protections. For a more detailed analysis of the relationship between
state law and the privacy rules, see the ``Preemption'' provisions of
the preamble.

Tribal Law

    Comments: One commenter suggested that the consultation process
with tribal governments described in the NPRM was inadequate under
Executive Order No. 13084. In addition, the commenter expressed concern
that the disclosures for research purposes as permitted by the NPRM
would conflict with a number of tribal laws that offer individuals
greater privacy rights with respect to research and reflects cultural
appropriateness. In particular, the commenter referenced the Health
Research Code for the Navajo Nation which creates a entity with broader
authority over research conducted on the Navajo Nation than the local
IRB and requires informed consent by study participants. Other laws
mentioned by the commenter included the Navajo Nation Privacy and
Access to Information Act and a similar policy applicable to all health
care providers within the Navajo Nation. The commenter expressed
concern that the proposed regulation research provisions would override
these tribal laws.
    Response: We disagree with the comment that the consultation with
tribal governments undertaken prior to the proposed regulation is
inadequate under Executive Order No. 13084. As stated in the proposed
regulation, the Department consulted with representatives of the
National Congress of American Indians and the National Indian Health
Board, as well as others, about the proposals and the application of
HIPAA to the Tribes, and the potential variations based on the
relationship of each Tribe with the IHS for the purpose of providing
health services. In addition, Indian and tribal governments had the
opportunity to, and did, submit substantive comments on the proposed
rules.
    Additionally, disclosures permitted by this regulation do not
conflict with the policies as described by this commenter. Disclosures
for research purposes under the final rule, as in the proposed
regulation, are permissive disclosures only. The rule describes the
outer boundaries of permissible disclosures. A covered health care
provider that is subject to the tribal laws of the Navajo Nation must
continue to comply with those tribal laws. If the tribal laws impose
more stringent privacy standards on disclosures for research, such as
requiring informed consent in all cases, nothing in the final rule
would preclude compliance with those more stringent privacy standards.
The final rule does not interfere with the internal governance of the
Navajo Nation or otherwise adversely affect the policy choices of the
tribal government with respect to the cultural appropriateness of
research conducted in the Navajo Nation.

TRICARE

    Comment: One comment expressed concern regarding the application of
the ``minimum necessary'' standard to investigations of health care
providers under the TRICARE (formerly the CHAMPUS) program. The comment
also expressed concern that health care providers would be able to
avoid providing their records to such investigators because the
proposed Sec. 164.510 exceptions were not mandatory disclosures.
    Response: In our view, neither the minimum necessary standard nor
the final Secs. 164.510 and 164.512 permissive disclosures will impede
such investigations. The regulation requires covered entities to make
all reasonable efforts not to disclose more than the minimum amount of
protected health

[[Page 82600]]

information necessary to accomplish the intended purpose of the use or
disclosure. This requirement, however, does not apply to uses or
disclosures that are required by law. See Sec. 164.502(b)(2)(iv). Thus,
if the disclosure to the investigators is required by law, the minimum
necessary standard will not apply. Additionally, the final rule
provides that covered entities rely, if such reliance is reasonable, on
assertions from public officials about what information is reasonably
necessary for the purpose for which it is being sought. See
Sec. 164.514(d)(3)(iii).
    We disagree with the assertion that providers will be able to avoid
providing their records to investigators. Nothing in this rule permits
covered entities to avoid disclosures required by other laws.

Veterans Affairs

    Comment: One comment sought clarification about how disclosures of
protected health information would occur within the Veterans Affairs
programs for veterans and their dependents.
    Response: We appreciate the commenter's request for clarification
as to how the rules will affect disclosures of protected health
information in the specific context of Veteran's Affairs programs.
Veterans health care programs under 38 U.S.C. chapter 17 are defined as
``health plans.'' Without sufficient details as to the particular
aspects of the Veterans Affairs programs that this comment views as
problematic, we cannot comment substantively on this concern.
    Comment: One comment suggested that the final regulation clarify
that the analysis applied to the substance abuse regulations apply to
laws governing Veteran's Affairs health records.
    Response: Although we realize some difference may exist between the
laws, we believe the discussion of federal substance abuse
confidentiality regulations in the ``Relationship to Other Federal
Laws'' preamble provides guidance that may be applied to the laws
governing Veteran's Affairs (``VA'') health records. In most cases, a
conflict will not exist between these privacy rules and the VA
programs. For example, some disclosures allowed without patient consent
or authorization under the privacy regulation may not be within the VA
statutory list of permissible disclosures without a written consent. In
such circumstances, the covered entity would have to abide by the VA
statute, and no conflict exists. If the disclosures permitted by the VA
statute come within the permissible disclosures of our rules, no
conflict exists. In some cases, our rules may demand additional
requirements, such as obtaining the approval of a privacy board or
Institutional Review Board if a covered entity seeks to disclose
protected health information for research purposes without the
individual's authorization. A covered entity subject to the VA statute
will need to ensure that it meets the requirements of both that statute
and the regulation below. If a conflict arises, the covered entity
should evaluate the specific potential conflicting provisions under the
implied repeal analysis set forth in the ``Relationship to Other
Federal Laws'' discussion in the preamble.

WIC

    Comment: One comment called on other federal agencies to examine
their regulations and policies regarding the use and disclosure of
protected health information. The comment suggested that other agencies
revise their regulations and policies to avoid duplicative,
contradictory, or more stringent requirements. The comment noted that
the U.S. Department of Agriculture's Special Supplemental Nutrition
Program for Women, Infants, and Children (``WIC'') does not release WIC
data. Because the commenter believed the regulation would not prohibit
the disclosure of WIC data, the comment stated that the Department of
Agriculture should now release such information.
    Response: We support other federal agencies to whom the rules apply
in their efforts to review existing regulations and policies regarding
protected health information. However, we do not agree with the
suggestion that other federal agencies that are not covered entities
must reduce the protections or access-related rights they provide for
individually identifiable health information they hold.

Part 160, Subpart C--Compliance and Enforcement

Section 160.306(a)--Who Can File Complaints With the Secretary

    Comment: The proposed rule limited those who could file a complaint
with the Secretary to individuals. A number of commenters suggested
that other persons with knowledge of a possible violation should also
be able to file complaints. Examples that were provided included a
mental health care provider with first hand knowledge of a health plan
improperly requiring disclosure of psychotherapy notes and an
occupational health nurse with knowledge that her human resources
manager is improperly reviewing medical records. A few comments raised
the concern that permitting any person to file a complaint lends itself
to abuse and is not necessary to ensure privacy rights and that the
complainant should be a person for whom there is a duty to protect
health information.
    Response: As discussed below, the rule defines ``individual'' as
the person who is the subject of the individually identifiable health
information. However, the covered entity may allow other persons, such
as personal representatives, to exercise the rights of the individual
under certain circumstances, e.g., for a deceased individual. We agree
with the commenters that any person may become aware of conduct by a
covered entity that is in violation of the rule. Such persons could
include the covered entity's employees, business associates, patients,
or accrediting, health oversight, or advocacy agencies or
organizations. Many persons, such as the covered entity's employees,
may, in fact, be in a better position than the ``individual'' to know
that a violation has occurred. Another example is a state Protection
and Advocacy group that may represent persons with developmental
disabilities. We have decided to allow complaints from any person. The
term ``person'' is not restricted here to human beings or natural
persons, but also includes any type of association, group, or
organization.
    Allowing such persons to file complaints may be the only way the
Secretary may learn of certain possible violations. Moreover,
individuals who are the subject of the information may not be willing
to file a complaint because of fear of embarrassment or retaliation.
Based on our experience with various civil rights laws, such as Title
VI of the Civil Rights Act of 1964 and Title II of the Americans with
Disabilities Act, that allow any person to file a complaint with the
Secretary, we do not believe that this practice will result in abuse.
Finally, upholding privacy protections benefits all persons who have or
may be served by the covered entity as well as the general public, and
not only the subject of the information.
    If a complaint is received from someone who is not the subject of
protected health information, the person who is the subject of this
information may be concerned with the Secretary's investigation of this
complaint. While we did not receive comments on this issue, we want to
protect the privacy rights of this individual. This might

[[Page 82601]]

involve the Secretary seeking to contact the individual to provide
information as to how the Secretary will address individual's privacy
concerns while resolving the complaint. Contacting all individuals may
not be practicable in the case of allegations of systemic violations
(e.g., where the allegation is that hundreds of medical records were
wrongfully disclosed).

Requiring That a Complainant Exhaust the Covered Entity's Internal
Complaint Process Prior to Filing a Complaint With the Secretary

    Comment: A number of commenters, primarily health plans, suggested
that individuals should not be permitted to file a complaint with the
Secretary until they exhaust the covered entity's own complaint
process. Commenters stated that covered entities should have a certain
period of time, such as ninety days, to correct the violation. Some
commenters asserted that providing for filing a complaint with the
Secretary will be very expensive for both the public and private
sectors of the health care industry to implement. Other commenters
suggested requiring the Secretary to inform the covered entity of any
complaint it has received and not initiate an investigation or ``take
enforcement action'' before the covered entity has time to address the
complaint.
    Response: We have decided, for a number of reasons, to retain the
approach as presented in the proposed rule. First, we are concerned
that requiring that complainants first notify the covered entity would
have a chilling effect on complaints. In the course of investigating
individual complaints, the Secretary will often need to reveal the
identity of the complainant to the covered entity. However, in the
investigation of cases of systemic violations and some individual
violations, individual names may not need to be identified. Under the
approach suggested by these commenters, the covered entity would learn
the names of all persons who file complaints with the Secretary. Some
individuals might feel uncomfortable or fear embarrassment or
retaliation revealing their identity to the covered entity they believe
has violated the regulation. Individuals may also feel they are being
forced to enter into negotiations with this entity before they can file
a complaint with the Secretary.
    Second, because some potential complainants would not bring
complaints to the covered entity, possible violations might not become
known to the Secretary and might continue. Third, the delay in the
complaint coming to the attention of the Secretary because of the time
allowed for the covered entity to resolve the complaint may mean that
significant violations are not addressed expeditiously. Finally, the
process proposed by these commenters is arguably unnecessary because an
individual who believes that an agreement can be reached with the
covered entity, can, through the entity's internal complaint process or
other means, seek resolution before filing a complaint with the
Secretary.
    Our approach is consistent with other laws and regulations
protecting individual rights. None of the civil rights laws enforced by
the Secretary require a complainant to provide any notification to the
entity that is alleged to have engaged in discrimination (e.g.,
Americans with Disabilities Act, section 504 of the Rehabilitation Act,
Title VI of the Civil Rights Act, and the Age Discrimination Act). The
concept of ``exhaustion'' is used in laws that require individuals to
pursue administrative remedies, such as that provided by a governmental
agency, before bringing a court action. Under HIPAA, individuals do not
have a right to court action.
    Some commenters seemed to believe that the Secretary would pursue
enforcement action without notifying the covered entity. It has been
the Secretary's practice in investigating cases under other laws, such
as various civil rights laws, to inform entities that we have received
a complaint against them and to seek early resolution if possible. In
enforcing the privacy rule, the Secretary will generally inform the
covered entity of the nature of any complaints it has received against
the entity. (There may be situations where information is withheld to
protect the privacy interests of the complainant or others or where
revealing information would impede the investigation of the covered
entity.) The Secretary will also generally afford the entity an
opportunity to share information with the Secretary that may result in
an early resolution. Our approach will be to seek informal resolution
of complaints whenever possible, which includes allowing covered
entities a reasonable amount of time to work with the Secretary to come
into compliance before initiating action to seek civil monetary
penalties.

Section 160.306(b)(3)--Requiring That Complaints Be Filed With the
Secretary Within a Certain Period of Time

    Comment: A number of commenters, primarily privacy and disability
advocacy organizations, suggested that the regulation require that
complaints be filed with the Secretary by a certain time. These
commenters generally recommended that the time period for filing a
complaint should commence to run from the time when the individual knew
or had reason to know of the violation or omission. Another comment
suggested that a requirement to file a complaint with the Secretary
within 180 days of the alleged noncompliance is a problem because a
patient may, because of his or her medical condition, be unable to
access his or her records within that time frame.
    Response: We agree with the commenters that complainants should
generally be required to submit complaints in a timely fashion. Federal
regulations implementing Title VI of the Civil Rights Act of 1964
provide that ``[a] complaint must be filed not later than `180 days
from the date of the alleged discrimination' unless the time for filing
is extended by the responsible Department official or his designee.''
45 CFR 80.7(b). Other civil rights laws, such as the Age Discrimination
Act, section 504 of the Rehabilitation Act, and Title II of the
Americans with Disabilities Act (ADA) (state and local government
services), also use this approach. Under civil rights laws administered
by the EEOC, individuals have 180 days of the alleged discriminatory
act to file a charge with EEOC (or 300 days if there is a state or
local fair employment practices agency involved).
    Therefore, in the final rule we require that complaints be filed
within 180 days of when the complainant knew or should have known that
the act or omission complained of occurred unless this time limit is
waived by the Secretary for good cause shown. We believe that an
investigation of a complaint is likely to be most effective if persons
can be interviewed and documents reviewed as close to the time of the
alleged violation as possible. Requiring that complaints generally be
filed within a certain period of time increases the likelihood that the
Secretary will have necessary and reliable information. Moreover, we
are taking this approach in order to encourage complainants to file
complaints as soon as possible. By receiving complaints in a timely
fashion, we can, if such complaints prove valid, reduce the harm caused
by the violation.

Section 160.308--Basis for Conducting Compliance Reviews

    Comment: A number of comments expressed concern that the Secretary
would conduct compliance reviews

[[Page 82602]]

without having received a complaint or having reason to believe there
is noncompliance. A number of these commenters appeared to believe that
the Secretary would engage in ``routine visits.'' Some commenters
suggested that the Secretary should only be able to conduct compliance
reviews if the Secretary has initiated an investigation of a complaint
regarding the covered entity in the preceding twelve months. Some
commenters suggested that there should only be compliance reviews based
on established criteria for reviews (e.g., finding of ``reckless
disregard''). Many of these commenters stated that cooperating with
compliance reviews is potentially burdensome and expensive.
    One commenter asked whether the Secretary will have a process for
reviewing all covered entities to determine how they are complying with
requirements. This commenter questioned whether covered entities will
be required to submit plans and wait for Departmental approval.
    Another commenter suggested that the Secretary specify a time limit
for the completion of a compliance review.
    Response: We disagree with the commenters that the final rule
should restrict the Secretary's ability to conduct compliance reviews.
The Secretary needs to maintain the flexibility to conduct whatever
reviews are necessary to ensure compliance with the rule.

Section 160.310 (a) and (c)--The Secretary's Access to Information in
Determining Compliance

    Comment: Some commenters raised objections to provisions in the
proposed rule which required that covered entities maintain records and
submit compliance reports as the Secretary determines is necessary to
determine compliance and required that covered entities permit access
by the Secretary during normal business hours to its books, records,
accounts, and other sources of information, including protected health
information, and its facilities, that are pertinent to ascertaining
compliance with this subpart. One commenter stated that the Secretary's
access to private health information without appropriate patient
consent is contrary to the intent of HIPAA. Another commenter expressed
the view that, because covered entities face criminal penalties for
violations, these provisions violate the Fifth Amendment protections
against forced self incrimination. Other commenters stated that covered
entities should be given the reason the Secretary needs to have access
to its books and records. Another commenter stated that there should be
a limit to the frequency or extent of intrusion by the federal
government into the business practices of a covered entity and that
these provisions violate the Fourth Amendment of the Constitution.
    Finally, a coalition of church plans suggested that the Secretary
provide church plans with additional procedural safeguards to reduce
unnecessary intrusion into internal church operations. These suggested
safeguards included permitting HHS to obtain records and other
documents only if they are relevant and necessary to compliance and
enforcement activities related to church plans, requiring a senior
official to determine the appropriateness of compliance-related
activities for church plans, and providing church plans with a self-
correcting period similar to that Congress expressly provided in Title
I of HIPAA under the tax code.
    Response: The final rule retains the proposed language in these two
provisions with one change. The rule adds a provision indicating that
the Secretary's access to information held by the covered entity may be
at any time and without notice where exigent circumstances exist, such
as where time is of the essence because documents might be hidden or
destroyed. Thus, covered entities will generally receive notice before
the Secretary seeks to access the entity's books or records.
    Other than the exigent circumstances language, the language in
these two provisions is virtually the same as the language in this
Department's regulation implementing Title VI of the Civil Rights Act
of 1964. 45 CFR 80.6(b) and (c). The Title VI regulation is
incorporated by reference in other Department regulations prohibiting
discrimination of the basis of disability. 45 CFR 84.61. Similar
provisions allowing this Department access to recipient information is
found in the Secretary's regulation implementing the Age Discrimination
Act. 45 CFR 91.34. These provisions have not proved to be burdensome to
entities that are subject to these civil rights regulations (i.e., all
recipients of Department funds).
    We do not interpret Constitutional case law as supporting the view
that a federal agency's review of information pursuant to statutory
mandate violates the Fifth Amendment protections against forced self
incrimination. Nor would such a review of this information raise Fourth
Amendment problems. See discussion above regarding Constitutional
comments and responses.
    We appreciate the concern that the Secretary not involve herself
unnecessarily into the internal operations of church plans. However, by
providing health insurance or care to their employees, church plans are
engaging in a secular activity. Under the regulation, church plans are
subject to the same compliance and enforcement requirements with which
other covered entities must comply. Because Congress did not carve out
specific exceptions or require stricter standards for investigations
related to church plans, incorporating such measures into the
regulation would be inappropriate.
    Additionally, there is no indication that the regulation will
directly interfere with the religious practices of church plans. Also,
the regulation as written appropriately limits the ability of
investigators to obtain information from covered entities. The
regulation provides that the Secretary may obtain access only to
information that is pertinent to ascertain compliance with the
regulation. We do not anticipate asking for information that is not
necessary to assess compliance with the regulation. The purpose of
obtaining records and similar materials is to determine compliance, not
to engage in any sort of review or evaluation of religious activities
or beliefs. Therefore, we believe the regulation appropriately balances
the need to access information to determine compliance with the desire
of covered entities to avoid opening every record in their possession
to the government.

Provision of Technical Assistance

    Comment: A number of commenters inquired as to how a covered entity
can request technical assistance from the Secretary to come into
compliance. A number of commenters suggested that the Secretary provide
interpretive guidance to assist with compliance. Others recommended
that the Secretary have a contact person or privacy official, available
by telephone or email, to provide guidance on the appropriateness of a
disclosure or a denial of access. One commenter suggested that there be
a formal process for a covered entity to submit compliance activities
to the Secretary for prior approval and clarification. This commenter
suggested that clarifications be published on a contemporaneous basis
in the Federal Register to help correct any ambiguities and confusion
in implementation. It was also suggested that the Secretary undertake
an assessment of ``best practices'' of covered entities and document
and promote the findings to serve as a convenient ``road map'' for
other covered entities. Another commenter suggested that we work with
providers to create implementation guidelines modeled after the
interpretative

[[Page 82603]]

guidelines that HCFA creates for surveyors on the conditions of
participation for Medicare and Medicaid contractors.
    Response: While we have not in the final rule committed the
Secretary to any specific model of providing guidance or assistance, we
do state our intent, subject to budget and staffing constraints, to
develop a technical assistance program that will include the provision
of written material when appropriate to assist covered entities in
achieving compliance. We will consider other models including HCFA's
Medicare and Medicaid interpretative guidelines. Further information
regarding the Secretary's technical assistance program may be provided
in the Federal Register and on the HHS Office for Civil Rights (OCR)
Web Site. While OCR plans to have fully trained staff available to
respond to questions, its ability to provide individualized advice in
regard to such matters as the appropriateness of a particular
disclosure or the sufficiency of compliance activities will be based on
staff resources and demands. The idea of looking at ``best practices''
and sharing information with all covered entities is a good one and we
will explore how best to do this. We note that a covered entity is not
excused from compliance with the regulation because of any failure to
receive technical assistance or guidance.

Basis for Violation Findings and Enforcement

    Comment: A number of commenters asked that covered entities not be
liable for violations of the rule if they have acted in good faith. One
commenter indicated that enforcement actions should not be pursued
against covered entities that make legitimate business decisions about
how to comply with the privacy standards.
    Response: The commenters seemed to argue that even if a covered
entity does not comply with a requirement of the rule, the covered
entity should not be liable if there was an honest and sincere
intention or attempt to fulfill its obligations. The final rule,
however, does not take this approach but instead draws careful
distinctions between what a covered entity must do unconditionally, and
what a covered entity must make certain reasonable efforts to do. In
addition, the final rule is clear as to the specific provisions where
``good faith'' is a consideration. For example, a covered entity is
permitted to use and disclose protected health information without
authorization based on criteria that includes a good faith belief that
such use or disclosure is necessary to avert an imminent threat to
health or safety (Sec. 164.512(j)(1)(i)). Therefore, covered entities
need to pay careful attention to the specific language in each
requirement. However, we note that many of these provisions can be
implemented in a variety of ways; e.g, covered entities can exercise
business judgement regarding how to conduct staff training.
    As to enforcement, a covered entity will not necessarily suffer a
penalty solely because an act or omission violates the rule. As we
discuss elsewhere, the Department will exercise discretion to consider
not only the harm done, but the willingness of the covered entity to
achieve voluntary compliance. Further, the Administrative
Simplification provisions of HIPAA provide that whether a violation was
known or not is relevant in determining whether civil or criminal
penalties apply. In addition, if a civil penalty applies, HIPAA allows
the Secretary, where the failure to comply was due to reasonable cause
and not to willful neglect, to delay the imposition of the penalty to
allow the covered entity to comply. The Department will develop and
release for public comment an enforcement regulation applicable to all
the administrative simplification regulations that will address these
issues.
    Comment: One commenter asked whether hospitals will be vicariously
liable for the violations of their employees and expressed concern that
hospitals and other providers will be the ones paying large fines.
    Response: The enforcement regulation will address this issue.
However, we note that section 1128A(1) of the Social Security Act,
which applies to the imposition of civil monetary penalties under
HIPAA, provides that a principal is liable for penalties for the
actions of its agent acting within the scope of the agency. Therefore,
a covered entity will generally be responsible for the actions of its
employees such as where the employee discloses protected health
information in violation of the regulation.
    Comment: A commenter expressed the concern that if a covered entity
acquires a non-compliant health plan, it would be liable for financial
penalties. This commenter suggested that, at a minimum, the covered
entity be given a grace period of at least a year, but not less than
six months to bring any acquisition up to standard. The commenter
stated that the Secretary should encourage, not discourage, compliant
companies to acquire non-compliant ones. Another commenter expressed a
general concern about resolution of enforcement if an entity faced with
a HIPAA complaint acquires or merges with an entity not covered by
HIPAA.
    Response: As discussed above, the Secretary will encourage
voluntary efforts to cure violations of the rule, and will consider
that fact in determining whether to bring a compliance action. We do
not agree, however, that we should limit our authority to pursue
violations of the rule if the situation warrants it.
    Comment: One commenter was concerned about the ``undue risk'' of
liability on originators of information, stemming from the fact that
``the number of covered entities is limited and they are unable to
restrict how a recipient of information may use or re-disclose
information * * *''
    Response: Under this rule, we do not hold covered entities
responsible for the actions of recipients of protected health
information, unless the recipient is a business associate of the
covered entity. We agree that it is not fair to hold covered entities
responsible for the actions of persons with whom they have no on-going
relationship, but believe it is fair to expect covered entities to hold
their business associates to appropriate standards of behavior with
respect to health information.

Other Compliance and Enforcement Comments

    Comment: A number of comments raised questions regarding the
Secretary's priorities for enforcement. A few commenters stated that
they supported deferring enforcement until there is experience using
the proposed standards. One organization asked that we clarify that the
regulation does not replace or otherwise modify the self-regulatory/
consumer empowerment approach to consumer privacy in the online
environment.
    Response: We have not made any decisions regarding enforcement
priorities. It appears that some commenters believe that no enforcement
action will be taken against a given covered entity until that entity
has had some time to comply. Covered entities have two years to come
into compliance with the regulation (three years in the case of small
health plans). Some covered entities will have had experience using the
standards prior to the compliance date. We do not agree that we should
defer enforcement where violations of the rule occur. It would be wrong
for covered entities to believe that enforcement action is based on
their not having much experience in

[[Page 82604]]

using a particular standard or meeting another requirement.
    We support a self-regulation approach in that we recognize that
most compliance will be achieved by the voluntary activities of covered
entities rather than by our enforcement activities. Our emphasis will
be on education, technical assistance, and voluntary compliance and not
on finding violations and imposing penalties. We also support a
consumer empowerment approach. A knowledgeable consumer is key to the
effectiveness of this rule. A consumer familiar with the requirements
of this rule will be equipped to make choices regarding which covered
entity will best serve their privacy interests and will know their
rights under the rule and how they can seek redress for violations of
this rule. Privacy-minded consumers will seek to protect the privacy
rights of others by bringing concerns to the attention of covered
entities, the public, and the Secretary. However, we do not agree that
we should defer enforcement where violations of the rule occur.
    Comment: One commenter expressed concern that by filing a complaint
an individual would be required to reveal sensitive information to the
public. Another commenter suggested that complaints regarding
noncompliance in regard to psychotherapy notes should be made to a
panel of mental health professionals designated by the Secretary. This
commenter also proposed that all patient information be maintained as
privileged, not be revealed to the public, and be kept under seal after
the case is reviewed and closed.
    Response: We appreciate this concern and will seek to ensure that
individually identifiable health information and other personal
information contained in complaints will not be available to the
public. The privacy regulation provides, at Sec. 160.310(c)(3), that
protected health information obtained by the Secretary in connection
with an investigation or compliance review will not be disclosed except
if necessary for ascertaining or enforcing compliance with the
regulation or if required by law. In addition, this Department
generally seeks to protect the privacy of individuals to the fullest
extent possible, while permitting the exchange of records required to
fulfill its administrative and program responsibilities. The Freedom of
Information Act, 5 U.S.C. 552, and the HHS implementing regulation, 45
CFR part 5, provide substantial protection for records about
individuals where disclosure would constitute an unwarranted invasion
of their personal privacy. In implementing the privacy regulation, OCR
plans to continue its current practice of protecting its complaint
files from disclosure. OCR treats these files as investigatory records
compiled for law enforcement purposes. Moreover, OCR maintains that
disclosing protected health information in these files generally
constitutes an unwarranted invasion of personal privacy.
    It is not clear in regarding the use of mental health
professionals, whether the commenter believes that such professionals
should be involved because they would be best able to keep
psychotherapy notes confidential or because such professionals can best
understand the meaning or relevance of such notes. OCR anticipates that
it will not have to obtain a copy or review psychotherapy notes in
investigating most complaints regarding noncompliance in regard to such
notes. There may be some cases where a review of the notes may be
needed such as where we need to identify that the information a covered
entity disclosed was in fact psychotherapy notes. If we need to obtain
a copy of psychotherapy notes, we will keep these notes confidential
and secure. OCR investigative staff will be trained to ensure that they
fully respect the confidentiality of personal information. In addition,
while the specific contents of these notes is generally not relevant to
violations under this rule, if such notes are relevant, we will secure
the expertise of mental health professionals if needed in reviewing
psychotherapy notes.
    Comment: A member of Congress and a number of privacy and consumer
groups expressed concern with whether OCR has adequate funding to carry
out the major responsibility of enforcing the complaint process
established by this rule. The Senator stated that ``[d]ue to the
limited enforcement ability allowed for in this rule by HIPAA, it is
essential that OCR have the capacity to enforce the regulations. Now is
the time for OCR to begin building the necessary infrastructure to
enforce the regulation effectively.''
    Response: We agree and are committed to an effective enforcement
program. We are working with Congress to ensure that the Secretary has
the necessary funds to secure voluntary compliance through education
and technical assistance, to investigate complaints and conduct
compliance reviews, to provide states with exception determinations,
and to use civil and criminal penalties when necessary. We will
continue to work with Congress and within the new Administration in
this regard.

Coordination With Reviewing Authorities

    Comment: A number of commenters referenced other entities that
already consider the privacy of health information. One commenter
indicated opposition to the delegation of inspections to third party
organizations, such as the Joint Commission on the Accreditation of
Healthcare Organizations (JCAHO). A few commenters indicated that state
agencies are already authorized to investigate violations of state
privacy standards and that we should rely on those agencies to
investigate alleged violations of the privacy rules or delegate its
complaint process to states that wish to carry out this responsibility
or to those states that have a complaint process in place. Another
commenter argued that individuals should be required to exhaust any
state processes before filing a complaint with the Secretary. Others
referenced the fact that state medical licensing boards investigate
complaints against physicians for violating patient confidentiality.
One group asked that the federal government streamline all of these
activities so physicians can have a single entity to whom they must be
responsive. Another group suggested that OMB should be given
responsibility for ensuring that FEHB Plans operate in compliance with
the privacy standards and for enforcement.
    A few commenters stated that the regulation might be used as a
basis for violation findings and subsequent penalties under other
Department authorities, such as under Medicare's Conditions of
Participation related to patient privacy and right to confidentiality
of medical records. One commenter wanted some assurance that this
regulation will not be used as grounds for sanctions under Medicare.
Another commenter indicated support for making compliance with the
privacy regulation a Condition of Participation under Medicare.
    Response: HIPAA does not give the Secretary the authority to
delegate her responsibilities to other private or public agencies such
as JCAHO or state agencies. However, we plan to explore ways that we
may benefit from current activities that also serve to protect the
privacy of individually identifiable health information. For example,
if we conduct an investigation or review of a covered entity, that
entity may want to share information regarding findings of other bodies
that conducted similar reviews. We would welcome such

[[Page 82605]]

information. In developing its enforcement program, we may explore ways
it can coordinate with other regulatory or oversight bodies so that we
can efficiently and effectively pursue our joint interests in
protecting privacy.
    We do not accept the suggestion that individuals be required to
exhaust their remedies under state law before filing a complaint with
the Secretary. Our rationale is similar to that discussed above in
regard to the suggestion that covered entities be required to exhaust a
covered entity's internal complaint process before filing a complaint
with the Secretary. Congress provided for federal privacy protection
and we want to allow individuals the right to this protection without
barriers or delay. Covered entities may in their privacy notice inform
individuals of any rights they have under state law including any right
to file privacy complaints. We do not have the authority to interfere
with state processes and HIPAA explicitly provides that we cannot
preempt state laws that provide greater privacy protection.
    We have not yet addressed the issue as to whether this regulation
might be used as a basis for violation findings or penalties under
other Department authorities. We note that Medicare conditions of
participation require participating providers to have procedures for
ensuring the confidentiality of patient records, as well as afford
patients with the right to the confidentiality of their clinical
records.

Penalties

    Comment: Many commenters considered the statutory penalties
insufficient to protect privacy, stating that the civil penalties are
too weak to have the impact needed to reduce the risk of inappropriate
disclosure. Some commenters took the opposing view and stated that
large fines and prison sentences for violations would discourage
physicians from transmitting any sort of health care information to any
other agency, regardless of the medical necessity. Another comment
expressed the concern that doctors will be at risk of going to jail for
protecting the privacy of individuals (by not disclosing information
the government believes should be released).
    Response: The enforcement regulation will address the application
of the civil monetary and criminal penalties under HIPAA. The
regulation will be published in the Federal Register as a proposed
regulation and the public will have an opportunity to comment. We do
not believe that our rule, and the penalties available under it, will
discourage physicians and other providers from using or disclosing
necessary information. We believe that the rule permits physicians to
make the disclosures that they need to make under the health care
system without exposing themselves to jeopardy under the rule. We
believe that the penalties under the statute are woefully inadequate.
We support legislation that would increase the amount of these
penalties.
    Comment: A number of commenters stated that the regulations should
permit individuals to sue for damages caused by breaches of privacy
under these regulations. Some of these commenters specified that
damages, equitable relief, attorneys fees, and punitive damages should
be available. Conversely, one comment stated that strong penalties are
necessary and would preclude the need for a private right of action.
Another commenter stated that he does not believe that the statute
intended to give individuals the equivalent of a right to sue, which
results from making individuals third party beneficiaries to contracts
between business partners.
    Response: We do not have the authority to provide a private right
of action by regulation. As discussed below, the final rule deletes the
third party beneficiary provision that was in the proposed rule.
    However, we believe that, in addition to strong civil monetary
penalties, federal law should allow any individual whose rights have
been violated to bring an action for actual damages and equitable
relief. The Secretary's Recommendations, which were submitted to
Congress on September 11, 1997, called for a private right of action to
permit individuals to enforce their privacy rights.
    Comment: One comment stated that, in calculating civil monetary
penalties, the criteria should include aggravating or mitigating
circumstances and whether the violation is a minor or first time
violation. Several comments stated that penalties should be tiered so
that those that commit the most egregious violations face stricter
civil monetary penalties.
    Response: As mentioned above, issues regarding civil fines and
criminal penalties will be addressed in the enforcement regulation.
    Comment: One comment stated that the regulation should clarify
whether a single disclosure that involved the health information of
multiple parties would constitute a single or multiple infractions, for
the purpose of calculating the penalty amount.
    Response: The enforcement regulation will address the calculation
of penalties. However, we note that section 1176 subjects persons to
civil monetary penalties of not more than $100 for each violation of a
requirement or prohibition and not more than $25,000 in a calendar year
for all violations of an identical requirement or prohibition. For
example, if a covered entity fails to permit amendment of protected
health information for 10 patients in one calendar year, the entity may
be fined up to $1000 ($100 times 10 violations equals $1000).

Part 164--Subpart A--General Requirements

Part 164--Subpart B-D--Reserved

Part 164--Subpart E--Privacy

Section 164.500--Applicability

Covered Entities

    The response to comments on covered entities is included in the
response to comments on the definition of ``covered entity'' in the
preamble discussion of Sec. 160.103.

Covered Information

    The response to comments on covered information is included in the
response to comments on the definition of ``protected health
information'' in the preamble discussion of Sec. 164.501.

Section 164.501--Definitions

Designated record set

    Comment: Many commenters generally supported our proposed
definition of designated record set. Commenters suggested different
methods for narrowing the information accessible to individuals, such
as excluding information obtained without face-to-face interaction
(e.g., phone consultations). Other commenters recommended broadening
the information accessible to individuals, such as allowing access to
``the entire medical record,'' not just a designated record set. Some
commenters advocated for access to all information about individuals. A
few commenters generally supported the provision but recommended that
consultation and interpretative assistance be provided when the
disclosure may cause harm or misunderstanding.
    Response: We believe individuals should have a right to access any
protected health information that may be used to make decisions about
them and modify the final rule to accomplish this result. This approach
facilitates an open and cooperative relationship between individuals
and covered health care providers and health plans and allows
individuals fair opportunities to know what health information may be

[[Page 82606]]

used to make decisions about them. We list certain records that are
always part of the designated record set. For covered providers these
are the medical record and billing record. For health plans these are
the enrollment, payment, claims adjudication, and case or medical
management records. The purpose of these specified records is
management of the accounts and health care of individuals. In addition,
we include in the designated record set to which individuals have
access any record used, in whole or in part, by or for the covered
entity to make decisions about individuals. Only protected health
information that is in a designated record set is covered. Therefore,
if a covered provider has a phone conversation, information obtained
during that conversation is subject to access only to the extent that
it is recorded in the designated record set.
    We do not require a covered entity to provide access to all
individually identifiable health information, because the benefits of
access to information not used to make decisions about individuals is
limited and is outweighed by the burdens on covered entities of
locating, retrieving, and providing access to such information. Such
information may be found in many types of records that include
significant information not relevant to the individual as well as
information about other persons. For example, a hospital's peer review
files that include protected health information about many patients but
are used only to improve patient care at the hospital, and not to make
decisions about individuals, are not part of that hospital's designated
record sets.
    We encourage but do not require covered entities to provide
interpretive assistance to individuals accessing their information,
because such a requirement could impose administrative burdens that
outweigh the benefits likely to accrue.
    The importance to individuals of having the right to inspect and
copy information about them is supported by a variety of industry
groups and is recognized in current state and federal law. The July
1977 Report of the Privacy Protection Study Commission recommended that
individuals have access to medical records and medical record
information.\2\ The Privacy Act (5 U.S.C. 552a) requires government
agencies to permit individuals to review records and have a copy made
in a form comprehensible to the individual. In its report ``Best
Principles for Health Privacy,'' the Health Privacy Working Group
recommended that individuals should have the right to access
information about them.\3\ The National Association of Insurance
Commissioners' Health Information Privacy Model Act establishes the
right of an individual to examine or receive a copy of protected health
information in the possession of the carrier or a person acting on
behalf of the carrier.
---------------------------------------------------------------------------

    \2\ Privacy Protection Study Commission, ``Personal Privacy in
an Information Society,'' July 1977, p. 298-299.
    \3\ Health Privacy Working Group, ``Best Principles for Health
Privacy,'' Health Privacy Project, Institute for Health Care
Research and Policy, Georgetown University, July 1999.
---------------------------------------------------------------------------

    Many states also establish a right for individuals to access health
information about them. For example, Alaska law (AK Code 18.23.005)
entitles patients ``to inspect and copy any records developed or
maintained by a health care provider or other person pertaining to the
health care rendered to the patient.'' Hawaii law (HRS section 323C-11)
requires health care providers and health plans, among others, to
permit individuals to inspect and copy protected health information
about them. Many other states have similar provisions.
    Industry and standard-setting organizations also have developed
policies to enable individual access to health information. The
National Committee for Quality Assurance and the Joint Commission on
Accreditation of Healthcare Organizations issued recommendations
stating, ``Patients' confidence in the protection of their information
requires that they have the means to know what is contained in their
records. The opportunity for patients to review their records will
enable them to correct any errors and may provide them with a better
understanding of their health status and treatment.'' \4\ Standards of
the American Society for Testing and Materials state, ``The patient or
his or her designated personal representative has access rights to the
data and information in his or her health record and other health
information databases except as restricted by law. An individual should
be able to inspect or see his or her health information or request a
copy of all or part of the health information, or both.'' \5\ We build
on this well-established principle in this final rule.
---------------------------------------------------------------------------

    \4\ National Committee on Quality Assurance and the Joint
Commission on Accreditation of Healthcare Organizations,
``Protecting Personal Health Information: A Framework for Meeting
the Challenges in a Managed Care Environment,'' 1998, p. 25.
    \5\ ASTM, ``Standard Guide for Confidentiality, Privacy, Access
and Data Security, Principles for Health Information Including
Computer-Based Patient Records,'' E 1869-97, Sec. 11.1.1.
---------------------------------------------------------------------------

    Comment: Several commenters advocated for access to not only
information that has already been used to make decisions, but also
information that may be used to make decisions. Other commenters
believed accessible information should be more limited; for example,
some commenters argued that accessible information should be restricted
to only information used to make health care decisions.
    Response: We agree that it is desirable that individuals have
access to information reasonably likely to be used to make decisions
about them. On the other hand, it is desirable that the category of
records covered be readily ascertainable by the covered entity. We
therefore define ``designated record set'' to include certain
categories of records (a provider's medical record and billing record,
the enrollment records, and certain other records maintained by a
health plan) that are normally used, and are reasonably likely to be
used, to make decisions about individuals. We also add a category of
other records that are, in fact, used, in whole or in part, to make
decisions about individuals. This category includes records that are
used to make decisions about any individuals, whether or not the
records have been used to make a decision about the particular
individual requesting access.
    We disagree that accessible information should be restricted to
information used to make health care decisions, because other decisions
by covered entities can also affect individuals' interests. For
example, covered entities make financial decisions about individuals,
such as whether an individual's deductible has been met. Because such
decisions can significantly affect individuals' interests, we believe
they should have access to any protected health information included in
such records.
    Comment: Some commenters believed the rule should use the term
``retrievable'' instead of ``retrieved'' to describe information
accessible to individuals. Other commenters suggested that the rule
follow the Privacy Act's principle of allowing access only when
entities retrieve records by individual identifiers. Some commenters
requested clarification that covered entities are not required to
maintain information by name or other patient identifier.
    Response: We have modified the proposed definition of the
designated record set to focus on how information is used, not how it
is retrieved. Information may be retrieved or retrievable by name, but
if it is never used to make decisions about any

[[Page 82607]]

individuals, the burdens of requiring a covered entity to find it and
to redact information about other individuals outweigh any benefits to
the individual of having access to the information. When the
information might be used to affect the individual's interests,
however, that balance changes and the benefits outweigh the burdens. We
confirm that this regulation does not require covered entities to
maintain any particular record set by name or identifier.
    Comment: A few commenters recommended denial of access for
information relating to investigations of claims, fraud, and
misrepresentations. Many commenters suggested that sensitive,
proprietary, and legal documents that are ``typical state law
privileges'' be excluded from the right to access. Specific suggestions
for exclusion, either from the right of access or from the definition
of designated record set, include quality assurance activities,
information related to medical appeals, peer review and credentialing,
attorney-client information, and compliance committee activities. Some
commenters suggested excluding information already supplied to
individuals on previous requests and information related to health care
operations. However, some commenters felt that such information was
already excluded from the definition of designated record set. Other
commenters requested clarification that this provision will not prevent
patients from getting information related to medical malpractice.
    Response: We do not agree that records in these categories are
never used to affect the interests of individuals. For example, while
protected health information used for peer review and quality assurance
activities typically would not be used to make decisions about
individuals, and, thus, typically would not be part of a designated
record set, we cannot say that this is true in all cases. We design
this provision to be sufficiently flexible to work with the varying
practices of covered entities.
    The rule addresses several of these comments by excepting from the
access provisions (Sec. 164.524) information compiled in reasonable
anticipation of, or for use in, a civil, criminal, or administrative
action or proceeding. Similarly, nothing in this rule requires a
covered entity to divulge information covered by physician-patient or
similar privilege. Under the access provisions, a covered entity may
redact information in a record about other persons or information
obtained under a promise of confidentiality, prior to releasing the
information to the individual. We clarify that nothing in this
provision would prevent access to information needed to prosecute or
defend a medical malpractice action; the rules of the relevant court
determine such access.
    We found no persuasive evidence to support excluding information
already supplied to individuals on previous requests. The burdens of
tracking requests and the information provided pursuant to requests
outweigh the burdens of providing the access requested. A covered
entity may, however, discuss the scope of the request for access with
the individual to facilitate the timely provision of access. For
example, if the individual agrees, the covered entity could supply only
the information created or received since the date access was last
granted.

Disclosure

    Comment: A number of commenters asked that the definition of
``disclosure'' be modified so that it is clear that it does not include
the release, transfer, provision of access to, or divulging in any
other manner of protected health information to the individual who is
the subject of that information. It was suggested that we revise the
definition in this way to clarify that a health care provider may
release protected health information to the subject of the information
without first requiring that the patient complete an authorization
form.
    Response: We agree with the commenters' concern, but accomplish
this result through a different provision in the regulation. In
Sec. 164.502 of this final rule, we specify that disclosures of
protected health information to the individual are not subject to the
limitations on disclosure of protected health information otherwise
imposed by this rule.
    Comment: A number of commenters stated that the regulation should
not apply to disclosures occurring within or among different
subsidiaries or components of the same entity. One commenter
interpreted ``disclosure'' to mean outside the agency or, in the case
of a state Department of Health, outside sister agencies and offices
that directly assist the Secretary in performing Medicaid functions and
are listed in the state plan as entitled to receive Medicaid data.
    Response: We agree that there are circumstances under which related
organizations may be treated as a single covered entity for purposes of
protecting the privacy of health information, and modify the rule to
accommodate such circumstances. In Sec. 164.504 of the final rule, we
specify the conditions under which affiliated companies may combine
into a single covered entity and similarly describe which components of
a larger organization must comply with the requirements of this rule.
For example, transfers of information within the designated component
or affiliated entity are uses while transfers of information outside
the designated component or affiliated entity are disclosures. See the
discussion of Sec. 164.504 for further information and rationale. It is
not clear from these comments whether the particular organizational
arrangements described could constitute a single covered entity.
    Comment: A commenter noted that the definition of ``disclosure''
should reflect that health plan correspondence containing protected
health information, such as Explanation of Benefits (EOBs), is
frequently sent to the policyholder. Therefore, it was suggested that
the words ``provision of access to'' be deleted from the definition and
that a ``disclosure'' be clarified to include the conveyance of
protected health information to a third party.
    Response: The definition is, on its face, broad enough to cover the
transfers of information described and so is not changed. We agree that
health plans must be able to send EOBs to policyholders. Sending EOB
correspondence to a policyholder by a covered entity is a disclosure
for purposes of this rule, but it is a disclosure for purposes of
payment. Therefore, subject to the provisions of Sec. 164.522(b)
regarding Confidential Communications, it is permitted even if it
discloses to the policyholder protected health information about
another individual (see below).

Health care operations

    Comment: Several commenters stated that the list of activities
within the definition of health care operations was too broad and
should be narrowed. They asserted that the definition should be limited
to exclude activities that have little or no connection to the care of
a particular patient or to only include emergency treatment situations
or situations constituting a clear and present danger to oneself or
others.
    Response: We disagree. We believe that narrowing the definition in
the manner requested will place serious burdens on covered entities and
impair their ability to conduct legitimate business and management
functions.
    Comment: Many commenters, including physician groups, consumer
groups, and privacy advocates, argued that we should limit the
information that can be used for health care operations to de-
identified data. They

[[Page 82608]]

argued that if an activity could be done with de-identified data, it
should not be incorporated in the definition of health care operations.
    Response: We disagree. We believe that many activities necessary
for the business and administrative operations of health plans and
health care providers are not possible with de-identified information
or are possible only under unduly burdensome circumstances. For
example, identified information may be used or disclosed during an
audit of claims, for a plan to contact a provider about alternative
treatments for specific patients, and in reviewing the competence of
health care professionals. Further, not all covered entities have the
same ability to de-identify protected health information. Covered
entities with highly automated information systems will be able to use
de-identified data for many purposes. Other covered entities maintain
most of their records on paper, so a requirement to de-identify
information would place too great a burden on the legitimate and
routine business functions included in the definition of health care
operations. Small business, which are most likely to have largely paper
records, would find such a blanket requirement particularly burdensome.
    Protected health information that is de-identified pursuant to
Sec. 164.514(a) is not subject to this rule. We hope this provides
covered entities capable of de-identifying information with the
incentive to do so.
    Comment: Some commenters requested that we permit the use of
demographic data (geographic, location, age, gender, and race) separate
from all other data for health care operations. They argued that
demographic data was needed to establish provider networks and monitor
providers to ensure that the needs of ethnic and minority populations
were being addressed.
    Response: The use of demographic data for the stated purposes is
within the definition of health care operations; a special rule is not
necessary.
    Comment: Some commenters pointed out that the definition of health
care operations is similar to, and at times overlaps with, the
definition of research. In addition, a number of commenters questioned
whether or not research conducted by the covered entity or its business
partner must only be applicable to and used within the covered entity
to be considered health care operations. Others questioned whether such
studies or research performed internal to a covered entity are ``health
care operations'' even if generalizable results may be produced.
    Response: We agree that some health care operations have many of
the characteristics of research studies and in the NPRM asked for
comments on how to make this distinction. While a clear answer was not
suggested in any of the comments, the comments generally together with
our fact finding lead to the provisions in the final rule. The
distinction between health care operations and research rests on
whether the primary purpose of the study is to produce ``generalizable
knowledge.'' We have modified the definition of health care operations
to include ``quality assessment and improvement activities, including
outcomes evaluation and development of clinical guidelines, provided
that the obtaining of generalizable knowledge is not the primary
purpose of any studies resulting from such activities.'' If the primary
purpose of the activity is to produce generalizable knowledge, the
activity fits within this rule's definition of ``research'' and the
covered entity must comply with Secs. 164.508 or 164.512, including
obtaining an authorization or the approval of an institutional review
board or privacy board. If not and the activity otherwise meets the
definition of health care operations, the activity is not research and
may be conducted under the health care operations provisions of this
rule.
    In some instances, the primary purpose of the activity may change
as preliminary results are analyzed. An activity that was initiated as
an internal outcomes evaluation may produce information that the
covered entity wants to generalize. If the purpose of a study changes
and the covered entity does intend to generalize the results, the
covered entity should document the change in status of the activity to
establish that they did not violate the requirements of this rule. (See
definition of ``research,'' below, for further information on the
distinction between ``research'' and ``health care operations.'')
    We note that the difficulty in determining when an activity is for
the internal operations of an entity and when it is a research activity
is a long-standing issue in the industry. The variation among
commenters' views is one of many indications that, today, there is not
consensus on how to draw this line. We do not resolve the larger issue
here, but instead provide requirements specific to the information
covered by this rule.
    Comment: Several commenters asked that disease management and
disability management activities be explicitly included in the
definition of health care operations. Many health plans asserted that
they would not be able to provide disease management, wellness, and
health promotion activities if the activity were solely captured in the
rule's definition of ``treatment.'' They also expressed concern that
``treatment'' usually applies to an individual, not to a population, as
is the practice for disease management.
    Response: We were unable to find generally accepted definitions of
the terms ``disease management'' and ``disability management.'' Rather
than rely on this label, we include many of the functions often
included in discussions of disease management in this definition or in
the definition of treatment, and modify both definitions to address the
commenters' concerns. For example, we have revised the definition of
health care operations to include population-based activities related
to improving health or reducing health care costs. This topic is
discussed further in the comment responses regarding the definition of
``treatment,'' below.
    Comment: Several commenters urged that the definition of health
care operations be illustrative and flexible, rather than structured in
the form of a list as in the proposed rule. They believed it would be
impossible to identify all the activities that constitute health care
operations. Commenters representing health plans were concerned that
the ``static'' nature of the definition would stifle innovation and
could not reflect the new functions that health plans may develop in
the future that benefit consumers, improve quality, and reduce costs.
Other commenters, expressed support for the approach taken in the
proposed rule, but felt the list was too broad.
    Response: In the final rule, we revise the proposed definition of
health care operations to broaden the list of activities included, but
we do not agree with the comments asking for an illustrative definition
rather than an inclusive list. Instead, we describe the activities that
constitute health care operations in broad terms and categories, such
as ``quality assessment'' and ``business planning and development.'' We
believe the use of broadly stated categories will allow industry
innovation, but without the privacy risks entailed in an illustrative
approach.
    Comment: Several commenters noted that utilization review and
internal quality review should be included in the definition. They
pointed out that both of these activities were discussed in the
preamble to the proposed rule but were not incorporated into the
regulation text.

[[Page 82609]]

    Response: We agree and have modified the regulation text to
incorporate quality assessment and improvement activities, including
the development of clinical guidelines and protocol development.
    Comment: Several commenters stated that the proposal did not
provide sufficient guidance regarding compiling and analyzing
information in anticipation of or for use in legal proceedings. In
particular, they raised concerns about the lack of specificity as to
when ``anticipation'' would be triggered.
    Response: We agree that this provision was confusing and have
replaced it with a broader reference to conducting or arranging for
legal services generally.
    Comment: Hospital representatives pointed out the pressure on
health care facilities to improve cost efficiencies, make cost-
effectiveness studies, and benchmark essential health care operations.
They emphasized that such activities often use identifiable patient
information, although the products of the analyses usually do not
contain identifiable health information. Commenters representing state
hospital associations pointed out that they routinely receive protected
health information from hospitals for analyses that are used by member
hospitals for such things as quality of care benchmark comparisons,
market share analysis, determining physician utilization of hospital
resources, and charge comparisons.
    Response: We have expanded the definition of health care operations
to include use and disclosure of protected health information for the
important functions noted by these commenters. We also allow a covered
entity to engage a business associate to provide data aggregation
services. See Sec. 164.504(e).
    Comment: Several commenters argued that many activities that are
integral to the day-to-day operations of a health plan have not been
included in the definition. Examples provided by the commenters
include: issuing plan identification cards, customer service, computer
maintenance, storage and back-up of radiologic images, and the
installation and servicing of medical equipment or computer systems.
    Response: We agree with the commenters that there are activities
not directly part of treatment or payment that are more closely
associated with the administrative or clerical functions of the plan or
provider that need to be included in the definition. To include such
activities in the definition of health care operations, we eliminate
the requirement that health care operations be directly related to
treatment and payment, and we add to this definition the new categories
of business management (including general administrative activities)
and business planning activities.
    Comment: One commenter asked for clarification on whether cost-
related analyses could also be done by providers as well as health
plans.
    Response: Health care operations, including business management
functions, are not limited to health plans. Any covered entity can
perform health care operations.
    Comment: One commenter stated that the proposed rule did not
address what happens to records when a covered entity is sold or merged
with another entity.
    Response: We agree and add to the definition of health care
operations disclosures of protected health information for due
diligence to a covered entity that is a potential successor in
interest. This provision includes disclosures pursuant to the sale of a
covered entity's business as a going concern, mergers, acquisitions,
consolidations, and other similar types of corporate restructuring
between covered entities, including a division of a covered entity, and
to an entity that is not a covered entity but will become a covered
entity if the reorganization or sale is completed. Other types of sales
of assets, or disclosures to organizations that are not and would not
become covered entities, are not included in the definition of health
care operations and could only occur if the covered entity obtained
valid authorization for such disclosure in accordance with Sec. 164.508
or if the disclosure is otherwise permitted under this rule.
    Once a covered entity is sold or merged with another covered
entity, the successor in interest becomes responsible for complying
with this regulation with respect to the transferred information.
    Comment: Several commenters expressed concern that the definition
of health care operations failed to include the use of protected health
information for the underwriting of new health care policies and took
issue with the exclusion of uses and disclosures of protected health
information of prospective enrollees. They expressed the concern that
limiting health care operations to the underwriting and rating of
existing members places a health plan in the position of not being able
to evaluate prudently and underwrite a consumer's health care risk.
    Response: We agree that covered entities should be able to use the
protected health information of prospective enrollees to underwrite and
rate new business and change the definition of health care operations
accordingly. The definition of health care operations below includes
underwriting, premium rating, and other activities related to the
creation of a contract of health insurance.
    Comment: Several commenters stated that group health plans needed
to be able to use and disclose protected health information for
purposes of soliciting a contract with a new carrier and rate setting.
    Response: We agree and add ``activities relating to the * * *
replacement of a contract of insurance'' to cover such disclosures. See
Sec. 164.504 for the rules for plan sponsors of group health plans to
obtain such information.
    Comment: Commenters from the business community supported our
recognition of the importance of financial risk transfer mechanisms in
the health care marketplace by including ``reinsurance'' in the
definition of health care operations. However, they stated that the
term ``reinsurance'' alone was not adequate to capture ``stop-loss
insurance'' (also referred to as excess of loss insurance), another
type of risk transfer insurance.
    Response: We agree with the commenters that stop-loss and excess of
loss insurance are functionally equivalent to reinsurance and add these
to the definition of health care operations.
    Comment: Commenters from the employer community explained that
there is a trend among employers to contract with a single insurer for
all their insurance needs (health, disability, workers' compensation).
They stated that in these integrated systems, employee health
information is shared among the various programs in the system. The
commenters believed the existing definition poses obstacles for those
employers utilizing an integrated health system because of the need to
obtain authorizations before being permitted to use protected health
information from the health plan to administer or audit their
disability or workers' compensation plan.
    Other commenters representing employers stated that some employers
wanted to combine health information from different insurers and health
plans providing employee benefits to their workforces, including its
group health plan, workers' compensation insurers, and disability
insurers, so that they could have more information in order to better
manage the occurrences of disability and illness among their
workforces. They expressed concern

[[Page 82610]]

that the proposed rule would not permit such sharing of information.
    Response: While we agree that integrating health information from
different benefit programs may produce efficiencies as well as benefits
for individuals, the integration also raises significant privacy
concerns, particularly if there are no safeguards on uses and
disclosures from the integrated data. Under HIPAA, we do not have
jurisdiction over many types of insurers that use health information,
such as workers' compensation insurers or insurers providing disability
income benefits, and we cannot address the extent to which they provide
individually identifiable health information to a health plan, nor do
we prohibit a health plan from receiving such information. Once a
health plan receives identifiable health information, however, the
information becomes protected and may only be used and disclosed as
otherwise permitted by this rule.
    We clarify, however, that a covered entity may provide data and
statistical analyses for its customers as a health care operation,
provided that it does not disclose protected health information in a
way that would otherwise violate this rule. A group health plan or
health insurance issuer or HMO, or their business associate on their
behalf, may perform such analyses for an employer customer and provide
the results in de-identified form to the customer, using integrated
data received from other insurers, as long as protected health
information is not disclosed in violation of this rule. See the
definition of ``health care operations,'' Sec. 164.501. If the employer
sponsors more than one group health plan, or if its group health plan
provides coverage through more than one health insurance issuer or HMO,
the different covered entities may be an organized health care
arrangement and be able to jointly participate in such an analysis as
part of the health care operations of such organized health care
arrangement. See the definitions of ``health care operations'' and
``organized health care arrangement,'' Sec. 164.501. We further clarify
that a plan sponsor providing plan administration to a group health
plan may participate in such an analysis, provided that the
requirements of Sec. 164.504(f) and other parts of this rule are met.
    The results described above are the same whether the health
information that is being combined is from separate insurers or from
one entity that has a health component and also provides excepted
benefits. See the discussion relating to health care components,
Sec. 164.504.
    We note that under the arrangements described above, the final rule
provides substantial flexibility to covered entities to provide general
data and statistical analyses, resulting in the disclosure of de-
identified information, to employers and other customers. An employer
also may receive protected health information from a covered entity for
any purpose, including those described in comment above, with the
authorization of the individual. See Sec. 164.508.
    Comment: A number of commenters asserted that the proposed
definition appeared to limit training and educational activities to
that of health care professionals, students, and trainees. They asked
that we expand the definition to include other education-related
activities, such as continuing education for providers and training of
non-health care professionals as needed for supporting treatment or
payment.
    Response: We agree with the commenters that the definition of
health care operations was unnecessarily limiting with respect to
educational activities and expand the definition of health care
operations to include ``conducting training programs in which students,
trainees, or practitioners in areas of health care learn under
supervision to practice or improve their skills as health care
providers.'' We clarify that medical rounds are considered treatment,
not health care operations.
    Comment: A few commenters outlined the need to include the training
of non-health care professionals, such as health data analysts,
administrators, and computer programmers within the definition of
health care operations. It was argued that, in many cases, these
professionals perform functions which support treatment and payment and
will need access to protected health information in order to carry out
their responsibilities.
    Response: We agree and expand the definition of health care
operations to include training of non-health care professionals.
    Comment: One commenter stated that the definition did not
explicitly include physician credentialing and peer review.
    Response: We have revised the definition to specifically include
``licensing or credentialing activities.'' In addition, peer review
activities are captured in the definition as reviewing the competence
or qualifications of health care professionals and evaluating
practitioner and provider performance.

Health Oversight Agency

    Comment: Some commenters sought to have specific organizations
defined as health oversight agencies. For example, some commenters
asked that the regulation text, rather than the preamble, explicitly
list state insurance departments as an example of health oversight
agencies. Medical device manufacturers recommended expanding the
definition to include government contractors such as coding committees,
which provide data to HCFA to help the agency make reimbursement
decisions.
    One federal agency sought clarification that several of its sub-
agencies were oversight agencies; it was concerned about its status in
part because the agency fits into more than one of the categories of
health oversight agency listed in the proposed rule.
    Other commenters recommended expanding the definition of oversight
agency to include private-sector accreditation organizations. One
commenter recommended stating in the final rule that private companies
providing information to insurers and employers are not included in the
definition of health oversight agency.
    Response: Because the range of health oversight agencies is so
broad, we do not include specific examples in the definition. We
include many examples in the preamble above and provide further clarity
here.
    As under the NPRM, state insurance departments are an example of a
health oversight agency. A commenter concerned about state trauma
registries did not describe the registries' activities or legal
charters, so we cannot clarify whether such registries may be health
oversight agencies. Government contractors such as coding committees,
which provide data to HCFA to support payment processes, are not
thereby health oversight agencies under this rule. We clarify that
public agencies may fit into more than one category of health oversight
agency.
    The definition of health oversight agency does not include private-
sector accreditation organizations. While their work can promote
quality in the health care delivery system, private accreditation
organizations are not authorized by law to oversee the health care
system or government programs in which health information is necessary
to determine eligibility or compliance, or to enforce civil rights laws
for which health information is relevant. Under the final rule, we
consider private accrediting groups to be performing a health care
operations function for covered entities. Thus, disclosures to private
accrediting organizations are

[[Continued on page 82611]]