Physicians Seek Relief On Eve of FTC's Red Flags Enforcement Deadline

As previously reported here, the Federal Trade Commission (FTC) is currently scheduled to commence enforcement of the FACTA Red Flags Rule (72 Fed. Reg. 63,718) on June 1, 2010.  On Friday, only 10 days before the deadline, the American Medical Association, the American Osteopathic Association, and the Medical Society for the District of Columbia filed suit against the FTC in the United States District Court for the District of Columbia (AMA v. FTC, D.D.C., No. 1:10-cv-00843), following in the footsteps of similar lawsuits filed in the past year by the American Bar Association (ABA) and the American Institute of Certified Public Accountants (AICPA).  The ABA, in a lawsuit filed last August (ABA v. FTC, No. 1:09-cv-01636-RBW), succeeded in obtaining an order (now on appeal) barring the FTC from enforcing the Red Flags Rule against lawyers.  (There has been no ruling on the AICPA complaint filed last November.)

Following is a discussion of the definitions ("creditor" and "credit") at the heart of the dispute, a summary of the positions taken by the FTC and the AMA with respect to application of the Red Flags Rule to physicians, and a brief review of the court's decision in ABA v. FTC.

The Definitions of "Creditor" and "Credit"

"Creditor" and "credit" are defined terms under the FACTA Red Flags Rule. The Fair and Accurate Credit Transactions Act (FACTA) (15 U.S.C. § 1681a(r)(5)) incorporates by reference the definitions of "creditor" and "credit" found in the Equal Credit Opportunity Act (ECOA). The ECOA defines "creditor" as "any person who regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit." 15 U.S.C. § 1691a(e). The ECOA defines "credit" as "the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or services and defer payment therefor." 15 U.S.C. § 1691a(d).

The FTC's Position

As noted in the AMA complaint, the FTC's position on the application of the Red Flags Rule to physicians (and to attorneys) was first spelled out on April 30, 2009 in a footnote of its "Extended Enforcement Policy: Identity Theft Red Flags Rule":

In FACTA, Congress imported the definition of creditor from the [ECOA] for purposes of the [FCRA]. This definition covers all entities that regularly permit deferred payments for goods or services. The definition thus has a broad scope and may include entities that have not in the past considered themselves to be creditors. For example. creditors under the ECOA include professionals, such as lawyers or health care providers, who bill their clients after services are rendered.

(Emphasis added.)

In May 2009, the FTC published another document on its website entitled "'The ‘Red Flags’ Rule: What Health Care Providers Need to Know About Complying with New Requirements for Fighting Identity Theft.”  That document stated as follows:

Health care providers may be subject to the Rule if they are “creditors.” Although you may not think of your practice as a “creditor” in the traditional sense of a bank or mortgage company, the law defines “creditor” to include any entity that regularly defers payments for goods or services or arranges for the extension of credit. For example, you are a creditor if you regularly bill patients after the completion of services, including for the remainder of medical fees not reimbursed by insurance. Similarly, health care providers who regularly allow patients to set up payment plans after services have been rendered are creditors under the Rule. Health care providers are also considered creditors if they help patients get credit from other sources — for example, if they distribute and process applications for credit accounts tailored to the health care industry.

In a press release dated July 29, 2009, the FTC referenced a document that provided answers to frequently asked questions (FAQs), which reiterated its position that attorneys and health care providers are required to comply with the Red Flags Rule when their billing arrangements qualify them as creditors under FACTA and the ECOA:

the definition of "creditor" is broad, and includes businesses or organizations that regularly provide goods or services first and allow customers to pay later. . . . Examples of groups that may fall within this definition are utilities, health care providers, lawyers, accountants, and other professionals, and telecommunications companies.

The AMA's Position

The AMA argues that physicians are not creditors under the Rule and that the practice of allowing deferred payment by patients, particularly in emergency circumstances, serves a number of purposes unique to the profession:

. . . The practice of not demanding payment at the time care is provided serves several purposes. It gives a benefit to patients who are often under stress when receiving care. It underscores that the physician has a fiduciary relationship with the patient and thereby furthers the patient-physician relationship. Where the patient is insured, the practice enables the insurer to determine what portion of the bill is covered and what amount should be billed to the patient. Because the amount that the patient will owe the physician is not certain at the time that services are provided, the physician does not defer payment of a “debt” by billing after the patient is treated. In many cases, a physician is not entitled to bill patients immediately upon providing services under contracts with health insurance carriers.

Physicians also provide emergency medical care to patients whose identifying information may be unknown to them and who may even be unconscious. In some emergency situations, which may occur for certain physicians on a regular basis, there is no practical way for the physician to bill for his or her services at the time of those services. Further, it would violate the norms of human decency, not to mention principles of ethical conduct . . . , for a physician to demand payment at the time of service in such situations. Indeed, federal law requires a physician to provide services to a patient in an emergency condition without regard to the patient’s ability to pay. See 42 U.S.C. § 1395dd.

The AMA further argues that the Red Flags Rule would interfere with the patient-physician relationship and a physician's ethical responsibilities:

the FTC’s attempt to impose a duty upon physicians to investigate each patient’s identity in advance of treatment conflicts with basic precepts concerning the patient-physician relationship and physicians’ ethical responsibilities to safeguard that relationship. “From ancient times, physicians have recognized that the health and well-being of patients depends upon a collaborative effort between physician and patient.... The patient-physician relationship is of greatest benefit to patients when they bring medical problems to the attention of their physicians in a timely fashion, provide information about their medical condition to the best of their ability, and work with their physicians in a mutually respectful alliance.” AMA, Ethical Opinion 10.01 (“Fundamental Elements of the Patient-Physician Relationship”). Because the success of diagnosis and treatment depends on patients’ willingness to divulge often private and highly sensitive information to their physicians, the patient-physician relationship “is based on trust and gives rise to physicians’ ethical obligations to place patients’ welfare above their own self-interest and above obligations to other groups, and to advocate for their patients’ welfare.” AMA, Ethical Opinion 10.015 (“The Patient-Physician Relationship”). Contrary to these obligations, the FTC requires physicians to approach each new patient with skepticism concerning his or her identity. As a result, the FTC’s Extended Enforcement Policy compromises physicians’ ability to gain new patients’ trust, which is essential to the well-being of patients.

Finally, the AMA argues that, when Congress intends to regulate the practice of medicine, it does so expressly (e.g., in enacting the Health Information Portability and Accountability Act (HIPAA) and the Health Information Technology for Economic and Clinical Health Act (HITECH).

The Court's Analysis in ABA v. FTC

Naturally, the analysis of the District Court in ABA v. FTC (currently on appeal) is of interest here.  In that case, the court applied the test for review of agency action set forth in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), and concluded that the FTC's actions violated the Administrative Procedure Act and must be rejected "because the Red Flags Rule cannot be properly applied to attorneys in the overly broad manner in which the Commission seeks to enforce it."

First, the court found that "it was not 'the unambiguously expressed intent of Congress,' Chevron, 467 U.S. at 842-43, to bring attorneys within the purview of the FACT Act and thus subject them to regulation by the Commission's Red Flags Rule." Footnote 9 of the court's decision, while dicta, is particularly interesting for purposes of the new AMA lawsuit.  There, the court rejected the FTC's reliance on a particular Sixth Circuit case regarding medical providers:

The Court is not persuaded that the Commission's reliance on Barney v. Holzer Clinic, Ltd., 110 F.3d 1207 (6th Cir. 1997), is sound given that the Sixth Circuit expressly refused to address the question of whether a medical services provider was a creditor under ECO Act, id. at 1209 . . . and made findings to the contrary, id. at 1211 ("The provision of medical treatment under this program is not a credit transaction, either under the technical language of the ECO[ Act] or in the more common sense of the term, any more than is a court-appointed attorney's agreement to represent an indigent defendant.").

(Emphasis added.)

The court also rejected the FTC's reliance on the Federal Reserve Board's staff notes to Regulation B (which state that, if a doctor or lawyer allows the client or customer to defer the payment of a bill, that deferral of debt is credit for purposes of the “incidental credit” regulation, even though there is no finance charge and no agreement for payment in installments).  The court did so "because those interpretations were made in a context totally unrelated to identity theft, and therefore the Court is not convinced that it is proper to presume that Congress intended to adopt the Regulation B interpretations when it enacted the FACT Act. Accordingly then, absent any legislative history showing that the Federal Reserve Board's staff's interpretation of Regulation B was actually considered by Congress when enacting the FACT Act, and given that the purposes of the FACT Act and Regulation B do not square with one another, the Court cannot draw the inference the Commission urges."

The court also noted that monthly billing by lawyers is driven by practical considerations:  "Invoicing clients for services previously rendered, instead of demanding immediate payment when service is provided is more likely an outgrowth of practicality and necessity, rather than an attempt to provide clients credit."

Although the court resolved the issue under the first prong of Chevron, it went on to determine that, "even if [it] were to reach question two of Chevron by finding that the FACT Act did not foreclose the Commission's regulation of attorneys, it would still find that the Commission's interpretation of the FACT Act and its resulting application of the Red Flags Rule to attorneys is unreasonable and therefore undeserving of deference." 

In its Chevron prong two discussion, the court took issue with the FTC's interpretation of what it means to "defer" payment, again noting the practicality of monthly billing by lawyers:

To invoice client at the end of each month is not delaying payment or giving a client a right to postpone payment. As a practical matter in the legal context, legal services are not the type of services that can in may instances be billed and payment received simultaneously with the occurrence of the services, as can be done, for example, when one's furnace is repaired or catering services are provided for a wedding.   . . . And as a practical matter, it would be unreasonable to expect attorneys to bill for services in any manner other than periodically, especially given the frequent unanticipated services attorneys have to perform for their clients or the practical reality that clients may lack the ability to immediately access funds when legal services unexpectedly have to be performed without delay. Not only would immediate billing and collection of fees and expenses be impractical, considering the unique nature of the practice of law, but contrary to the Commission's position, conducting a legal practice in that manner would be extremely costly and time consuming. It does not take much imagination to appreciate the added cost and burden attorneys would incur if they were required to immediately calculate, bill and collect their fees after each task is performed or else run afoul of the Commission's construction of the FACT Act through its adoption of the Red Flags Rule.

Query whether the same analysis should apply to physicians.  We shall see.

So, Must Physicians Comply with the Red Flags Rule by June 1?

Yes, for now.  Indeed, the BNA Privacy and Security Law Report reports that, pending resolution of the litigation, the AMA has encouraged physicians to comply with the rule, using online resources provided by the AMA.