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To Audit Or Not To Audit: If A Business Associate Is In Violation Of The HIPAA Security Rule And No One Knows, Does It Matter?

There has been some debate as to the extent that a covered entity (CE) should audit a business associate (BA) to ensure that they are compliant with the HIPAA Security Rule and adequately safeguarding customer PHI. While I don’t offer up the answer to that question, I thought it made sense to explore some of the surrounding issues.

Some of the key factors that come to mind are:

Monetary Penalties

The HITECH Act creates “several categories of violations that reflect increasing levels of culpability” for HIPAA violations. There are four tiers of fines: $100 (“did not know”), $1,000 (“reasonable cause”), $10,000 (“willful neglect – corrected”), $50,000 (“willful neglect – not corrected”) per violation. In each tier there is a minimum fine of $50,000 per incident and a maximum fine of $1,500,000 per calendar year. As these fines are calculated per violation, with each record exposed, in the case of a data breach for example, counting as a violation, the fines can be significant. Of course, the actual fine amount is a function of the culpability. According to the HITECH Act: “in the case of a violation where it is established that a covered entity did not know of the violation and would not have known through the exercise of reasonable diligence” the lowest tier of $100 would apply.

If minimizing monetary penalty risk is a primary objective, then performing “reasonable diligence” might be the recommended approach. Though defining “reasonable” is another question.


If security is your objective and protecting your client data is an important ideal, then you might define reasonable in another way. For example, if most of your patient records are accessible by one particular BA then it could be that the bulk of the CEs data security risk is really encapsulated in a single BA – and perhaps extra care might be taken to ensure the BA has an effective information security program in place. In this case you might call for the BA to perform some type of security assessment or HIPAA Risk Analysis.

Practical Business Management

Another issue is the case of a BA with the following attributes: they provides a critical business function for the CE, they have extensive access to PHI and they are difficult to swap out with another vendor. In this case it’s a question of – do I really want to know if they are in non-compliance? This is a tough question. In the best case you’d identify a critical area of security risk or non-compliance, notify the BA and then they’d fix it. But what if they don’t fix it?

Pure Capitalism

Besides the monetary fines, how else might a security incident impact revenue? Well that depends on the extent that the CE is commoditized. In the banking sector, for example, it is very easy for a customer to move from one institution to another, so a security breach can cause a wave of customer defections. If you are the only hospital in town, for example, then perhaps this is less of a risk. Other brand damage due to a security breach is more difficult to quantify.

Summary (AKA what is “reasonable”)

So perhaps its all about “reasonable due diligence”. This will depend on how each individual CE prioritizes how a security breach impacts their business and compliance responsibilities. And it will surely be the subject of extensive interpretation by both the courts and BAs (when contract liability is being litigated).

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