Several medical associations have filed a last-minute lawsuit to prevent the Federal Trade Commission from extending the identity theft regulations under the Red Flags rule to physicians. The rule, after several delays, is scheduled to be effective on June 1.

The rule requires many businesses, including health care organizations, to take specific steps to minimize identity theft.  The American Medical Association, American Osteopathic Association and Medical Society of the District of Columbia filed the suit May 21 in federal court. They charge the FTC exceeded its authority under the Fair and Accurate Credit Transactions Act of 2003, which mandated the rule, in extending its provisions to physicians. Its application to physicians is "arbitrary, capricious and contrary to the law," according to the suit.

According to an FTC explanation of the rule:

"The Red Flags Rule is an anti-fraud regulation, requiring 'creditors' and 'financial institutions' with covered accounts to implement programs to identify, detect, and respond to the warning signs, or 'red flags,' that could indicate identity theft. The financial regulatory agencies, including the FTC, developed the Rule, which was mandated by the Fair and Accurate Credit Transactions Act of 2003 (FACTA). FACTA's definition of 'creditor' includes any entity that regularly extends or renews credit - or arranges for others to do so - and includes all entities that regularly permit deferred payments for goods or services. Accepting credit cards as a form of payment does not, by itself, make an entity a creditor. 'Financial institutions' include entities that offer accounts that enable consumers to write checks or make payments to third parties through other means, such as other negotiable instruments or telephone transfers."

Among other factors, the medical associations argue that physicians are not commonly referred to as "creditors," nor are patients ordinarily thought of as "account holders" or "customers." These terms, they contend, are used in FACTA "to refer to entities whose business is providing credit and to customers of such entities."

For instance, physicians routinely do not demand full payment at the time of service, according to the lawsuit. "Physicians do not fit within the definition of 'creditor' incorporated into FACTA. 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."

The associations in the lawsuit ask for a declaratory judgment finding the rule is unlawful and void as applied to physician members of medical associations and state medical societies.

For a copy of the lawsuit, click here.

--Joseph Goedert


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