Spring-Summer 2009

In This Issue

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Message from the General Counsel

It is no secret that legislatures at both the state and federal level have been busy this year. Yes, both our federal and state governments have given us new law—whether we asked for it or not. Accordingly, this issue of The Foreseeable Future is focused on walking you through a few of the higher profile measures that affect institutions of higher education. I can’t promise that this is the most scintillating issue of The Foreseeable Future but OGC attorneys have done a fine job of parsing arcane law and regulations and illustrating how it impacts your campus. Consider this issue just a preview of things to come. OGC in collaboration with OGR is hard at work on our 81st Regular Session summary, which gives a blow-by-blow review of al new state legislation with an eye towards operational impact on campus. OGC—making sure you have plenty of bedtime reading.

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New HIPAA Privacy & Security Requirements Added by ARRA

by Barbara Holthaus (General Law)

Is your institution, or some part of it, a covered entity that is subject to HIPAA? Has your institution signed a contract that includes an agreement to act as a Business Associate of another institution, hospital, clinic, company or other entity that is subject to HIPAA?  If the answer to one or both of these questions is “yes,” hang on to your hat!  The economic stimulus act or American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law last February.  Among many other things, ARRA contains the “Health Information Technology for Economic and Clinical Health Act” or “HITECH”,  which amends the Privacy and Security Rules implemented under HIPAA.  The current HIPAA Privacy and Security Rules remain in effect to the extent they are not inconsistent with HITECH.  State privacy laws also remain effective unless they are inconsistent with HITECH.

Here are some highlights of the new HITECH HIPAA requirements and their effective dates:

Business Associates Must Now Comply with HIPAA.   HITECH codifies the current Privacy Rules that address Business Associates as part of the HIPAA statute.  Business Associates are entities with whom Covered Entities (health care providers and insurance companies and other third party payors subject to HIPAA) share protected health information (“PHI”) so the Business Associate can provide services on behalf of the Covered Entity.

Covered Entities must enter into a contract, called a Business Associate Agreement; in which the Business Associate agrees to comply with the Covered Entity’s HIPAA Privacy and Security policies.  Currently, Business Associates are not technically bound by HIPAA or subject to penalties if they violate the terms of a Business Associate Agreement.  If they don’t live up to their bargain, their only liability is to the Covered Entity for breach of the contract. 

Under the new HIPAA amendments, Business Associates will have a direct, rather than contractual, obligation to comply with the HIPAA Security Rule, as well as the provisions of the Privacy Rule that apply to Business Associates (42 CFR 164.504(e)(2)), and the new Privacy and Security requirements added by HITECH.  They will also have to have their own written HIPAA policies and procedures, and will be subject to civil and criminal penalties for violations of HIPAA.

HITECH also expands the definition of Business Associate to include entities that regularly access a Covered Entity’s electronic health information.  This will affect health institutions participating in electronic records sharing partnerships and programs.  The new Business Association requirements take effect February 17, 2010.  Hopefully, the Department of Health and Human Services (HHS), which enforces HIPAA, will issue guidance and templates to assist Covered Entities and Business Associates in amending their current Business Associate Agreements to ensure compliance with this new requirement.

New Breach Notification Requirements.   Currently, HIPAA does not require Covered Entities to report security breaches that result in unauthorized access to an individual’s PHI.  There is a current duty to mitigate that has been interpreted to require notification, but the requirement in HITECH is specific.  It places an affirmative duty on Covered Entities to report security breaches that involve PHI to both HHS and each individual whose PHI is accessed, if the PHI is not encrypted using standards that are endorsed by HHS.  Covered Entities must notify individuals about the breach by mail, e-mail (if the individual agrees to email notices), or telephone (if use of the information is imminent).  If contact information for the individual is unavailable or outdated, and the breach involved more than 10 people, the Covered Entity must also put a notice on its website or in the media with a toll-free number for information.  Business Associates that experience such breaches must notify the Covered Entity, which must then provide the individual notices and inform HHS.

A Covered Entity must notify HHS immediately of all breaches involving 500 or more individuals.  HHS will post these on its website.  The Covered Entity must also notify the prominent media outlets servicing a state or jurisdiction if over 500 individuals in that state or jurisdiction are affected.  A Covered Entity must keep a log of breaches that involve less than 500 individuals and report all such breaches to HHS annually.

The HITECH Act requires HHS to adopt rules that identify the encryption standards that must be used to exempt a Covered Entity from the breach reporting requirements by no later than August 17, 2009.  Covered Entities and Business Associates will be required to comply with the breach reporting requirements within 30 days of the adoption date of these rules.

On a related note: There is pending state legislation, HB 2004 that, if enacted, will also require state agencies, including institutions of higher education, to report breaches of medical and claims payment information that is not encrypted.  Institutions that are not required to comply with HIPAA, but maintain medical records, such as student health clinics, will need to comply with the state law requirements if the bill passes.  Institutions subject to HIPAA will be required to comply with both the state law and the new HIPAA breach requirements.

Enhanced State and Federal Enforcement of HIPAA Privacy and Security Violations. As mentioned above, under HITECH, Business Associates will be subject to civil and criminal penalties for violating HIPAA.  In addition, criminal actions can be brought against anyone who wrongfully discloses PHI held by a Covered Entity or a Business Associate.  A new category of enforcement is added for “willful neglect”, which can be punishable up to $1,500,000 for multiple violations in a calendar year.

HHS must also develop a HIPAA Privacy and Security Audit Program.  This means HHS will not have to wait for a complaint to be filed to investigate a Covered Entity or a Business Associate.  Other big changes will bring HIPAA enforcement, currently reserved to the federal government, into the state arena.  State Attorneys General will soon be able to bring civil actions on behalf of residents injured by violations and to recover attorneys fees.  These changes take effect February 17, 2010.  In addition, the Act requires that by 2012, HHS must create a mechanism to permit individuals who were harmed by a HIPAA disclosure to share in civil monetary penalties collected by HHS.  This is a major change.  Previously, HIPAA prohibited all private causes of action for violations.

Other New Requirements include:

Changes to the Requirement to Agree to Certain Restriction Requests. Currently, although individuals have a right to request restrictions on the release of their PHI, Covered Entities do not have an obligation to comply with the request.  Disclosures may always be made to other Covered Entities for treatment, payment and healthcare operations without the patient’s permission.  Under HITECH, requests from a patient to a doctor or other health care provider not to disclose the patient’s PHI to an insurer must be honored if the disclosure is not for purposes of treatment and the patient has paid the provider in full for the services out-of-pocket.  This may impact workers compensation insurers and other carriers.  This requirement takes effect February 17, 2010.

Changes to the Minimum Necessary Rule. The amendment requires the Secretary of HHS to issue guidance on the “minimum necessary” rule by August 17, 2010.  Between February 12, 2010 until the new guidance issued, Covered Entities must limit disclosure of PHI “to the extent practicable” to a limited data set from which all individually identifiable information has been removed except age, address and dates of service. 

Removal of “Fundraising” from Definition of “Operations.”  Fundraising by a Covered Entity is currently considered a use or disclosure of protected health information that does not require the patient’s consent because it falls under the definition of “healthcare operations.”  Beginning in February 17, 2010, fundraising activities will be excluded from the definition of health care operations. Instead, a Covered Entity will have to get a patient’s consent before it can use his or her PHI for fundraising purposes.

The Bottom Line:  HIPAA is back and bigger than ever with beefed up consequences for those who fail to comply.  OGC will continue to keep UT System institutions informed as information and guidance is generated about the new requirements.  In the meantime, given the additional compliance efforts these changes are sure to generate, institutions that are or house Covered Entities subject to HIPAA should review the new requirements and make plans to revise their HIPAA policies accordingly. Institutions that are voluntarily complying with HIPAA should think hard about whether they have the resources to ensure compliance with the new requirements.  Institutions that are considering entering into, or renewing an agreement to act as a Business Associate for another entity should review the upcoming new Business Associate requirements before signing on the dotted line.

If you have any questions regarding this article, please contact Barbara Holthaus by email or at (512) 499-4617.

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Contracts Involving Use of Campus Real Estate by a Third Party

by Mark Gentle (Business Law)

Institutions of higher education have authority to undertake a wide variety of activities that are not strictly educational but that support the educational mission of the institution.  Bookstores, computer stores, food service arrangements, and the placement of ATM machines on campus, are all examples of commercial activities designed to support the modern campus life that students have come to expect.  The clear trend toward offering a broader array of services for students on campus is perhaps best illustrated by those institutions that are in transition from a commuter campus to a dynamic residential campus.

Permitting the use of campus real estate by third parties can be a complex area of law.  Depending on the specifics of the proposed use, in addition to real estate and procurement issues, there may be a variety of tax implications, including unrelated business income taxes, ad valorem property taxes, and private use issues if the campus real estate was developed with tax exempt bonds.  Determining the predominate nature of the intended relationship between the UT institution and the third party is fundamental to deciding how the transaction should be structured. 

UT System’s Real Estate Office (REO) and Office of General Counsel (OGC) worked together to re‑examine policies, real estate principles and legal considerations related to the use of campus real estate by a third party to engage in a commercial enterprise.  Several important recommendations emerged from this analysis. 

As soon as your institution becomes aware of a potential use of campus real estate by a third party, your institution should contact REO and OGC and request a pre-solicitation review of the proposed initiative.  REO and OGC will engage all necessary staff to discuss with you your institution’s proposed goals regarding the use of campus real estate and will provide guidance and sample documentation to assist your institution in accomplishing those goals.  REO and OGC review of transactions involving the use of campus real estate is intended to assure that your institution’s business goals are met and the transaction is documented in compliance with legal, policy and procedural requirements.

REO and OGC involvement early in the process is critical.  Depending on the facts of a particular transaction involving the use of campus real estate, the transaction may be structured in one of several forms.  Each structure may require different procedures prior to award.  One structure will not be appropriate under all circumstances. In addition, solicitation and contract templates used in the past may not be suitable going forward.  Each transaction involving the use of campus real estate will need to be analyzed and documents tailored to meet the unique needs of the transaction. 

Potential transaction structures may include:

Real Estate Lease

Under a lease, the tenant occupies campus real estate and may use the space for any purpose permitted by the lease. If the transaction is a lease, then the rental must be a market rent as established by an appraisal or other credible evidence of market rent.  A lease is an interest in real property and carries with it specific legal rights owed to a tenant.  For example, the UT institution may own an office building and lease one floor to a software development firm to use as office space. The use of the space may or may not be directly related to the UT institution’s mission. The tenant is operating its own business and will receive the profit or incur the loss resulting from the business activity.

Operating License or Lease

Under an operating license, the operator conducts its business on campus real estate and may be subject to certain operational requirements imposed by the UT institution.  A lease is an interest in real property and carries with it specific legal rights owed to a tenant; a license does not.  So, REO and OGC will work with you to determine whether the facts of the transaction support the decision to use a license or, in the alternative, a lease.  The key point isn’t whether the agreement is called a “lease” or a “license,” but what the facts of the transaction are.  If the agreement and the facts reflect a lease, then a court will treat the agreement as a lease even if the parties called it a license.  REO and OGC can help you make the correct determination.

A campus bookstore contract is an example of a transaction that may be structured as an operating license because obtaining a service for the institution is typically not the fundamental business goal.   Rather, the goal is generally to grant a bookstore operator a business opportunity and a license to use campus real estate while imposing operational requirements on the operator, in exchange for the payment of consideration by the operator to the institution for the privilege of so doing.  While the operating license structure is different from the service contract structure (discussed below), the UT institution’s business goals are still achieved. 

Management Contract

Under a management contract, a UT institution may hire a third party to operate an auxiliary enterprise or other mission-aligned activity on behalf of the UT institution.  The UT institution will receive the profit or incur the loss resulting from the activity.

Service Contract with Real Estate License

REO and OGC have concluded that there is a distinction between contracts under which a UT institution pays a vendor to provide services on campus (i.e., custodial contracts) and those agreements in which the institution is offering a business the opportunity to operate its enterprise in campus real estate in exchange for payments from that business (i.e., an office lease).  Under a service contract, a service provider performs a service for the UT institution and the UT institution pays the provider for that service. The service provider is operating its own business and receives the profit or incurs the loss resulting from the business activity. On occasion, the service provider uses campus real estate in connection with performance of the services. The campus real estate is generally licensed to the service provider. For example, in a custodial contract, the service provider cleans and maintains campus real estate and uses a storeroom and an office under a space license for the purposes of managing the services and storing equipment and supplies.

The Bottom Line:  As soon as your institution becomes aware of a potential use of campus real estate by a third party, your institution should contact the REO and OGC so that we may have a pre-solicitation discussion with you of the proposed activity and how best to solicit and document it. 

If you have any questions regarding this article, please contact Mark Gentle by email or at (512) 499-4502.

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Guidelines for Ensuring Export Controls Compliance with Visiting Scholars and Scientists

by BethLynn Maxwell (Business Law, IP Practice Group)
with contributions by Christine Pavalasky (Legal Administrative Assistant, Business Law)

Performing proper diligence in vetting visiting scholars and scientists allows the University to make informed decisions whether to permit the scholar to visit, and to determine what level of restrictions the visiting scholar should have while on campus.  An adequate vetting process also ensures that the University complies with U.S. export controls laws.  Failure to properly vet visiting scholars/scientists could result in the University being fined or subjected to other penalties for “deemed exports” of export controlled technologies.

The following guidelines should be considered when developing a University’s policies on visiting scholars/scientists as they relate to export controls:

Adopt a Vetting and Approval Process which should include at least the following:

  • Screening the visiting scholar, his/her sponsoring university and any other relevant affiliations through the Visual Compliance export controls software.  UT System has a system-wide license for the Visual Compliance software, and all UT institutions have access to the software.  For your University’s Visual Compliance point-person, contact BethLynn Maxwell.
  • Working with the sponsoring faculty member and his/her department, determine if there is any export controlled technology, data, information and/or equipment the visiting scholar could come in contact with.
  • Obtaining any required export licenses, if required.
  • Conducting a background check if the visiting scholar will be in a security-sensitive position.
  • Coordinating with the University’s “International Office” regarding any applications and VISA requirements.
  • Reviewing and renewing the visiting scholar/scientist status on an annual basis (if needed).

Formalize a Visiting Scholar Agreement and Intellectual Property Agreement

  • Approval for visiting scholars should be granted at the level of Provost or higher or consistent with the University’s policy. Review documents and statement of work from the sponsoring faculty member supporting the visiting scholar.
  •  Coordinate with the University’s Office of Sponsored Projects to execute a Visiting Scholar/ Visiting Scientist Agreement and/or an Intellectual Property Agreement before the visitor has access to University facilities or resources.
  • A sample Visiting Scientist Agreement is available at UT Austin’s website.
  • A sample Intellectual Property Agreement is also available at UT Austin’s website.
  • Provide proper guidance and education on what the visiting scholar/scientist is permitted and prohibited from doing while on campus.  Any restrictions should be explained and the visiting scholar and sponsoring faculty member should countersign any documents as “read and understood.”
  • Once all necessary documents are signed, a University ID card and a high assurance EID (if applicable) may be issued.

Develop a Technology Control Plan

  • If the University has export controlled technology, data, information and/or equipment on campus, a Technology Control Plan should be put in place to prevent unauthorized access by foreign nationals to the export controlled technology unless an appropriate license has been obtained.
  • A sample Technology Control Plan is available at UT Austin’s website.
  • Ensure all University computers will lock out after a period of idle time, and require password verification to regain access.
  • Ensure buildings and laboratories containing export controlled technology, data, information and/or equipment are secure (e.g. require key card access) and are not accessible via common walkways open to the public.  Critical that the sponsoring faculty member understands where the visiting scholar may go and where he/she may not go.
  • Clearly identify and mark all export controlled information as such.
  • Conversations and discussions about export controlled projects should be held in areas where only authorized personnel are present.

If the visiting scholar has arrived before the investigation and vetting process is complete, the University and sponsoring faculty member should treat the visiting scholar as a member of the public, and not permit access to University email accounts, network processes, or allow access to laboratories or other campus buildings which contain export controlled information or technologies.

  • The visiting scholar/scientist may use web-based email (e.g. Yahoo, Gmail, et al).
  • The visiting scholar/scientist may have access to buildings like any member of the public.

The Bottom Line:  Campuses should identify all export controlled technology on campus, and ensure access is restricted to only authorized individuals.  The day-to-day responsibility of controlling access falls on the sponsoring faculty member’s shoulders.

If you have any questions regarding this article, please contact BethLynn Maxwell by email or at (512) 499-4518. 

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The 81st Legislative Session and Public Information

by Neera Chatterjee (General Law)

Several bills were passed during the 81st legislative session that will impact how our campuses handle certain public information requests procedurally and will also help our institutions substantively by allowing them to keep certain categories of information confidential.  A summary of the significant legislation is outlined below. 

SB 1068
Effective Date: June 4, 2009

Under this bill, a governmental body can redact, without seeking a ruling from the Attorney General, home addresses, home telephone numbers, and family information relating to former and current employees, assuming that the employees made a timely election to keep such information confidential as well as such information relating to peace officers, county jailers, and security officers, regardless of whether they made a timely election.  However, if a governmental body redacts this information without seeking a ruling from the Attorney General, it must provide to the requestor, on a form prescribed by the Attorney General, a description of the redacted information, a citation to the relevant section of the Public Information Act, and instructions explaining that the requestor may seek a decision from the Attorney General as to whether the redacted information is excepted from disclosure.  The form prescribed by the Attorney General can be found on the Attorney General’s website at http://www.oag.state.tx.us/open/ord_forms.shtml.  If a requestor wishes to seek a ruling from the Attorney General relating to personal information of current and former employees of a governmental body, the Attorney General is required to issue its ruling within 45 business days.

This bill also adds an exception under Chapter 552 of the Government Code, the Public Information Act, by excepting from disclosure information that relates to an employee or officer of a governmental body if under the specific circumstances, the release of such information would subject the individual to a substantial threat of physical harm.  Thus far, the Attorney General has issued a ruling finding that this exception would apply in instances involving undercover police officers.  This exception has the potential to be very helpful should, for example, our faculty researchers be threatened by various individuals and organizations.

HB 4189
Effective Date: June 19, 2009

This bill makes certain information relating to compliance programs of institutions of higher education confidential under the Education Code, thereby excepting such information from disclosure under the Public Information Act.  Specifically, information that reveals the identity of a person making a report to or participating in an investigation pursuant to a compliance program office is confidential.  In addition, information which reveals the identity of a person who is the subject of a compliance program investigation that the compliance program determines to be without merit or unsubstantiated is confidential.  Finally, and most far reaching, all information created as a result of a compliance program investigation is confidential if it would interfere with an ongoing compliance investigation.  A “compliance program” is defined as being a process to ensure compliance by the officers and employees with applicable laws, rules, regulations and policies.  Given the broad definition of “compliance program” under this section, it appears that information would be considered confidential even if the investigation was not conducted by the compliance office so long as it was conducted in order to ensure compliance with relevant laws and policies. 

SB 1182
Effective Date: September 1, 2009

There are several changes pertaining to public information within this bill.  Only the most notable are addressed.

First, the bill adds, in relevant part, an exception under the Public Information Act.  The exception is for information relating to a biological agent or toxin identified or listed as a select agent under federal law, and as such, will impact the University of Texas Medical Branch at Galveston.  Information about the specific location of the select agent, personal identifying information of a person whose name appears in documentation relating to the chain of custody of select agents, and the identity of individuals authorized to possess, use, or access a select agent are excepted from disclosure.  However, neither information relating to the identity of the select agents present in a particular facility nor the identity of a faculty member or employee whose name appears or will appear in published research are excepted from disclosure under this new section.  Finally, if a resident from another state is in Texas and is authorized to possess, use, or access a select agent at a Texas facility, information relating to the identity of such individual is subject to disclosure only to the extent that the information would be subject to disclosure in the individual’s home state.  This exception applies to a request for public information that was made before, on, or after the effective date of the bill.  In addition, the exception applies to information that, as of the effective date of the bill, had not been disclosed, was the subject of a request for information made before the effective date of the bill, and was information that the attorney general determined before the effective date of the bill to be subject to disclosure.

Chapter 552 of the Government Code is also amended so that if a governmental body requires a member, committee, or agency of the legislature to sign a confidentiality agreement, such individual, committee, or agency of the legislature may seek a ruling from the Attorney General as to whether the information subject to the confidentiality agreement is confidential under law.  A confidentiality agreement is void to the extent that the agreement covers information that is determined by the Attorney General to not be confidential under law.  The Attorney General is required to adopt rules to establish procedures and deadlines for receiving information necessary to decide the matter.  Once the Attorney General issues its written ruling, the requestor or governmental body can appeal the decision to a Travis County district court.  Despite the effective date of the bill, this amendment does not go into effect until September 1, 2010.  Please note that this section of SB 1182 was also passed as SB 671.

Finally, there are some amendments to the civil enforcement provisions under the Public Information Act.  First, under § 552.324, only a governmental body, and not the officer for public information, may file suit against the Attorney General seeking only declaratory relief from compliance with a decision issued by the Attorney General.  This suit must be filed in Travis County district court.  However,  under § 552.353(b)(3), a public information officer has an affirmative defense to prosecution for criminal negligence if: (1) the governmental body or public information officer files a petition for declaratory judgment within ten days after the receipt of the ruling from the Attorney General and (2) the matter is pending.  Where a governmental body files suit seeking declaratory relief, the court may assess costs of litigation and reasonable attorney fees, and in so doing, the court must consider the actions of the governmental body as whole and not only those of the public information officer for the governmental body.

The Bottom Line:  By in large, the 81st Legislative Session resulted in the passage of legislation that will help our campuses protect certain information from disclosure that previously would have been difficult, if not impossible, to protect.

If you have any questions regarding this article, please contact Neera Chatterjee by email or at (512) 499-4521.

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When Must Protected Health Information be Released?

by Kent Kostka (Claims & Bankruptcy)

In the information age, protecting sensitive or confidential information is among the highest priorities for businesses and corporate entities, particularly those dealing with health or medical information.  Multiple laws and regulations govern the release of such personal information, and many medical institutions have responded with strict and unwavering policies prohibiting the release of protected information.

UT institutions, both academic and medical, should be aware that, along with the many laws protecting the security of such information and regulating its release, there are also numerous regulations mandating when such information must be released to a patient or the patient’s representative.

The Texas Government Code, §552.023, mandates that a patient or the patient’s authorized representative has a special right of access to records that contain information relating to the person that would otherwise be protected from public disclosure by privacy laws.  In other words, a patient has the right to make an Open Records Request for their own medical files, and certain timeliness rules apply to such requests.

The Texas Property Code, Chapter 55.008, states that medical providers asserting a claim for charges incurred by a patient injured in an accident must provide to the patient’s attorney, upon request, its records concerning the services provided to the patient.  Similarly, Chapter 159 of the Occupations Code defines the circumstances under which a physician is obligated, with only a handful of exceptions, to release to a patient that patient’s medical records and physicians’ notes.  Other statutes, such as Chapter 74 of the Civil Practices and Remedies Code and §311.002 of the Health and Safety Code, provide for a similar right of access by patients to their health information in specific circumstances.  Your institution's compliance officer can help you understand when such information must be disclosed.

However, most important, federal HIPAA regulations provide a clear right of individuals to "inspect and obtain" a copy of their confidential or privileged health information, and all institutions should be aware of their responsibilities to provide this information to the patient or the patient's authorized representative. Section 164 of HIPAA provides only a handful of exceptions from this right of access, such as when release of the information would create a danger to the patient’s health or to the health and/or safety of others. This information must be provided in the format requested by the patient, or in a readable hard copy if agreed to by the patient. In addition, if the institution does not maintain the requested records, but is aware of where this information is maintained, the institution must inform the patient where to direct the request for access. The institution may charge a reasonable and justifiable cost-based fee for copying and postage, if applicable.

In all cases, the patient requesting this information need only make the request in writing or in person, subject to confirmation of the patient’s identity, and the institution may require all requests to be made in writing, provided that it informs all individuals of this requirement.  In the event that the patient elects to have an authorized representative obtain this information, an appropriate medical authorization is required, signed by the patient.  In the event that the provider is presented with a Power of Attorney or authorization to provide the patient’s counsel with medical information, the provider must treat the request as if it has come from the patient herself (Texas Probate Code, Chapter XII).  Any information that a patient has the right to access must also be given to the patient’s attorney, provided that proper authorization and documentation exists.

The Bottom Line:  If you are in doubt as to when medical or health information must be provided, may be provided, or cannot be provided to a patient or a patient's representative, please contact your institution's legal officer, your designated HIPAA compliance officer, your compliance office, or the UT System Office of General Counsel for guidance and clarification.

If you have any questions regarding this article, please contact Kent Kostka by email or at (512) 499-4462.

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Recent Congressional Acts are Taxing

by Don Jansen and Kyle ZumBerge (Business Law)

The crisis in the housing and financial markets has prompted an unprecedented flurry of federal legislation trying to stem the hemorrhaging economy and start the process to recovery.  Trillions of dollars have been dedicated to shoring up the housing markets and the banking system and stimulating the economy.  The Internal Revenue Code has long been used to accomplish and shape social objectives and its use has not been limited to raising funds for implementing federal fiscal policy.  The various Acts covered by this survey, starting with the Heartland, Habitat, Harvest and Horticulture Act of 2008 effective May 22, 2008 and concluding with the American Recovery and Reinvestment Act of 2009 signed February 17, 2009, are no exception.  The bulk of the amendments, modifications, and repealers contained in these Acts have impacted various provisions of the Internal Revenue Code.  This article will survey and summarize the major provisions of each of these six Acts and, and where there is peculiar impact on higher education or its employees, those points will be highlighted.  At this point no one knows whether these Acts will have the desired impact of stimulating and reviving the current economic crisis. 

The Heartland, Habitat, Harvest and Horticulture Act of 2008

After an override of the President’s veto, Congress enacted this law to effect changes to the tax law pertaining to agriculture, energy and conservation. The Act will give tax incentives to agriculture by modifying installment sale rules, establishing new tax credit bonds, providing tax credit of certain energy efficient motors and reducing the depreciation period for certain farm machinery. A permanent Agricultural Disaster Relief Trust Fund is established to provide payments to farmers. The Act creates tax credits for alcohol fuel and reduces the excise tax on ethanol while extending the tariff on imported ethanol. A tax credit is available for eligible farmland enrolled in the Conservation Reserve Program which provides for annual rental for fragile farm lands taken out of production. A tax credit is also provided for the recovery and restoration of endangered species.

Heroes Earnings Assistance and Relief Act of 2008 (“HEART Act”)

The HEART Act grants many additional benefits to the military and their families under the Internal Revenue Code. Tax qualified pension plans are required to provide additional survivor benefits for participants who die while on active duty. Differential wages offered by employers for employees serving on active duty are treated as compensation for retirement plan purposes. The 10% penalty for early withdrawals from IRAs or pension plans is permanently waived for individuals on active military duty. Military death gratuity and military group life insurance payments may be rolled over by survivors to a Roth IRA or an educational savings account. Unused health flexible account balances may be used tax free by any member of an Armed Forces reserve component who is called or ordered to active duty.

The Housing Assistance Tax Act of 2008

This Act created $15.1 Billion in tax incentives for home ownership and affordable housing that were fully funded by revenue raising offsets.  In other words there was an attempt to pay for this legislation without increasing the deficit.  The most widely touted benefits for individual taxpayers were a first-time homebuyer tax credit of $7,500, subject to income limitations, and an increased “additional standard deduction” for homeowners that do not itemize their deductions.  The $7,500 tax credit is probably a misnomer because it really is not a credit because it must be repaid ratably over 15 years, by increasing the tax due on the taxpayer’s annual return (e.g. Form 1040) by $500.  Also, this provision was superceded by more a more favorable tax credit statute in subsequent legislation, discussed below.  The additional standard deduction permits homeowners to deduct the lesser of actual property taxes paid on a principal residence or $500 (if single, or $1,000 if married filing jointly) from taxable income, thereby reducing their ultimate tax bill. 

As previously mentioned, these tax benefits were to be funded with offsetting revenue generators.  The first is a new reporting requirement on credit card providers, so that income that was perceived to be leaking from the tax base would be reported as taxable income.  In short, all credit card type companies (e.g. Visa and Paypal) that process such cards for a merchant (e.g. UT or Nordstroms) must file a report with the IRS if the value of the payments processed exceed $20,000  and there are more than 200 individual transactions processed during that same year.  It is likely that various UT entities will begin receiving these new information reports for calendar years beginning after December 31, 2010. 

The second funding mechanism is achieved by no longer permitting the exclusion of certain gain on the sale a taxpayer’s principal residence.  Prior to January 1, 2009, a taxpayer could sell their principal residence and exclude gain of up to $250,000 ($500,000 if married filing jointly) from their income, so long as they lived in the house for 2 of the 5 years immediately preceding the date of sale.  Effective for a sale that occurs after December 31, 2008, a taxpayer must apportion the gain realized on the sale of a principal residence between “use as a principal residence” and “nonqualified use” (i.e. converted to rental property) with the latter being subject to tax. 

Emergency Economic Stabilization Act of 2008

This Act had many laudable goals, stabilize the economy, preserve home ownership, stabilizing the economy, taxpayer protection, no windfalls for executives, strong oversight, and various miscellaneous tax provisions. 

To stabilize the economy, the Emergency Economic Stabilization Act of 2008 (EESA) provided significant funding ($700 billion or thereabouts) to the Secretary of the Treasury to buy mortgages and other assets that are dragging down the balance sheets of financial institutions and making it difficult for working families, small businesses, and other companies to access credit, which is vital to a strong and stable economy. EESA also establishes a program that would allow companies to insure their troubled assets (i.e. Troubled Asset Relief Program or TARP).

To preserve home ownership, EESA requires the Treasury to modify troubled loans many the result of predatory lending practices wherever possible to help American families keep their homes. It also directs other federal agencies to modify loans that they own or control. Finally, it improves the HOPE for Homeowners program by expanding eligibility and increasing the tools available to the Department of Housing and Urban Development to help more families keep their homes.

 To protect taxpayers and so that taxpayers are not required to pay for Wall Streets’ mistakes, the Act requires companies that sell bad assets to the government to provide warrants so that taxpayers will benefit from any future growth these companies may experience. The legislation also requires the President to submit legislation that would cover any losses to taxpayers resulting from this program by charging a small, broad-based fee on all financial institutions. 

So that no windfall inures to executives, they will not be allowed to dump their bad assets on the government, and then walk away with millions of dollars in bonuses.  In order to participate in the TARP, companies will lose certain tax benefits and, in some cases, must limit executive pay. In addition, the bill limits golden parachutes and requires that unearned bonuses be returned.

So that Congress can maintain oversight, whether or not it is being done effectively, and rather than giving the Treasury all the funds at once, the legislation gave the Treasury $250 billion immediately, then requires the President to certify that additional funds are needed ($100 billion, then $350 billion subject to Congressional disapproval). The Treasury must report on the use of the funds and the progress in addressing the crisis. EESA also establishes an Oversight Board so that the Treasury cannot act in an arbitrary manner. It also establishes a special inspector general to protect against waste, fraud and abuse.

Various other provisions provided specific benefits targeted at certain taxpayers.  First, the Act expands the current transportation fringe benefit to include bicycle commuters by permitting employers to reimburse $20 to an employee for each month during which the employee “regularly uses a bike for a substantial portion of travel between the employee’s residence and place of employment.”  Another provision will likely impact UT development offices as IRA owners may make a charitable contribution of up to $100,000 from an IRA that will count against their Required Minimum Distribution and will not be recognized as income to its owner. 

The Children’s Health Insurance Program and Reauthorization Act of 2009

This act renews and expands the State Children’s Health Insurance Program (SCHIP) . The Act is now extended for four and a half years and covers four million more low-income uninsured children over and above the seven million currently covered. The Act will cost an estimated $32.8 billion most of which is covered by an increase in the tobacco tax of $31.3 billion. Dental and mental health services have been added. States have the option of covering legal immigrant children and pregnant women. States are allowed to offer premium assistance for employer sponsored health coverage for children eligible for CHIP but who are covered by an employer plan.

American Recovery and Reinvestment Act of 2009

The unofficial name of this new Act is the economic stimulus act. The new law pumps $787 billion into the American economy to counteract the recession. The stimulus is comprised of tax breaks, spending on infra-structure, health care, alternative energy and direct grants of aid.

The Act gives individuals a special Making Work Pay Credit of up to $400 for middle and lower working class taxpayers, an expanded first-time homeowner credit up to $8,000, enhancements of residential, automobile and alternative energy credits, a deduction for sales tax for purchasing an automobile, motorcycle, truck or motor home and an increase in the exemption from the alternative minimum tax.

Certain recipients of Social Security, SSI, Railroad Retirement and veteran disability benefits will be entitled to a one-time $250 payment. Unemployment compensation up to $2400 is exempt from income tax in 2009. New and expanded tax exempt or tax credit bonds for investors are available in 2009 and 2010 for “build America”, energy, conservation, school construction, industrial development, low-income housing and other purposes.

Portions of the Act that more directly impact higher education or its employees include: 

  • The date that governments are required to collect a special 3% tax on payments for goods and services is postponed from January 1, 2011 to January 1, 2012.
  • For 2009 and 2010, excludable higher education expenses paid from a Section 529 qualified tuition plan will include expenses for computer equipment and technology and for internet access and related services.
  • In 2009 and 2010, the Hope Scholarship Credit has been enhanced. The maximum credit is increased from $1800 to $2500 per year and the income tax credits under the program for qualified tuition and expenses has been expanded to include text books and other course materials. The two year eligibility for the credit has been expanded to four years. The credit phaseout income level has been increased from $50,000 to $80,000 of income per year.
  • COBRA premiums are temporarily reduced to 35% of the premium for qualified beneficiaries if the qualifying event is involuntary termination of employment between September 1, 2008 and December 31, 2009. The employer providing the COBRA coverage will receive a credit against payroll taxes of the 65% reduction in the COBRA premiums. This COBRA premium subsidy is not available for taxpayers with a modified adjusted income in excess of $125,000.

The Bottom Line:  Recent history demonstrates Congress’ penchant for making changes to the Internal Revenue Code in an attempt to stem the hemorrhaging economy and start the process to recovery.  Towards this end trillions of dollars have been dedicated to shoring up the housing markets and the banking system and stimulating the economy.  Even though none of these laws directly targeted higher education, several of them will impact higher education and its employees.  Whether the desired economic stimulation and revival will result is not presently known, but one thing is for sure – these Congressional acts are taxing. 

If you have any questions regarding this article, please contact Don Jansen by email or at (512) 499-4493, or Kyle ZumBerge by email or at (512) 499-4394.

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Federal Healthcare Initiatives under the New Administration

by Walter Mosher (Health Law)

On February 17, 2009, President Barrack Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA), otherwise known as the federal stimulus package.  The ARRA is a mix of government spending and tax measures totaling $789 billion intended to stimulate the economy through investments in infrastructure, unemployment benefits, transportation, education and healthcare.  It is one of several healthcare bills the new administration is implementing under its healthcare reform policy.  This article briefly reviews recent federal healthcare initiatives that affect UT System and its health components.

Medicaid Funding and Expansion Initiatives

Prior to the enactment of the stimulus package, President Obama signed the Children's Health Insurance Program Reauthorization Act of 2009 that seeks to extend healthcare coverage for an additional four million uninsured children above the seven million children currently covered by the State Children’s Health Insurance Plan (SCHIP).  The act includes $87 billion in Medicaid funding and seeks to add more children by giving states the authority to cover families with annual incomes as high as 300 percent of the federal poverty level, or about $66,000 for a family of four.  In Texas, SCHIP provides coverage for children of families with incomes above Medicaid eligibility criteria yet less than 200 percent of the federal poverty level (about $44,000 for a family of four).  Since Medicaid is joint program between federal government and the state (where the federal government provides most of the funding and sets the eligibility criteria and the state provides access to care for all eligible persons), the Texas legislature has the opportunity to cover additional children up to the 300 percent poverty level limit.  Estimates suggest that approximately 180,000 Texas children may be eligible to enroll in this Medicaid healthcare coverage if the legislature fully allocates state funding to match federal SCHIP funding.

Soon after the approval of the SCHIP legislation, the stimulus package directed an additional $86.6 billion to state Medicaid programs, of which Texas will receive $5.45 billion.  In Texas, Medicaid provides health insurance coverage to children, low income families, disabled persons, and poverty level seniors.  Under both the state Medicaid CHIP and the medical assistance program, this new level of state-federal funding will create a greater base level of covered care for low-income and indigent patient population groups that are currently being treated by UT physicians and at UT healthcare facilities.  Thus, this additional Medicaid funding will improve both community health indicators and reimbursement revenues.

Health Information Technology and Electronic Health Records Initiatives

The federal stimulus package also specifically allocates $23 billion to health information technology (HIT) and electronic health records (EHR).  The two major areas of new HIT funding include:

  • $2 billion for the US Department of Health and Human Services’ Office of National Coordinator of Health Information Technology to jump start the development of EHRs and the national health information infrastructure; and
  • $20.8 billion in Medicare and Medicaid incentives to facilitate the adoption of HIT and EHR technologies by providers and health organizations.  An additional $2 billion in grants and loans is available through the HHS Office of National Coordinator of Health Information Technology for projects integrating EHR to the clinical education of health professionals (see, Health Information Technology for Economic and Clinical Health Act).

Under the Medicare and Medicaid initiatives, ARRA enables a eligible professionals (physician) and hospitals to receive incentive payments by demonstrating “meaningful use” of certified EHR technology.   While the ARRA defers to the U.S. Department of Health and Human Services/Centers for Medicare and Medicaid Services (HHS/CMS) to define the term meaningful use, the act does identify key criteria such as e-prescribing, electronic exchange of medical records, and interoperability of systems. 

Starting in 2015, HHS/CMS will use EHRs to connect to its federal hospital and physician quality improvement and reporting programs. 

Initiatives Affecting Medical Schools

ARRA also contains several Medicare and Medicaid provisions that specifically benefit medical schools and teaching programs (see, “Recovery Package Includes Medicare and Medicaid Relief, HIT Incentives,” Association of American Medical Colleges, (Feb. 13, 2009)).  These include:

  • $191 million for restoration of the FY09 Indirect Medical Education (IME) adjustment.  IME supports the unique education mission of teaching hospitals, such as supervision of  residents and fellows enrolled in Graduate Medical Education programs, clinical research, and access to specialty care with the latest technologies.
  • $460 million in adjustments for FY09 and FY10 Medicaid disproportionate share hospital (DSH) payments.  DSH compensates hospitals for the increase operating costs as a result of treating a larger low-income patient population.
  • $86.6 billion increase for Medicaid medical assistance through December, 2010.
  • $17.2 billion in Medicare and Medicaid incentive payments for hospitals and eligible professionals that promote meaningful use of HIT and EHRs. 

Other Healthcare Initiatives

Along with the healthcare initiatives and funding identified above, the stimulus package funds several other national healthcare priorities, which have an indirect impact that benefits our local, state, and national healthcare delivery system (see, “Stimulus Bill Has Billions for Texas Medicaid,” Texas Medical Association, (Feb. 16, 2009)).  These initiatives include:

  • $1 billion for prevention and wellness programs with evidence-based strategies. Of this amount, $400 Million is directed to the Centers for Disease Control for immunization programs.  The remaining $600 million will be distributed by HHS for evidence-based clinical strategies and the development of public health workforces.
  • $8.5 billion for biomedical research in cancer, Alzheimer's, heart disease, and stem cells.
  • $2.6 billion to improve National Institutes of Health (NIH) facilities for NIH-HHS research and evaluation of different health care services and treatment options.
  • $500 million for federal community health centers under the Health Resources and Services Administration (HRSA).
  • $500 million for training health professions under HRSA and the National Health Service Corps to recruit and place healthcare professionals at designated underserved areas.  NHSC providers typically practice in underserved communities in return for scholarship or loan repayment assistance.
  • $1.5 million to NIH’s Institute of Medicine to study national priorities on clinical and community-based prevention and wellness activities.
  • $7.7 billion to build or improve health care facilities under the Department of Defense or the Department of Veterans Affairs.

These new federal initiatives significantly advance state and national healthcare reform.  As perhaps the largest provider in the Texas healthcare system, UT physicians, health facilities, and health components are in a position to greatly benefit from these new funding sources in supporting their respective missions in education, clinical care, research, and community service.

The Bottom Line:  In this uncertain economy and in an effort to meet the healthcare needs of patients, legal staff and business advisors should recognize the importance of accessing these federal dollars to facilitate the goals of their health institution.  Prioritizing and fully supporting requests for assistance related to these federal healthcare initiatives will best serve the goals of UT health institutions and the health of their respective communities.

If you have any questions regarding this article, please contact Walter Mosher by email or at (512) 499-4463.

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Resources from this e-Newsletter

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