Deeper Dive: Plan for Regulatory Scrutiny in Financial Services Data Security Incidents

industryFinancial services industry companies were involved in 18% of the over 300 data security incidents we helped manage in 2015, and reported in our 2016 BakerHostetler Data Security Incident Response Report (the “Report”). After healthcare, the financial services industry was the second most affected industry according to the data we reported.

It is not surprising that cyber criminals target financial services companies. They do so for the same reason that Willie Sutton robbed banks – the financial services industry is where the money is.  But financial services companies should not be just looking at outside threats as they assess their risk profile.  The majority of incidents we reported – nearly a third – were caused by employee negligence or malfeasance, with hacking and malware a close second.

The Report also reveals an uptick in regulatory scrutiny of incidents involving financial services companies. In nearly all of the reported incidents requiring regulator notification, state regulators made further inquiries.  We also saw an increase in investigations into incidents by regulators, including regulators who have only in recent years become active in cyber security enforcement, such as the Security and Exchange Commission (“SEC”), National Credit Union Administration (NCUA), Financial Crimes Enforcement Network (FinCen), Financial Industry Regulatory Authority (FINRA). In some instances we are seeing detailed scrutiny by financial services regulators of incident involving small numbers of customers – approximately 500 or less – as regulators appear to be using incident investigations and a basis for developing a deeper understanding of the cyber-security practices of financial services companies.

The increased regulatory scrutiny of the financial services industry data shown by the report is not surprising in light of the significant pronouncements we have seen on cyber security from financial services regulators in 2015. For example, FINRA and the New York Department of Financial Services (NYDFS) each issued guidance to financial institutions for the protection of sensitive customer data. The Federal Financial Institutions Examination Council (FFIEC) also created a Cybersecurity Assessment Tool to help institutions identify their risks and determine their cybersecurity preparedness.  All three regulators have encouraged financial service organizations to have specific plans in place to prepare for a data security incident.

The 2015 FINRA Report on Cybersecurity Practices is representative of pronouncements we are seeing from many financial services regulators on cybersecurity.  It encourages financial organizations to implement the following best practices:

  1. Create frameworks that involve senior management, incorporate the organization’s risk tolerance, and allow for risk assessments that help improve the framework over time.
  2. Identify the sources of potential cybersecurity threats and prioritize the areas in most need of improvement given the organization’s risk tolerance.
  3. Take specific actions to protect software and hardware that contain data, especially data subject to cybersecurity threats.
  4. Implement procedures for responding to cybersecurity incidents and define roles for individuals in charge of incident response.
  5. Take a risk-based approach to selecting, engaging, and monitoring third party service providers.
  6. Provide employees and other authorized users of the organization’s systems with training appropriate to their specific responsibilities and the types of data they may access.
  7. Create and deploy an effective cyber intelligence program using all resources available to the organization.
  8. Periodically review the adequacy of an organization’s cybersecurity coverage to determine if the policy aligns with threats identified by the organization’s risk assessment(s) and ability to bear losses. Organizations that do not have cyber insurance should evaluate the cyber insurance market to determine if coverage is available that would enhance the organization’s ability to manage the financial impact of a cybersecurity event.

On the enforcement side, in September 2015, the SEC reached a settlement with a St. Louis-based investment adviser on charges that it failed to establish required cybersecurity policies and procedures in advance of a breach affecting the personally identifiable information (“PII”) of 100,000 individuals. Notably, there was no evidence of any harm to clients as a result of the hack. Despite the lack of harm, the SEC announced its intention to enforce the Safeguards Rule “even when there is no apparent financial harm to clients.” It also cautioned financial firms to adopt written policies to protect customers’ private information and to “anticipate potential cybersecurity events and have clear procedures in place rather than waiting to react once a breach occurs.”

Given the increased regulatory scrutiny facing financial services organizations, in preparing for the impact of a data security incident, organizations should consider the likelihood that a regulatory investigation will follow. Organizations would be wise to consider purchasing cyber-insurance or reevaluate existing policies to ensure that regulatory investigations are covered.

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Deeper Dive: Integrating Physician Practices into a Health System’s HIPAA Privacy and Security Program

BH16067_DataSecurity_DataRisk_800The healthcare industry shift to a value-based business model is resulting in greater alignment between hospitals and physicians to provide quality, outcomes driven care in order to receive payment for health care services. Prior to implementation of the Affordable Care Act, physicians more often were independent practitioners who held medical staff privileges to care for patients at the hospital.  The pressure for health systems to develop clinically integrated networks and accountable care organizations, and the financial constraints placed on physician practices, necessitate alignment with physician practices and integrating them into the health system.

Improving alignment between hospitals and physicians is essential to change the way care is delivered. Properly structured, these alignments seek to reduce costs and duplication of services, improve the quality of patient care delivered, and improve patient satisfaction.  The health system’s IT infrastructure, data sharing, and data analytics are key to a successful integration.

However, rather than fully integrating as one healthcare system, many are a collection of different hospitals and physician groups, each with their own information systems for patient records, billing, scheduling, and release of information practices that create a patchwork of IT systems and varying degrees of privacy and security resources dedicated to maintaining these systems.

The statistics in the 2016 BakerHostetler Incident Response Report include incidents involving newly acquired practices and found the privacy and security safeguards varied significantly. Compliance with the HIPAA Privacy, Security, and Breach Notification Rules varied; some practices had inadequate staff or did not have a privacy or security officer to monitor compliance and address risks; minimal policies and procedures in place, lack of documentation that training and education of workforce was completed, lack of a security risk analysis completed, or if one was completed, lack of documentation that corrective action was taken or that a risk management plan to address the identified issues was implemented.

The health system needs to understand its IT capabilities and operating competencies and develop the required infrastructure to support clinical integration of the physician practices. This includes an understanding of how the health system IT system will be connected to the practices, whether to interface the various systems, implement new systems, or leave the practice as is, with connectivity to the hospital’s electronic health record.  How the health system and its covered entities structured in order to share health information among each covered entity, such as whether the covered entities are organized into an organized health care arrangement (OHCA), or affiliated covered entities (ACE), where there is common ownership or control of the entities.  If the covered entities hold themselves out as having one joint notice of privacy practices (NPP), then all covered entities are required to follow the established NPP, and HIPAA policies and procedures.  While there are efficiencies with operating as an OHCA or as an ACE, there are also risks if a covered entity experiences a security incident or a breach. OCR can enforce corrective action on the whole health system rather than the individual covered entity for the individual covered entity’s breach, especially if OCR identifies systemic compliance issues for the ACE.   The health system should develop and utilize standardized activities to conduct due diligence, assessment or conducting a security risk analysis; and an implementation strategy and risk management plan for HIPAA privacy and security integration of the practice into the health system, and thereby reducing the risk of noncompliance or a breach.

HIPAA Due Diligence for the proposed Transaction.

The health system due diligence efforts prior to a transaction provides information about the current operating and compliance status of the physician practice to make an informed decision whether the health system wants to move forward with the transaction. The parties conducting due diligence should determine gaps in the practice’s HIPAA privacy and security program, and the associated risks.  Documents to review for due diligence should include the practice’s  security risk analysis and security risk management plan; business associate relationships and agreements; data use agreements; privacy and security policies and procedures; Notice of Privacy Practices; workforce training and education; corrective action and sanctions with employees and vendors; complaint and breach investigations and response, OCR and state attorneys general actions; litigation; breach complaint log; mobile device use; social media; use of texting and email to transmit PHI; and record retention and document retrieval practices and availability of documents for the prior six years.

Integration of a Practice into the Health System

Many health systems have dedicated mergers and acquisition teams to conduct due diligence prior to a transaction. However, once the acquisition is completed, much of the integration activities are left for the practice and current health system staff to deal with. Such change can be overwhelming for a practice to make, especially if there are inadequate resources to assist with converting a practice to the health system processes.  The integration team should develop and implement an integration plan based upon the due diligence findings, including the practice’s risk analysis.  If the practice has not conducted a risk analysis the acquiring health system should have it completed to understand the current HIPAA compliance, a plan to strategize the risks, and a timeline to address the risks.  This requires commitment from senior leadership and allocation of resources to adequately address compliance risks and incorporate the practice into the health system’s overall privacy and security program.  It is well worth the commitment to ensure the practice is compliant, and if a HIPAA breach were to occur, the covered entity and health system will be in a better position to identify, contain, and mitigate the incident.

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