Red Flag Program Clarification Act of 2010
Most Physicians are not covered by Red Flags Rule
The Red Flag Program Clarification Act of 2010 generally limits the application of the Red Flags Rule to creditors that regularly and in the ordinary course of business engage in at least one of the following three types of conduct:
(i) Obtain or use consumer reports, directly or indirectly, in connection with a credit transaction;
(ii) Furnish information to consumer reporting agencies in connection with a credit transaction; or
(iii) Advance funds to or on behalf of a person, based on an obligation of the person to repay the funds or repayable from specific funds from specific property pledged by or on behalf of the person. The term “advance funds” does not include advancing funds on behalf of a person for expenses incidental to a service provided to such person.
The Clarification Act does not outright exempt any profession or industry from inclusion under the Red Flags Rule. However, because most medical practices typically do not use or obtain consumer reports routinely in connection with credit transactions or furnish information to consumer reporting agencies, most medical practices are not subject to the Red Flags Rule. If a medical practice uses credit reports or furnishes information to consumer reporting agencies as a regular aspect of business, the medical practice may qualify as a “creditor” and be subject to the Red Flags Rule..
Congress enacted the Fair and Accurate Credit Transactions Act of 2003 (“FACT ACT”) to “prevent identity theft, improve resolution of consumer disputes, improve the accuracy of consumer records, (and) make improvements in the use of, and consumer access to credit information”. The FACT ACT, among other things, authorized the FTC to “prescribe regulations requiring each financial institutions and each creditor to establish reasonable policies and procedures” to prevent identity theft. Acting pursuant to its delegated authority under the FACT Act, the FTC promulgated the Red Flags Rule in November 2007. The Red Flags Rule did not address whether health care professionals or lawyers were covered by the statute or the Rule.
The FTC initially set November 1, 2008 as deadline for compliance with the Red Flags Rule. This deadline was extended to May 1, 2009 due to uncertainty regarding the Red Flags Rule’s coverage. In April 2009, the FTC issued a policy statement “Extended Enforcement Policy” to explain the Rule’s coverage and delayed the Compliance deadline to August 1, 2009. The Extended Enforcement Policy stated that, in the FTC’s view, the term “creditor” as used in the Red Flags Rule and the FACT Act, included “all entities that regularly permit deferred payments for goods or services”, including professionals, “such as lawyers or health care providers, who bill their clients after services are rendered”.
Under the FTC’s interpretation of the term “creditor” most physicians would be covered by the Red Flags Rule. A physician would be considered to be a “creditor” if he/she did not regularly demand payment in full, either in advance or at the time services were rendered. A physician would also be considered to be a creditor if he/she agreed to bill a patient’s health insurance first, and then at a later date bill the patient for any non-covered portion of the fee, such as co-pays or deductibles.
The AMA and state medical societies objected to the FTC’s interpretation and were successful in obtaining delays in the implementation of the Red Flags Rule.
American Bar Association v. Federal Trade Commission
In August 2009 the American Bar Association filed suit in the United States District Court, for the District of Columbia challenging the FTC’s Extended Enforcement Policy. The District Court agreed with the ABA and enjoined the FTC from enforcing the Red Flag Rules against lawyers. The Federal Trade Commission appealed to the United States Court of Appeals for the District of Columbia Circuit
During the appeal to the United States Court of Appeals, Congress enacted the Red Flags Program Clarification Act in December 2010. The United State Court of Appeals then issued a ruling in March 2011 that the lawsuit brought by the ABA had become moot because the Red Flags Program Clarification Act now made it clear that lawyers would not be subject to the Red Flag Rule merely because they may not require payment in full at the time they render the service.
American Medical Association v. Federal Trade Commission
On May 21, 2010 the AMA and other medical societies sued the FTC to prevent enforcement of the Red Flags Rule against physicians
Shortly after the lawsuit was filed, the FTC announced that it was deferring enforcement of its Red Flags Rule until January 1, 2011. On June 25, 2010, the AMA and FTC agreed that the case would be “dormant” until resolution of the appeal in the similar case ABA v. FTC.
In the meantime, Congress enacted the Red Flag Program Clarification Act. Because the new law invalidated the FTC Extended Enforcement Policy and made it clear that physicians and other professionals are not subject to the Red Flags Rules merely because they may not require payment in full at the time they render their services, the parties agreed that the lawsuit had become moot.
RED FLAGS RULE FURTHER DELAYED UNTIL DECEMBER 31, 2010