New law narrows application of Red Flags Rule
by Legal and Regulatory Affairs Staff
January 13, 2011 — On December 18, 2010, President Obama signed the Red Flags Clarification Act of 2010, following successful advocacy by the American Psychological Association (APA) and the APA Practice Organization to protect members from unnecessary regulation under the Red Flags Rule.
Background and Professional Psychology’s Advocacy
The Federal Trade Commission (FTC) created the Red Flags Rule (RFR) in 2008 to reduce identity theft. The term "Red Flags" refers to patterns, practices and activities that serve as warning signs of identity theft.
The Rule requires “creditors” to develop plans to detect and prevent identity theft. Many observers expected that the RFR would apply only to financial institutions and other credit institutions traditionally regulated by the FTC.
Just before the original effective date of November 1, 2008, however, the FTC announced that psychologists and other health care providers were subject to the Red Flags Rule if they:
Provide services and then bill patients later (even if they are only billing patients later for insurance co-payments); or
Regularly allow their patients to defer payment for services.
Staff for APAPO heard complaints from members about the increased regulatory burden that would result from the FTC’s decision and ascertained that identity theft rarely affects psychological practices.
We determined that a legislative fix would be the optimal advocacy strategy for relieving members from the regulation. Our Government Relations staff, through their involvement with two coalitions – the Patients’ Access to Responsible Care Alliance (PARCA) and the larger Red Flags Coalition — lobbied key members of Congress on the issue.
The FTC delayed implementation of the Red Flags Rule several times: first, to allow unprepared businesses time to comply and later to give Congress time to enact legislation to clarify who needed to comply with the Rule. The final enforcement date was scheduled for December 31, 2010.
Our legislative advocacy efforts culminated in November 2010 when the APA, in coalition with 28 health care professional organizations and the U.S. Chamber of Commerce, sent a letter (PDF, 9 KB) to Senator John Thune (R-South Dakota) and Senator Mark Begich (D-Alaska), sponsors of the Red Flag Program Clarification Act of 2010 (S.3987), supporting its passage. The Senate passed the Act by unanimous consent on November 30. On December 7, the House passed S. 3987 without amendment, paving the way for the president’s signature in mid-December.
Impact on Practicing Psychologists
The new Act sharply narrows the definition of “creditors” to whom the FTC can apply the Red Flags Rule. Previously, the FTC had relied on a definition of creditor that applied to anyone who “regularly extends credit.” The FTC asserted that health care professionals who allow patients to pay some or all of the fee after services are provided are extending credit, thus making the provider a creditor subject to the Rule.
The Red Flags Clarification Act of 2010 narrows the definition from “extending credit” to advancing funds. The key element of the new creditor definition applies to those who regularly advance funds to (or on behalf of) a person based on an obligation to repay. While it may be common for psychologists to let patients defer some payment for services, psychologists generally do not lend money to their patients. The full definition of creditor in the new law has three prongs. Creditors regularly and in the ordinary course of business:
Advance funds to or on behalf of a person, based on the person's repayment obligation (this does not include funds for expenses incidental to a service provided by the creditor to that person);
Obtain or use consumer reports, directly or indirectly, in connection with a credit transaction; or
Furnish information to certain consumer reporting agencies in connection with a credit transaction.
Because psychologists do not engage in “credit transactions,” we do not expect that the last two prongs will apply to psychologists. The first prong generally does not apply for the reason noted above.
For more information, contact the Legal and Regulatory Affairs Department by e-mail or at (202) 336-5886.
Please note: This article does not constitute legal advice. If you need a legal opinion, you should work with an attorney in your area with appropriate experience.