Standards for Privacy of Individually Identifiable Health Information. Final Privacy Rule Preamble.. The Cost Model Methodology

12/28/2000

The RIA model employs two basic methodologies to determine the costs to small businesses that are covered entities. As stated above, the RFA determines the cost to small businesses by apportioning the total costs in the RIA using SIC code data. In places where the cost of a given provision of the final rule is a function of the number of covered entities, we determined the proportion of entities in each SIC code that have less than $5 million in revenues (see Table A). We then multiplied this proportion by the per-entity cost estimate of a given provision as determined in the RIA. For example, the cost of the privacy official provision is based on the fact that each covered entity will need to have a privacy official. Therefore, we multiplied the total cost of the privacy official, as determined in the RIA, by the proportion of small businesses in each SIC code to determine the small business cost. Using hospitals for illustrative purposes, because small and non-profit hospitals account for 50 percent of all hospitals, our methodology assigned 50 percent of the cost to small hospitals.

We used a second, though similar, method when the cost of a given provision in the RIA did not depend on the number of covered entities. For example, the requirement to provide notice of the privacy policy is a direct function of the number of patients in the health care system because the actual number of notices distributed depends on how many patients are seen. Therefore, for provisions like the notice requirement, we used SIC code revenue data in a two-step process. First, we apportioned the cost of each provision among sectors of the health care industry by SIC code. For example, because hospital revenue accounts for 27 percent of all health care revenue, we multiplied the total cost of each such provision by 27 percent to determine the cost for the hospital sector in total. Then to determine the cost for small hospitals specifically, we calculated the proportion of revenues within the SIC code that are attributable to small business and multiplied that proportion by the overall cost. For example, 45.1 percent of all hospital revenue is generated by small hospitals, therefore, the cost to small hospitals was assumed to account for 45.1 percent of all hospital costs. Estimates, by nature are inexact. However, we feel this is a reasonable way to determine the small business costs attributable to this regulation given the limited data from which to work.