This article was originally published in Probate & Property, Vol. No. 4, p. 20 (July/August 2004). Citations have not been confirmed or updated.

If you’ve been to a doctor or hospital in the last few months, you’ve been asked to sign a piece of paper titled something like “HIPAA Notice of Privacy Practices,” which probably told you all sorts of stuff about your medical records that you either didn’t understand or didn’t really care about.  Well, the same federal law that has doctors asking patients to sign all of those pieces of paper also imposes penalties on doctors (and hospitals and other health care providers) who make unauthorized disclosures of “protected health information” about their patients, and that means that health care providers are not going to be talking about (or otherwise disclosing information about) the medical condition of a patient to the families of the patient, or the lawyer for the patient, which can lead to problems when families and lawyers are trying to figure out whether the patient is disabled for purposes of durable powers of attorneys, advance medical directives, trusts, employment contracts, and other kinds of contracts and documents.

This article will therefore explain the history and general provisions of HIPAA and its regulations and discuss how those regulations may affect various estate planning documents and practices.

History and Background

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), H.R. 3103, P.L. 104-191, sometimes known as the Kennedy-Kassebaum bill, had as its primary goals the portability of health insurance coverage from one employer-provided health insurance program to another employer’s health insurance program, as well as the reduction of fraud in Medicaid, Medicare, and other kinds of health insurance and health care costs.  In order to carry out those goals, HIPAA instituted new standards for recording health care information electronically, and new standards for how that health care information could be shared electronically among health insurers and governmental regulators.  Finally, having begun regulating how health care information should be shared, Congress felt it necessary to regulate how health care information should NOT be shared, and so a section of HIPAA authorizes the Secretary of Health and Human Services to promulgate regulations on how health care information must be kept confidential and under what circumstances health care information may be disclosed.

To establish standards for health records, 42 U.S.C. §1173, added by section 262 of HIPAA, gives the Secretary of Health and Human Services broad discretion in adopting standards to enable health information to be exchanged electronically, as well as security standards for health information.  Section 1173(d)(2) also requires those who maintain or transmit health information to maintain reasonable and appropriate safeguards in order (among other things) “to protect against any reasonably anticipated … unauthorized uses or disclosures of health information.”

Section 264 of HIPAA required the Secretary to recommend standards with respect to the privacy of individually identifiable health information and, if those recommended standards were not enacted as legislation, the Secretary was required to issue regulations addressing:

“(1) The rights that an individual who is a subject of individually identifiable health information should have.
(2) The procedures that should be established for the exercise of such rights.
(3) The uses and disclosures of such information that should be authorized or required.” 

HIPAA, section 264(b).

HIPAA, section 264(b).

The Secretary published regulations on December 28, 2000, at 65 FR 82802, then modified the regulations on August 14, 2002, 67 FR 53182, and the modified regulations became effective April 14, 2003.  The regulations can be found at 45 CFR §§164.500 et seq.

The penalties for disclosing (or obtaining) “individually identifiable health information” in violation of HIPAA are severe.  Under 42 U.S.C. §1177, as added by section 262 of HIPAA, a person violating the privacy provisions of HIPAA can be fined not more than $50,000 and imprisoned not more than one year.  However, if the violation is “under false pretenses,” then the fine can be $100,000 and the imprisonment can be 5 years. and if the violation is “with intent to sell, transfer, or use individual identifiable health information for commercial advantage, personal gain, or malicious harm,” the fine can be $250,000 and the imprisonment can be 10 years.

Privacy Regulations

The HIPAA privacy regulations at 45 CFR §§164.500 et. seq. contain a number of detailed provisions about health information that may be shared or disclosed to carry out treatments, billing and payments, health care operations, and other purposes, and those details are beyond the scope of this article.  However, estate practitioners should know what is “protected health information,” the circumstances under which it can be disclosed to family members or legal representatives, and what procedural remedies might exist for failure to disclose.

The discussions that follow generally use the same terminology as the regulations themselves, with two exceptions.  The regulations apply to “covered entities,” which includes not only doctors, hospitals, and other health care providers but also health plans, employers, and health care clearinghouses.  Because practitioners will most often be dealing with doctors, hospitals, and other health care providers as their source of health information, the discussions below will refer to health care providers even when the regulations refer more broadly to “covered entities.”  The regulations also refer to the health information of an “individual,” but for convenience and clarity the discussions below will often refer to the health information of a “patient.”

The regulations apply generally to “protected health information,” which is defined by 45 CFR §164.501 as “individually identifiable health information” that is either transmitted by electronic media, maintained in any electronic media, or transmitted or maintained in any other form or medium (subject to certain exceptions not relevant here).  “Individually identifiable health information” is defined by 42 USC §1171(6) as any information (1) created or received by a health care provider, health plan, employer, or health care clearinghouse that (2) relates to the past, present, or future physical or mental health or condition of an individual, the provision of health care to an individual, or the past, present, or future payment for the provision of health care to an individual, and (3) either identifies the individual or with respect to which there is a reasonable basis to believe that the information can be used to identify the individual.

These definitions are quite broad, and would apparently include any information about a patient’s medical condition or treatment, transmitted in any form (including orally).

Protected health information can obviously be disclosed to the patient himself (45 CFR §164.502(a)(1)(i)) and must be disclosed to the patient (subject to various exceptions, including an exception for psychotherapy notes) if requested by the patient (45 CFR §164.524).  There are specific provisions for the review of the denial of a patient’s request for protected health information (45 CFR §164.528), amendments to protect health information (45 CFR §164.526), and accounting for past disclosures of protected health information (45 CFR §164.528).

The regulations also specify that, for purposes of disclosure, the patient’s “personal representative” is treated in the same way as the patient, meaning that the personal representative has the same rights and powers as the patient to protected health information.  The definition of “personal representative” is a functional definition, because the regulations state that, if a person has the authority to act on behalf of an adult or emancipated minor “in making decisions in relation to health care,” that person must be treated as the “personal representative” with respect to protected health information “relevant to such personal representation.”  45 CFR §164.502(g)(2).  The issue of who is a “personal representative” is therefore a function of state law, and the information that can be obtained by the personal representative is a function of the health care decisions that can be made by the personal representative under state law.

Similar rules allow a parent, guardian, or other person acting in loco parentis to an unemancipated minor to be treated as the personal representative of the minor with respect to protected health information relevant to health care decisions that may be made by that person under applicable law (45 CFR §164.502(g)(3)) and allow the executor or administrator of a decedent’s estate to be treated as the personal representative of the decedent (45 CFR §164.502(g)(4)).

However, the regulations do not require health care providers to follow state law in all cases.  A health care provider can refuse to treat a person as a personal representative for a patient if the health care provider has a reasonable belief that the personal representative may have abused the patient, or that treating the person as the personal representative could endanger the individual, if the health care provider decides, “in the exercise of professional judgment,” that it is not in the best interests of the patient to treat the person as the personal representative.  45 CFR §164.502(g)(5).  See also, 45 CFR §164.512(c)(2)(ii) and §164.524(a)(3)(iii).

Protected health information (other than psychotherapy notes) can also be disclosed in accordance with a “valid authorization” signed by the patient.  45 CFR §164.508.  A valid authorization is a document written in “plain language” (45 CFR §164.508(c)(2) and must contain the following information (45 CFR §164.508(c)(1)):

• A description of the information to be disclosed that identifies the information in a specific and meaningful fashion;
• The name or other specific identification of the health care providers or other persons (or class of persons) authorized to make the requested disclosure;
• The name or other specific identification of the persons (or class of persons) to whom the disclosure may be made;
• The purpose of the requested disclosure (which may be “at the request of” the patient if the patient initiates the request and does not wish to state the purpose);
• An expiration date or an expiration event that relates to the patient or the purpose of the disclosure; and
• The signature of the patient and date.  If the authorization is signed by a personal representative of the patient, the document must describe the source of the representative’s authority.

The authorization must also include statements adequate to put the patient on notice that (a) the patient has the right to revoke the authorization in writing and how the patient may revoke the authorization, (b) whether or not any treatment, payment, or enrollment is conditioned on the authorization, or the consequences of not signing the authorization (if any), and (c) the potential for disclosed information to be disclosed further because it may no longer be subject to HIPAA regulations once disclosed.

The regulations also state that a valid authorization should not be combined with “any other document” to create a compound authorization.  45 CFR §164.508(b)(3).  The goal seems to be to prevent confusing a patient by combing two different authorizations for two different purposes into one document.  In that case, both the literal language of the regulation and the purpose of the regulation would allow an authorization to be included as part of a larger document (such as a revocable trust, as discussed below) that is related to the authorization but does not include any other authorization for disclosure of health information.  However, health care providers are required to keep copies of all authorizations (45 CFR §164.508(b)(6)), and so it would be better to have a short, separate document for the health care provider’s records, rather than a longer document with information about the client’s estate plan (or other affairs) that the health care provider has no business knowing.  For both these reasons, it will usually be better to create separate written authorizations whenever an authorization to disclose protected health information is needed.

As can be seen from the foregoing, a family member or friend who is not a “personal representative” may be left in the dark about the medical condition of a spouse, parent, adult child, or other close family member.  The regulations seem to recognize only four circumstances in which the medical condition of a patient might be shared with family members or friends (if the patient does not object):

• Protected health information may be disclosed to a family member, other relative, close personal friend, or other person identified by the patient to the extent that the information is directly relevant to the person’s involvement with the patient’s care or payment for the health care.  45 CFR §164.510(b)(1)(i).  This would allow doctors to discuss the relevant aspects of the patient’s care with those who are living with the patient and who will be involved with her care, as well as with those who are paying for the health care.
• Protected health information may be disclosed to family members, a personal representative, or another person responsible for the care of the patient in order to notify them of the patient’s location, general condition, or death.  45 CFR §164.510(b)(1)(ii).  So it will not be a violation of federal law for a hospital to call a patient’s next of kin to let them know that the patient is in the hospital and not doing well (or has died).
• Protected health information may be disclosed to others in the presence of the patient if the patient is capable of making medical decisions and the patient (i) consents, (ii) does not object (after being given an opportunity to object) or (iii) it appears from the circumstances (based on an “exercise of professional judgment”) that the patient does not object.  45 CFR §164.510(b)(2).  So, when the doctor visits the patient in the hospital and the family is visiting and a family member asks a question about the patient’s condition, the doctor can answer if the doctor first asks the patient or if the doctor reasonably believes that the patient has no objection.
• If the patient is not present, or there is an emergency or an incapacity, but it is in the “best interests” of the patient, using “professional judgment” and “experience with common practice,” protected health information may be disclosed that is directly relevant to the person’s involvement with the patient’s care, such as allowing the person to pick up prescriptions, medical supplies, or X-rays.  45 CFR §164.510(b)(3).

These exceptions seem to be an attempt to formalize the “rules” under which doctors in the past typically advised family members about a patient’s condition.

Although these new rules may cause problems for family members trying to learn about the medical condition of a patient from a doctor, the problems that most estate lawyers will confront will relate to how the regulations relating to “personal representatives” and “valid authorizations” apply to powers of attorney and other estate planning documents and procedures.

Powers of Attorney

Many practitioners have expressed concerns that durable powers of attorney that include the power to make medical decisions (or durable health care powers of attorney) may need to be rewritten to comply with HIPAA.  Several legal groups and individual lawyers have published new language (sometimes very lengthy and complex language) that they recommend be added to forms of powers of attorney.  However, the language of the HIPAA regulations show that no changes should be needed for Pennsylvania powers of attorney that follow the statutory definitions for powers relating to medical care.

By statute, Pennsylvania allows a principal to empower an agent to “authorize medical and surgical procedures,” which means that the agent “may arrange for and consent to medical, therapeutical and surgical procedures for the principal, including the administration of drugs.”  20 Pa.C.S. §5603(h)(2).

As explained above, the regulations under HIPAA require health care providers to treat the personal representative in the same way as the patient, and a “personal representative” is the person who, under applicable law, has the power to make medical decisions for the patient.  A properly authorized agent under a power of attorney is a person who, under Pennsylvania law, has the power to make medical decisions for the principal, so the agent should be entitled to the same medical information as the principal.

Practitioners redrafting powers of attorney to include specific powers relating to health information should also consider that the HIPAA regulations make no provisions whatsoever for a “power of attorney” to receive health information or to authorize disclosures of health information.  In order to be the “personal representative,” a person needs to have the authority to make medical decisions for the patient.  Once a person has that power, all other powers granted by the document are superfluous.  Authorizing an agent to receive or disclose health information is simply a waste of paper and ink, because there is no such thing as a “personal representative” of the patient who has the power to authorize disclosures but does not have the power to make medical decisions.

In order to make sure that an agent under a durable power of attorney has access to health information, it might be possible to write a broad “valid authorization” in favor of the agent, but that may be contrary to the spirit and structure of the regulations.  The regulations are consistent with the principle that a person who has the power to make medical decisions for a patient should be entitled to the same medical information as the patient, but the regulations are hostile (or at least suspicious) of disclosures by written authorizations.  As shown above, written authorizations are supposed to be “specific” in what is to be disclosed, for what purpose, from whom, to whom, and for how long.  A broad general authorization to disclose all medical information from all sources, with no time limit, might not be valid under the regulations (or at least the regulations provide reasons for health care providers to hesitate before honoring such a document).

Most of the problems that are being encountered with health care professionals, HIPAA, protected health information, and powers of attorney are undoubtedly due to the newness of the regulations and the uncertainty of their application.  Many of these problems should disappear with time so that, in the long run, the best way to make sure that an agent under a power of attorney has access to all medical information is to make sure that the agent has the power to make all medical decisions, and not through additional wording in waivers or authorizations.

“Springing” Powers

A “springing” power of attorney (that takes effect only upon the disability of the principal) may create new problems under HIPAA, because how is an incapacitated principal going to be able to authorize access to the medical information needed to prove that the principal is incapacitated?

In order to avoid court proceedings and litigation (which is the purpose of most if not all powers of attorney), many springing powers state that the principal shall be deemed to be disabled upon the written opinions of some specific number of physicians.  But under the HIPAA regulations, the principal’s physicians are prohibited from disclosing information about the principal’s medical condition without the permission of the principal or the personal representative of the principal.  The principal can’t give permission because the principal is already incapacitated.  The agent under the power of attorney is not the “personal representative,” and can’t give permission, because the agent will have the power to make medical decisions for the principal only after the power of attorney becomes effective and the power of attorney will not be effective until after the physicians have given their opinions.

Catch-22.

The best solutions to this dilemma are either (a) stop using springing powers or (b) arrange for the principal to sign a separate “valid authorization” along with any springing power, so that the principal’s physicians are authorized to disclose the protected health information relevant to whether or not the principal is suffering from a disability.  See the discussion above of “valid authorizations” under 45 CFR §164.508.

Health Care Declarations (“Living Wills”)

Following the model of the Pennsylvania statute (20 Pa.C.S. §5404(b)), most advance health care declarations in Pennsylvania appoint a “surrogate” to make health care decisions in the event that the signer is “incompetent and in a terminal condition or in a state of permanent unconsciousness.”

Consistent with the HIPAA regulations, a “surrogate” appointed under an advance health care declaration is not going to be treated like the declarant for all disclosure purposes, but is going to be treated as a “personal representative” only after the advance health care directive becomes effective, which is only after the declarant is “incompetent and in a terminal condition or in a state of permanent unconsciousness.”  Because the authority of the surrogate could be seen as limited in scope (i.e., the surrogate is only authorized to decide whether a medical treatment will unnecessarily prolong life or is necessary to relieve pain), a health care provider could limit the disclosures of protected health information to the surrogate to the information relevant to those decisions.

Whether limitations on the information and authority of a “surrogate” are a problem depends on how practitioners themselves see the role of the surrogate.  If it is believed to be necessary or advisable for a family member to have full access to all medical information even before a patient might be incompetent or in a terminal condition, the best solution is to make sure that there is in force a durable power of attorney with the authority to make medical decisions, or a durable health care power of attorney, rather than attempting to revise or re-word an advance health care declaration.

Guardianship Proceedings

Like “springing” powers of attorney, guardianship proceedings themselves may be subject to an additional procedural hurdle in order to authorize the alleged incapacitated person’s physicians to testify in court (and necessarily disclose protected health information).

The HIPAA regulations specifically recognize judicial proceedings as an authorized disclosure.  45 CFR 164.512(e).  However, the regulations draw a distinction between an order of the court and a subpoena, and health care providers are not necessarily required to comply with subpoenas unless certain conditions are met.  See 45 CFR §164.512(e)(1)(ii).  In order to get a court order (and not just a subpoena), it may be necessary to file a petition and get a preliminary order for the disclosure of medical records and the testimony of physicians before there is an actual hearing on the issue of incapacity.  This will ultimately depend on whether health care providers are willing to honor a subpoena in guardianship proceedings or whether they will require a court order, and only time will tell what policies or attitudes the health care industry will adopt.

Trust Agreements

Like “springing” powers of attorney, many revocable trusts provide for the removal of the grantor as trustee, changes in distributions, or other consequences upon the disability of the grantor.  And, once again, many documents define the “disability” of the grantor in terms of an opinion by physicians that the physicians will not be willing to provide without compliance with HIPAA.

It would seem that there could be three possible solutions to this problem.

One possible solution is to change the language of the revocable trust so that a failure of the trustee to authorize the release of the medical information necessary for the opinion of the physicians would itself become an event causing the grantor to be removed as trustee or otherwise considered to be disabled for the purpose of the trust.  So, if the grantor were unable or unwilling to authorize the release of the medical information, the disability provisions would automatically take effect.

Another possible solution is to arrange for a separate authorization for the disclosure of the protected health information needed for the opinion of the physicians.  Although a broad and unlimited authorization might not be a “valid authorization” under the regulations, an authorization for the specific purpose of determining disability within the meaning of the trust document should be specific enough to pass muster under anything but the most stringent reading of the regulations.

A third possible solution is to include an authorization for the disclosure of the necessary health information within the trust agreement itself.  As discussed above, this is not recommended because the health care provider that discloses the health information will then be required to keep a copy of the trust document (45 CFR §164.508(b)(6)), which seems like a needless disclosure of the client’s estate plan.

Employment and Other Contracts

There are other documents related to estate planning that may include definitions of disability or a need for medical determinations, including employment agreements with disability benefits, shareholder or partnership agreements that allow or require transfers of business interests upon disability, and possibly even antenuptial agreements or separation agreements.  In each case, practitioners will need to reconsider how to get the necessary authorizations for the disclosure of health information.

Where it is to the benefit of the individual to provide the evidence of disability, then it would seem that very little needs to be done except to make sure that the individual has a durable power of attorney that includes the power to make medical decisions.

The more difficult case is that in which it is to the benefit of other parties to demonstrate the disability of the individual, and in those cases the best drafting solutions will probably follow the suggestions made above with respect to revocable trusts.  That is, that the documents be drafted so as to put the burden of proof on the individual and for the other parties to the contracts to be able to claim the existence of a disability if the individual is unable (or unwilling) to execute a valid authorization to disclose the necessary health information.  Or that the individual signed a valid authorization for the disclosure of health information when the contract is signed, so that the other parties to the contract may be able to obtain the necessary health information when needed.

Conclusions

Like many new laws, the HIPAA privacy regulations are causing confusion and uncertainty.  However, contrary to the fears of many practitioners, durable powers of attorney that give the agent the power to make medical decisions should continue to be honored under HIPAA and should allow the agent both access to protected health information and the power to authorize disclosures of protected health information.  Other problems that practitioners may encounter should be solvable with separate authorizations for the disclosure of protected health information, as well as trust and contractual agreements that recognize the problems of obtaining health information and reallocate the resulting burdens and presumptions.

By Daniel B. Evans

Copyright 1993, 2003. All rights reserved.

[Note: This article was originally published by the Law Practice Management Section of the American Bar Association in Law Practice Management, Vol. 19, No. 7, p. 26 (October 1993).]

I have read too many articles and commentaries which lament the extent to which law has become a “business”. The implicit assumption is that if a lawyer acts like a greedy, unprincipled, and insensitive pig, he is acting like a businessman. The truth is that a successful service business strives to provide useful and attractive services at reasonable prices, promote customer satisfaction, and earn a profit. Why are those concepts so offensive to the legal profession? (Also, why is the legal profession so quick to attribute to the business community those faults which the business community likes to attribute to lawyers?)

Fortunately, the practice of law will never become a business because lawyers will never learn to think or act like business managers. Lawyers will never think or act like business managers because law schools, law firms, and the legal system itself teaches them not to.

Law Schools

One of the biggest influences on lawyers is the training received in law school. This is not necessarily good for their attitudes and aptitudes for management.

Academia

If we assume that law schools are performing their proper function, and if we examine what it is that law schools do in order to work backwards and determine their function, we would have to conclude that the function of law schools is to take reasonably intelligent people and turn them into naive, academically proficient (but otherwise dysfunctional) idiots.

The average graduate from a law school understands the concept of a tort, the elements of negligence, and the social and legal policies underlying the tort system enforced by American courts. If pressed, he or she may even know what must be alleged in a complaint to initiate a lawsuit for negligence. However, the process of preparing a complaint, filing it with the proper fees, serving the complaint on the defendant, and conducting the case through to trial will probably be a complete mystery.

Even if a law school has a clinical program to acquaint students with the procedures of the real legal system, there will almost certainly be no instruction in how to dictate a letter, how to delegate work to secretaries or paralegals, how to maintain a file, how to record billable time, or any of the other practical office skills which go into practicing law.

From this perspective, a law school graduate most nearly resembles an idiot savant, able to perform impressive mental feats of calculation and memorization but unable to perform simple survival tasks or otherwise function in society.

Issue Identification

Even the job which law schools supposedly do well, which is to indoctrinate impressionable youth in arcane legal reasoning, can actually get in the way of running a law firm, because law schools teach students how to identify issues or problems, but not how to solve them. Given a particular factual situation on a law school exam, the highest grade goes to the student who can spot the most issues and describe the most number of potential legal arguments, both pro and con. Similarly, the most valuable lawyer is supposedly the one who can spot the most potential tax problems in a proposed transaction or the most weaknesses in a pleading or complaint. Law schools (and law firms) therefore place a premium on the discovery and identification of problems.

These is a useful skill in academic circles, and even in preparing an appellate brief, but it can produce disasters while managing a law firm. At a partnership meeting, most lawyers will be better at raising issues than at resolving them. They will not be happy until they have dissected every aspect of the situation, raised every possible problem or consideration, and voiced every possible argument for and against every issue. Trained to identify problems, they do so at every opportunity, whether or not it is appropriate, often blocking any managerial action by the firm.

Because they raise (or create) so many problems in business transactions, lawyers have a reputation for being “deal killers”. What is often overlooked is that lawyers can also be “law firm killers”.

Aristotelian Logic

Law school training is inherently aristotelian, not scientific. The socratic method used in law schools encourages students to believe that, through discussion, analysis, and contemplation, the “right” result will emerge. This was the “scientific” method of Aristotle, who believed that the sun revolved around the earth. The modern scientific method requires that, after you have developed an idea, you must test it and prove that it is right. Lawyers are never taught this second step, which is not part of the legal process, and so lawyers tend to believe that a group of lawyers, sitting in a conference room, can solve firm management problems without any additional input, learning, or testing.

An anecdote may help to illustrate the tendency of lawyers to try to solve problems by examining their individual or collective navels. Several years ago, a bar association decided to establish guidelines for evaluating and recommending judicial candidates. A committee of lawyers was formed. It met, discussed, drafted, and finally published guidelines describing the qualities and experience which were most important for a judge, and which would be used by the bar association in evaluating and recommending judicial candidates. However, no lawyer on the committee ever talked to any judge about what it was like to be a judge. In the factual vacuum of their offices, the committee members had prepared guidelines for what they thought a judge needed to do without every talking to a judge to find out what judges really did. This violates a simple and basic management rule: When finding someone to do a job, you first interview the last person to do that job to find out what the job is.

Those who cannot learn from the past are doomed to repeat it. Not knowing how to learn from the past experiences of others, and not knowing how to test their own ideas and learn from their own experiences, each generation of lawyers will make the same management mistakes as their predecessors.

Law Firms

The ways in which law firms operate are self-perpetuating systems which discourage any attempt to manage effectively.

Owner/Employees

The partnership (or shareholder) structure of every law firm obstructs efficient management.

In any business enterprise, ultimate management authority lies with the owners, whether those owners are the stockholders of a corporation or the partners in a partnership. Law firms are unusual among business organizations in that the owners also constitute a significant portion of the work force. In a typical law firm, the owners are the partners (or shareholders if a professional corporation), and those partners (or shareholders) are also practicing lawyers, so they are affected (along with all other employees) by all management decisions.

When partners are inconvenienced by a management decision on file management, document formats, billing, or other internal procedures, they may simply ignore the decision, which will defeat the goal of uniformity within the firm and sabotage the original purpose of the decision. If the partners don’t ignore the decision, they may oppose it, in which case every management decision becomes a partnership decision, requiring debate and consensus among the partners and wasting valuable partner time.

It is therefore understandable that managing a law firm has been compared to herding cats.

The Billable Hour

Recording time spent of behalf of clients was originally supposed to help law firms bill clients and allocate resources more intelligently. The practice of law is labor intensive, so the profitability of different clients, practice areas, and lawyers should be measured in the ratio of time spent to income received. However, law firms today do not use recorded time as one factor to consider in billing clients, but use recorded time as the sole factor in billing clients. This has so many adverse effects that the “billable hour” has become a Frankenstein monster, now threatening to destroy the lawyers who have nourished it.

Using time spent as the sole basis for all billing is a complete disincentive to any practice organization or practice efficiency. Consider, for example, something as simple as a research retrieval system. If a law firm had no research retrieval system, then each client problem would have to be assigned to a lawyer (probably an associate) for analysis and research, and the client would be billed for the associate’s time. If the firm had a research retrieval system, the associate might first check that system and discover a recent opinion on the same subject for another client. The associate’s time would therefore be limited to checking and updating the prior opinion, with a considerable savings in time and, based on time alone, a considerable reduction in the fee to the client.

Expressed in that way, the research retrieval system does not sound that bad, because the fee was reduced for the second client but the level of profitability for the firm remained the same (assuming that the associate had other work to do and that the firm still collected the same hourly rate for the time spent). If there were no impact on profitability, a firm might still wish to have a research retrieval system in order to reduce errors (such as conflicting opinions on the same issue) and in order to serve more clients in greater volume, even at the same level of profitability. However, a research retrieval system is not without its costs. The research to be retrieved must be collected, indexed, stored, and maintained. This will require attorney time, staff time, and physical resources such as office supplies and office space, or even computer hardware and software. If the firm has no way to bill clients for these costs, the adoption of a research retrieval system will make the firm less profitable, not more profitable, or will cause the firm to increase its billing rates, which may make the firm less competitive with other firms.

More complex automation applications provide even clearer examples of the disincentives to efficiency. It is possible to create computer systems which will draft complex documents very accurately and very quickly. However, if the firm has no way to bill a client except through billable time and if automation reduces billable time, then the hardware, software, and configuration costs become net losses to the firm, with no increase in profitability.

These examples show that the dependence on the billable hour provides a disincentive to any automation or other management efforts to promote efficiency. The billable hour also promotes organizational inefficiencies.

Because firm revenues are based on billable time, associates are rewarded for recording large amounts of billable time and punished (subtly or overtly) for recording small amounts of billable time. Even without committing any misrepresentation or fraud, associates learn quickly how to maximize their billable time. More to the point, they have no incentive to adopt any time saving measures, and may actually strive for overly time-consuming (but legally justifiable) steps in order to record the largest possible amount of time.

The more clever among the partners may also recognize that law firms enjoy diseconomies of scale. As was observed in The Mythical Man-Month, by Frederick P. Brooks Jr. (Addison-Wesley Publishing, 1982), adding workers to a project will slow it down, not speed it up, because additional time will be needed to educate the new workers, communicate among all workers, and coordinate all of the tasks. In other words, if one associate can research and write a brief in fifty billable hours, it may take two associates a total of seventy billable hours to do the same research and write the same brief. This is partly due to duplication of effort and partly due to the time required by the two associates to coordinate their work. Partners therefore have an incentive to assign the largest justifiable number of associates to a case in order to create the largest possible number of billable hours.

Observation: Most clients are businessmen and already know all these things. That is why they often don’t like bills from lawyers, particularly bills with large amounts of time recorded by attorneys in the same firm talking to each other.

Law firms have spent large amounts of time and money on computer and administrative systems to record billable time and have trained many clients to accept billable time as the sole basis for fees, so changes are unlikely in the near future. However, lawyers interested in alternative billing methods should see Beyond the Billable Hour, edited by Richard C. Reed and published by the ABA Section of Law Practice Management (1989).

Attribution

There is a joke among managers which is intended to show the problems which occur when a single business factor dominates decisions. The joke is that a business has been suffering from flat profits, and so the president decides to hire a new advertising agency. The new agency designs and carries out a new ad campaign, and sales increase. Unfortunately, profits go down, not up. The president therefore fires the ad agency and hires another ad agency.

More and more law firms now recognize the value of new business, and attorneys who can bring in new clients are important to a firm. Unfortunately, most of these legal “rainmakers” are not satisfied with increased compensation, but have demanded (and received) increasingly larger roles in the management of their law firms. The net effect is about the same you would expect if General Motors were run by the car salesmen. Disproportionate attention is focused on the things the rainmakers know and do best, such as bringing in new clients, and in things which serve the interests of the rainmakers, such as bringing in new clients which increase the attribution of the rainmakers. Relatively little time, attention, or firm resources may be allocated to things the rainmakers may do not do well, such as maintaining the quality of legal services, financing the practice, recruiting and training new lawyers, employee relations, automation, or any of the many other problems affecting law firms. This may weaken the long term (or even short term) profitability of the firm.

An attribution system can have two other adverse effects on a firm. The profitability of the firm may be adversely affected if the clients brought in by the major rainmakers are not in the practice, geographic, or economic areas most profitable to the firm. The attribution system might also become a self-perpetuating system in which the increasing importance of a lawyer provides the political leverage necessary to increase his importance, stifling or alienating other partners important to the firm.

The increased attention and importance attached to bringing in new business and “attribution” is, therefore, not necessarily business-like, and will not necessarily make a firm more profitable.

Firm Instability

The increasing instability of law firms is a corollary of the dual roles of the partner as both an owner and an employee.

In a free market economy, employees will always come and go based on market value. If an employee is offered a better salary by another employer, the employee may leave and go to work for the other employer. There is, therefore, always some instability in business organizations. However, in most business organizations, the employees may change, and even the management (officers) of the organization may change, but ownership remains relatively constant.

Law firm partnership shares are based primarily on the value of the services of the partner, not capital contributions, so partners can “shop” their services (or clients) to the highest bidder, just like other employees. Therefore, all compensation disputes involve a risk of partial (or total) partnership dissolution, and the movement of partners from firm to firm is a change in the ownership of the firms, as well as the work force of the firms.

Good management requires an investment of time and money and the investment does not necessarily pay immediate dividends. Like a capital investment, the benefits of good management may be realized only over an extended period of time. The owners of a corporation or other business organization will expect to see the results of good management eventually. However, the partners who own law firms have come to see their positions as primarily those of employees terminable at will, rather than owners of a capital investment. This means that the partners will invest time and effort only in those things which are portable. Close contacts with clients and good legal skills can be taken to another law firm, but good employee training, efficient organizational operations, sound financial practices, and other types of good management cannot be picked up and carried away. (Whether substantive systems, such as legal forms or checklists, can be moved from firm to firm depends on issues of intellectual property rights beyond the scope of this article. However, it is possible that things which can be photocopied or copied onto a computer diskette are portable, at least as a practical matter.) There is, therefore, a disincentive for partners to invest in good law firm management.

Unless lawyers can develop partnerships which promote institutional stability and a sense of institutional loyalty, those partnerships will not be well managed.

The Legal System

The very nature of the legal system makes it difficult for lawyers to cooperate and work efficiently with each other, or with non-lawyers.

The Adversary System

Law is an adversary system, and the attitudes of the system affect the attitudes of the lawyers within it.

After a long day (or a long week) of arguing with opponents in court or negotiating with the other parties in a commercial transaction, a lawyer will return to the office to meet with his or her partners. Unable to psychologically “shift gears” or “shift roles”, the lawyer will continue to think and act like an adversary, and will proceed to argue with his or her partners or negotiate with them instead of cooperating with them.

Professional Ethnocentrism

While litigators who specialize in medical malpractice do not often try to perform surgery, the same sense of modesty is not shared by labor lawyers, commercial litigators, and other corporate lawyers, all of whom feel competent to make business decisions for which they have no training and, in most cases, no aptitude. There are several factors which may contribute to this attitude.

One factor is the attitude of law schools. In law school, lawyers are led to believe that what they are learning is very important, very difficult, and very special. The study of law goes back hundreds of years and has engaged some admittedly brilliant minds. The decisions of courts, and the constitutions and statutes framed by lawyers, have changed the course of nations, major corporations, and the rights and lives of most citizens. By contrast, therefore, every other profession or occupation becomes less important, less difficult, and less special. This makes it difficult for lawyers to have respect for, or consult with, professional managers.

As noted above, law school curriculums are also academic and devoid of any mention of the practicality of a legal practice. Having gone through their formative years in an environment in which the ability to add and subtract, or cooperate with their peers, were not particularly valuable skills, lawyers may be excused if they do not place a high value on those skills after graduating.

Another potential source of the “legal ego” lies in the nature of legal representation. In a lawsuit or a business negotiation, lawyers are often required to learn new facts and concepts, and learn them quickly. In order to cross-examine the defendant’s medical expert, a litigator may need to learn medical terminology and medical concepts. In order to negotiate reasonable work rules during strike talks, a labor attorney may need to learn enough about the client’s business to know what rules the client can live with and what rules will be unworkable. When a lawyer succeeds, the lawyer may become very impressed with his or her mental skills and perhaps feel a little superior to the so-called experts who have worked so long acquire the same knowledge the attorney acquired in a few hours.

For whatever reason, most lawyers have great respect for themselves and for other lawyers, and very little respect for other professions or vocations. It must therefore come as an insult to a partner with years of experience practicing law to suggest that he or she is not competent to manage his or her own law firm. Admittedly, the firm now has 40 partners, 60 associates, and 120 staff positions, annual gross income in eight figures, offices in three states, and $1.5 million in computer hardware and software, while the partner has never balanced a checkbook, but it simply can’t be that difficult. It’s all just a matter of common sense, right? There’s surely no need to hire some outsider who has only an undergraduate degree from a state school and who will earn more than any associate just to do what amounts to bookkeeping?

Lawyers will never be able to manage themselves, or allow anyone else to manage them, until they have learned that the law is not the source of all knowledge, that lawyers are not inherently able to solve all problems, that the problems of law firms are not unique and not beyond the scope of accepted management theory, and that professional managers have valuable skills and knowledge which deserve attention and respect.

The Crisis Addiction

Legal problems are often crisis problems, and the time demands of legal representation may lead lawyers to ignore management issues. In the eleventh hour of a trial, a settlement, or a negotiated settlement, there may be no room for any discussion, consideration, or distraction other than the matter at hand, and certainly no time for a decision on the adoption of a new office procedure.

More importantly, many lawyers, and in particular many important and therefore influential lawyers, actually thrive on that type of total concentration, and cherish their roles as auteurs as much as a skilled surgeon or a prima donna. In the courtroom, the client may be financially ruined or imprisoned by an adverse decision. In the negotiating room, fortunes may be won or lost on the outcome of negotiations. Can any lawyer who has experienced the heady thrill of that kind of brinkmanship ever again be satisfied with the boredom of a partnership committee meeting? Lawyers are therefore often unable or unwilling to tolerate the daily and petty distractions of routine office management.

Closure

Most attorneys are consulted only when something goes wrong, or a specific transaction is contemplated. For that reason, most attorneys see controversies or negotiations as something with a beginning, a middle, and an ultimate end. Whatever the resolution of a matter may be, whether it is a judgement, contract, or tax return, it is eventually completed, filed, and moved into storage. One way or another, all matters achieve some sort of closure.

Attorneys really see only small parts of the lives of individuals and businesses. An attorney may advise a client to change a part of the client’s written employment policies, and may advise the client on how to implement the change. In most cases, that will be the end of the matter for the attorney. For the client, however, the work has just begun. The new employment policy must be remembered and enforced day after day, week after week, month after month, and year after year until something happens to require a revision in the policy. Management is, therefore, not a decision or an event, but a constant process of planning, implementation, evaluation, revision, and replanning. Attorneys expect to make decisions and then move on to something else. They do not expect to take small steps or to monitor a situation over an extended period of time.

The desire for decisive solutions becomes particularly obvious, and particularly absurd, in the area of automation. A firm of litigators which has never progressed past electric typewriters may look to automate. However, they will not be content to begin installing some PC’s as word processors, planning to progress later on to a networked solution for other applications. No, they want it all. They want a fully-automated, state-of-the-art, turn-key, no-additional-software-will-ever-be-necessary solution. The result is often disappointing, if not a disaster.

Other business decisions of lawyers may become disasters due to a lack of attention to the process of management. A decision to open a branch office in another city, or begin a new practice area, may be a good decision on paper, and made with the best of intentions, but the office or practice area may fail unless someone monitors the day to day progress of the operation and does whatever is necessary every day to make the operation a success.

Attorneys will never understand or appreciate management until they can stop thinking of decisions and results and start thinking of long term goals and the step by step processes which will be needed to reach those goals.

The Good News

Not every lawyer or every law firm enjoys all of the character traits I have described, but there are enough lawyers in enough law firms with enough of these traits to assure me that law will not be practiced as a business any time soon.

What is the good news? The good news is that things have gotten worse. Competition among law firms for clients is greater than ever. Clients are more critical consumers, spending more time questioning law firms about their services and about the size and nature of their fees. Associates have also gotten to be more sensitive to qualitative issues such as quality of life and the psychological demands (and perhaps rewards) of a legal practice. Law firms are being squeezed as the economic and qualitative demands of clients, partners, associates, expanding technology, and increasing operating expenses place ever greater pressures on law firm profitability.

Sooner or later, something is going to give. Some lawyers, or some law firms, are going to start managing their practices in new ways, with new techniques and new attitudes, and will attract large numbers of clients and associates. Other law firms will either learn from them or dissolve.

Well, at least one can hope.