Computer millennium bug’ can cause major problems
By Vito C. Peraino, Esq.
Hancock Rothert & Bunshoft LLP
Los Angeles
Your health care system’s computer has a bug. Not maybe, but definitely. Your facility’s computer has the bug because everyone’s computer has the bug. The condition is critical but treatable. If left uncorrected, however, it will lead to computer dementia and death. Treatment is expensive and requires extensive time to administer. Failure to act now undermines all known cures. Failure to act prudently means you are risking lawsuits, numerous claims, and the viability of your entire organization.
The bug is known variously as "the year 2000 problem" and "the millennium bug." It arises from the failure of computers to recognize the year 2000 properly. Almost all computers have been programmed to utilize only two digits for a year. So, for instance, the year 1997 is represented by the digits "97." The computer just assumes that the first two digits are "19." That works fine until the year 2000, when the computer will continue to assume that the first two digits are "19." The result is that instead of recognizing the date as 2000, the computer will assume that the date is 1900. It will base all date-sensitive calculations on this incorrect premise.
The problem seems ridiculously obvious and simple, but for a health care system computer, the results can be devastating. The problem undermines all date-sensitive calculations that an infected computer undertakes. Financial information, employee records, patient information, insurance claims processing, inventory dates, work schedules, pension benefits, banking records, securities transactions, and any other type of calculation that is date-sensitive will be affected. From a legal perspective, the consequences are far-reaching.
Unfortunately, the problem is not limited to mainframe computers. Now that many machines contain some type of computer, they also may be affected at the turn of the century. This problem has been verified in certain heating and air- conditioning systems, elevator systems, personal computers, security systems, PBX systems, and other machinery. All systems that use these so-called embedded chips must be checked and certified as compliant with dating beyond 2000.
The problem can be eradicated, but it will not be cheap or easy. The total worldwide cost of year 2000 remediation will range from $300 billion to $600 billion, exclusive of litigation costs. Federal, state, and local agencies and programs, including Medicare and Medicaid, are behind schedule and underfunded. Many private companies are only beginning to address the problem a problem that takes substantial time to fix and for which programming talent is drying up. In most cases, managers who begin a year 2000 project encounter the following problems:
1. The project is more expensive than originally budgeted.
2. It is more complicated than expected.
3. It takes more time than initially thought.
The first and most obvious area of potential liability lies in lawsuits that may be brought against health care facilities that fail to solve their millennium bug problem. These suits will be varied and will depend on the types of injury caused. They may arise from the inability of the institution to honor its contractual obligations. They may arise in tort, if system or mechanical failures cause injury to patients. Or legal difficulties could arise in the guise of consumer fraud, if billing and credit records are corrupted and compromised.
The bottom line is that the best defense against a millennium bug lawsuit is to solve your year 2000 problem.
Financial reporting in serious jeopardy
Equipment failures present a significant unknown in the hospital arena. The ubiquitous use of computer and electronic equipment in medical diagnosis, monitoring, and treatment raises the risk that equipment failures may injure patients. Embedded chip problems are particularly difficult to find and test. Often manufacturers simply do not know whether their equipment is compliant. A uniform policy of inquiry to equipment manufacturers is recommended as part of a proactive year 2000 policy.
The potential millennium bug problem is most insidious in relation to financial reporting. A typical financial statement is loaded with date-sensitive data. Accounts receivable, inventory, debt, leasehold obligations, notes payable, and, depending on the institution, several other reportable items all involve date-sensitive calculations. The ability to generate an auditable financial statement is critical for companies that hope to borrow funds or are required to provide public financial disclosures.
For publicly traded companies, the problem is more serious. Directors and officers will need to assess the need for disclosure of year 2000 issues on their financial statements. The federal Securities and Exchange Commission (SEC) recently has provided some guidance on this topic. In deciding on the "nature of the disclosure" to be made, the SEC recommends that "consideration should be given to whether either the costs of addressing the problem or the consequences of incomplete or untimely resolution of the problem represent a known material event or uncertainty that would affect future financial results."
The SEC seems to suggest that a prospective analysis of a year 2000 failure needs to be assessed, and, if applicable, disclosed as part of its 10K filing requirement, Management’s Discussion and Analysis of Financial Condition and Results of Operations. For public companies, failure to make a proper disclosure raises the specter of shareholder litigation.
Often the board also carries fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA) with respect to the integrity of employee pension plans. The year 2000 problem raises the issue of the board’s responsibility to assure that employee investments are protected and that the plan’s administrator will be in a position to undertake its duties.
Unfortunately, the millennium bug poses even greater risks. Even for companies that diligently address their problems, liabilities still lurk. If key service providers are unable to deliver critical services to a hospital, the hospital may be at legal risk. These may include payroll vendors, banks, and laboratories. It is critical for every company to ensure that their key vendors are notified of the need for year 2000 compliance. This simple step may help avert problems. Also, if the situation deteriorates, a good faith effort with vendors will position the institution to defend against potential litigation.
As noted earlier, year 2000 budgets place a heavy burden on operations. This is exacerbated by the accounting treatment required for year 2000 expenses. The Financial Accounting Standard Board Emerging Issues Task Force strongly suggests that year 2000 expenses be taken in the year incurred, instead of amortized. This treatment will force costs to the bottom line, having an impact on profitability. This double whammy a huge expense coupled with immediate recognition raises the issue of whether all year 2000 costs must be internalized.
My law firm recommends that institutions undertake a legal audit to determine whether there are potentially responsible parties for the year 2000 problem. Legal action against consultants and vendors may need to be considered when systems do not meet their warranted standard. Even where no express warranty was provided, implied warranties often place actionable duties on the part of vendors and consultants.
Because institutions are spending significant sums today, damages are currently being incurred. In some instances, the clock for the statute of limitations may be running and the right to obtain recompense may be waived if not promptly pursued.
The year 2000 problem is real, it is expensive, and it may result in a major legal risk for unwary institutions. Implementation of an immediate legal strategy to avoid liability and recoup costs is imperative as the legal waters grow more menacing.
With aggressive treatment and proper medication, your computer systems will survive the millennium bug. But you must act now.
[Editor’s note: Vito Peraino, Esq., with Hancock Rothert & Bunshoft LLP, is a year 2000 specialist in Los Angeles. If you would like more information about the year 2000 legal risk, contact him at (213) 623-7777. Or e-mail him at [email protected]. Additional information is available at the firm’s Web site: http://www.hrblaw.com.]
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