Legal Risks of AI for Health Systems and Providers in NY

Artificial intelligence is everywhere now, including in the healthcare sector. There is no avoiding it or hiding from it. While these tools can be significant revenue drivers and process optimizers, they also create significant legal risk when utilized improperly. Use of AI brings many regulatory and compliance challenges to the front, and you need to be ready to manage it properly.

The attorneys at Daniels, Porco & Lusardi, LLP help you create compliant strategies for AI use in health systems. Avoid the common pitfalls of AI use in the healthcare sector to reduce risk while properly utilizing this new technology.           

Regulatory Scrutiny Under New York’s Healthcare Laws

AI tools used in diagnosis, treatment planning, or patient treatment can trigger New York’s existing laws.

Key risks include:

• Unlicensed practice of medicine if AI tools influence clinical decisions without proper oversight
• Corporate Practice of Medicine (CPOM) violations when AI vendors exert control over clinical workflows
• Department of Health (DOH) review for AI systems integrated into Article 28 facilities
• Professional misconduct exposure if clinicians rely on AI without independent judgment

New York regulators expect providers, not vendors, to maintain full responsibility for clinical decisions.

Liability for AI‑Driven Clinical Errors

AI tools can misdiagnose, mis‑triage, or generate flawed recommendations. When that happens, New York providers may face:

• Medical malpractice claims
• Vicarious liability for errors in AI workflows
• Negligence claims for failing to supervise or validate AI recommendations

HIPAA, Data Privacy, and New York’s Expanding Data Laws

AI systems require large volumes of data, often including protected health information (PHI). This creates heightened privacy risks under:

• HIPAA
• New York’s SHIELD Act
• 42 CFR Part 2for substance‑use treatment data
• State breach‑notification laws

Common risk areas include:

• AI vendors using PHI to train their models without proper authorization
• Data flowing to third parties through APIs or cloud‑based tools
• Insufficient de‑identification or re‑identification vulnerabilities
• Patient‑facing AI tools that collect sensitive information outside HIPAA’s scope

Knowing who owns the data and where it is going is critical to avoiding liability when AI is involved.

Algorithmic Bias and Discrimination Risks

AI systems can unintentionally produce biased or discriminatory outcomes. For New York providers, this creates exposure under:

• New York Human Rights Law
• Federal civil rights laws
• Medicaid and Medicare program rules
• DOH and OMH oversight standards

Examples of high‑risk scenarios include:

• AI triage tools that deprioritize certain demographic groups
• Predictive analytics that reinforce historical disparities
• Automated scheduling or resource allocation tools that disadvantage protected classes

Billing, Coding, and Fraud Risks

AI‑driven revenue cycle tools can improve efficiency, but they can also create compliance problems if they generate inaccurate or inflated claims. Risks include:

• False Claims Act (FCA) liability
• Medicaid fraud investigations
• Overbilling caused by automated coding tools
• Documentation mismatches between AI‑generated notes and actual services

If AI tools “upcode” or produce documentation that does not reflect the clinician’s work, the provider, not the vendor, faces the enforcement consequences.

Contracting Risks With AI Vendors

AI vendor contracts often contain terms that shift risk to the provider. New York health systems should scrutinize:

• Data‑use rights and model‑training permissions
• Indemnification for clinical or operational errors
• Service‑level guarantees and uptime requirements
• Audit rights and transparency obligations
• Ownership of derivative data and analytics

Many AI vendors disclaim responsibility for accuracy, which is unacceptable in a regulated healthcare environment.

Governance and Oversight Requirements

New York providers should implement a formal AI governance framework that includes:

• Clinical oversight committees
• Bias and performance audits
• Vendor‑risk assessments
• Policies for clinician use and documentation
• Incident‑response procedures for AI failures

Regulators increasingly expect health systems to treat AI as part of their compliance infrastructure, not as a standalone technology.

Why This Matters for New York Providers

AI adoption is accelerating, but so are the legal risks. New York’s regulatory environment is uniquely strict, and providers who deploy AI without proper safeguards may face:

• Enforcement actions
• Malpractice exposure
• Data‑privacy violations
• Contract disputes
• Reputational harm

A proactive, compliance‑driven approach allows health systems to leverage AI’s benefits while minimizing risk.

Mitigate the Legal Risks of AI Use in New York Health Systems

A proactive approach to AI use in healthcare is essential to preventing legal risks. With the right attorneys at your side, you can better ensure compliance with complex healthcare laws and still derive the benefit of AI use in your processes.

The attorneys at Daniels, Porco & Lusardi, LLP are ready to help. Contact us today for a consultation.