Medical Necessity in Private Health Plans

Introduction

Under basic principles that guide the American health care system, decisions regarding which particular treatments, or the amount of treatment, are medically necessary are made by medical professionals in light of their patients' condition and desires, and the state of health care knowledge. Despite all the changes that have taken place in the health system over the past generation, medical professionals remain legally and ethically obligated to make treatment recommendations that reflect sound professional judgment and that are appropriate in light of their individual patients' needs.

At the same time, however, whether a patient ultimately will receive care considered necessary by a treating professional is influenced heavily by the availability of health insurance coverage to finance the recommended treatments (Hadley, 2002). The influence of health insurance on access to and utilization of behavioral health services is well documented and is a consequence of the high cost of treatment that frequently can involve expensive and (in the case of chronic conditions) long-term therapies (Buck, Teich, Umland, & Stein, 1999). For this reason, the coverage decisions made by health insurers and employee health benefit plans are fundamentally linked to the question of whether individuals will have access to health services that their treating professionals consider medically necessary and appropriate.

In the early years of the modern American health insurance era (said to date to the Second World War, when employer-sponsored group health insurance became increasingly common), insurers paid for whatever health services treating physicians recommended (Rosenblatt, Law, & Rosenbaum, 1997; Rosenblatt, Rosenbaum, and Frankford, 2002). As health care costs escalated, first public and then private health insurers introduced utilization review techniques. These techniques were designed to verify coverage and to independently assess the treatment recommendations made by health professionals. These early utilization review decisions, as they were known, were made retrospectively (after the fact). Subsequent analyses of these early cost containment efforts led to the conclusion that retrospective review was ineffective; as a result, insurers increasingly turned to prospective and concurrent review techniques.

Prospective and concurrent reviews soon became an industry standard, particularly with the growth of managed care. In managed care-style insurance, coverage is either entirely or partially conditioned on a patient's receipt of care from a medical professional who has been accepted into the plan's treating provider network and whose covered treatment recommendations are subject to the standards set by the plan. An insurer or health plan can exercise control in one of two ways. The intermediary might in the first instance issue general treatment guidelines that are supposed to guide physicians in their treating recommendations. Alternatively, the treating professional may submit specific recommendations for treatment to the insurer or health plan on behalf of an individual patient. Both approaches typically are present in any health plan; that is, a treating professional may apply standard guidelines to many patient treatment decisions (Domino et al., 1998; Institute of Medicine, 1990; Manderscheid, Henderson, & Brown, 2001; Varble, 2001), reserving patient-specific requests for treatment to a relatively small number of cases that do not appear to fit the parameters of such standard guidelines (e.g., patients with co-occurring conditions that place them out of standardized norms or particularly complex versions of a recognized health problem).

This analysis, prepared for the Substance Abuse and Mental Health Services Administration of the U.S. Department of Health and Human Services, focuses on medical necessity in health insurance as the concept applies to utilization management decisions by health insurers and employee benefit plans in specific patient cases. This analysis does not consider other factors that can influence access to coverage in the modern insurance system, such as the quality of the general treatment guidelines used by insurers or the contractual limitations on coverage that can exclude certain treatments altogether, no matter how medically necessary (a phenomenon that has received enormous attention in the case of behavioral health as a result of the mental health parity debate). Nor does this analysis consider limitations on access to care that can result from restrictions on the size and availability of a provider network established and used by an insurer or health plan.

Instead, this analysis focuses on those situations in which, in response to the perceived needs of an individual patient, a treating health professional recommends treatment that may require specific approval of coverage by an insurer or health plan. This analysis examines both the standards and procedures that insurers and health plans use explicitly to determine whether recommended services are necessary in specific instances; it does not address the process involved in determining the amount of treatment deemed appropriate.

The structure of this review is based on the assumption that, in determining whether a recommended course of treatment is medically necessary under the terms of the insurance contract, the definition of medical necessity and the process by which the contract is applied to a particular patient are of equal importance. In assessing the process of decisionmaking, this report considers the qualifications and impartiality of the reviewer as well as the extent to which the reviewer considers the specific condition of the individual patient, not merely what treatments are generally recommended in preset treatment guidelines. The procedural aspects of coverage decisionmaking are critical because, as this analysis shows, medical necessity definitions are broad and ambiguous and vest insurers with a great deal of discretion over the treatment of individual patients. How an insurer goes about deciding the necessity of care is a particularly important question in the case of patients whose conditions are further complicated by the existence of co-occurring health problems or a history of failure under standard treatments.

This review examines a broad range of information, including peer-reviewed literature, judicial decisions construing contract terms, legislation, and documents developed by insurers themselves. Much of the evidence regarding medical necessity presented in this analysis is found in legal documents, including judicial decisions in cases brought by patients whose requests for treatment have been denied, as well as in investigations conducted and actions brought by State attorneys general and insurance departments in response to evidence of systemic problems in obtaining access to insured coverage as a result of ongoing medical necessity denials.

Judicial decisions and official investigations frequently involve complaints regarding access to behavioral health coverage. This is probably not surprising, given the cost of long-term treatment for health conditions related to mental illness and substance abuse disorders as well as evidence of major efforts by insurers over the past decade to achieve significant reductions in behavioral health spending (DHHS, 1999). Because of the lengthy and costly process of pursuing a case against an insurer or health plan, reported judicial decisions are rare. (Indeed, in great part in response to the difficulty of pursuing legal claims against health plans that have denied coverage, Federal and State lawmakers have sought in recent years to establish simpler, less formal, and less costly external appeals procedures to challenge insurer denials) (Dallek & Pollitz, 2000).¹ At the same time, it is in these official sources of evidence that one is able to see most clearly the terms of the contract (which outside a legal setting is a confidential and closely held document) as well as the process by which an insurer or health plan administrator reached a decision. Medical necessity determinations that do not rise to the level of appeal or complaint are beyond the scope of this analysis.

Research Methods

The following research methods were used to conduct this review:

Completing a literature review and synthesis of findings regarding the definition and process of delimiting medical necessity in a behavioral health context. Sources included the peer-reviewed medical and health services literature on medical necessity, as well as judicial decisions, Federal and State laws, illustrative contract terms, accreditation standards, materials gathered from the industry, and State-level investigations and legal settlements regarding medical necessity practices.²
Convening a working group of 20 experts for a half-day consultation (May 7, 2002) on issues related to medical necessity in behavioral health care to provide comment and feedback on the draft literature review. Experts included professionals in clinical practice (e.g., psychiatry, psychology), employer purchasers of health care insurance, officials with managed care accreditation organizations, representatives of consumer advocacy organizations, and individuals with expertise in insurance and health plan regulation at the State and Federal levels. Officials from three large managed care organizations who were not able to attend the May 7 meeting were later interviewed by telephone. Officials from two State attorneys general offices (New York and Connecticut) and a State bureau of insurance (Maine) were interviewed by telephone to provide additional insight for the section on legal settlements and investigations. This report was refined based on the expert consultation, feedback, and assistance provided by these advisors.

Structure and Organization of the Review

Part 1 summarizes peer-reviewed and professional literature on medical necessity, and considers the views and recommendations of researchers and analysts regarding both the definition of medical necessity and the structure of the review process.

Part 2 describes industry practices as evidenced by individual insurer practices and accreditation standards, as well as judicial opinions and official investigations that have examined contract terms and decisionmaking procedures.

Part 3 reviews State insurance laws and examines in detail not only the definition of medical necessity adopted by States as part of their insurance regulation laws, but also the procedural elements of their independent review statutes.

Part 4 examines two major sources of law relevant to understanding the medical necessity review process in the private insurance context-the bodies of regulations that govern private employee health benefit plans covered by the Employee Retirement Income Security Act (ERISA) and standards applicable to medical necessity determinations and appeals under the Federal Employee Health Benefits program.

This review concludes with a synthesis of findings and a discussion of their implications for coverage of behavioral health services.

Tables 1-9 and Appendixes A-D can be found at the end of this review.

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