Medical Necessity in Private Health Plans

Relevant Federal Laws Pertaining to Medical Necessity Reviews

This part considers two sources of law relevant to medical necessity determinations. First, two sets of Federal standards governing employee health plans are examined. The first set of standards is embodied in the regulations promulgated by the Department of Labor in 2000 that set forth the "full and fair review" procedural requirements that all ERISA health benefit plans must meet. The second set is embodied in the standards governing medical necessity reviews that are currently in use by the U.S. Office of Personnel Management.

ERISA

The ERISA statute regulates health and welfare benefits for more than 140 million workers and their families (Rosenbaum, Frankford, Moore, & Borzi, 1999). ERISA requires every health benefit plan within its scope to provide adequate notice in writing to a participant when a claim is denied, "setting forth the specific reasons for such denial, written in a manner calculated to be understood by the participant."²⁹ In addition, ERISA affords a health plan member whose claim has been denied a "reasonable opportunity . . . for a full and fair review by the appropriate named fiduciary of the decision denying the claim."

In November 2000, the Department of Labor issued final regulations that revise the full and fair review requirements for appeals of denials of claims for health benefits, including both retrospective and prospective claims. These regulations became effective for group health plans on July 1, 2002. Although ERISA does not define medical necessity or provide a right to external administrative review,³⁰ these regulations establish extensive standards for internal reviews required in the case of health claims.³¹

The November 2000 regulations require ERISA-covered plans to "establish and maintain reasonable procedures governing the filing of benefit claims, notification of benefit determinations, and appeal of adverse benefit determinations."³² A plan's claims procedures must safeguard and verify that claims are made in accordance with governing plan documents and that plan provisions are applied consistently for similarly situated claimants.

The full and fair review regulations were intended to make the claims process "faster, fairer and fuller." With respect to the speed of the process, the regulations shortened the permissible time for initial claim decisions and appeals. Instead of 90 days under the prior applicable regulation, the November 2000 rule requires initial decisions in 72 hours for urgent care claims, 15 days for pre-service claims, and 30 days for post-service claims.³³ Health plans are allowed one 15-day extension for pre- and post-service claims. On appeals of denied claims, instead of 60 days under the prior applicable regulation, the new regulation requires decisions on appeals within 72 hours for urgent care claims, 30 days for pre-service claims, and 60 days for post-service claims. There are no extensions of time for health plans in determining appeals.³⁴

Under the "fairness" category, the regulation allows claimants more time to file an appeal (180 days instead of 60 under the prior regulation). The decisionmaker cannot be the same person who denied the initial claim or that person's subordinate. The claimant also has the opportunity to submit written comments, documents, records, and other information related to the claim, and the review must take into account all information submitted by the claimant (whether or not the information was considered in the initial benefit determination).³⁵

If the appeal involves a decision based on medical judgment, including whether an item or service was medically necessary, the health plan must consult with a "health care professional who has appropriate training in the field of medicine involved in the medical judgment." The health care professional must not have been involved with the initial decision or be a subordinate of the initial decisionmaker. Upon request, the health plan must disclose the identity of the health care expert it consulted. Health plans cannot require more than two levels of internal review of denied claims, and if there are two levels, both levels must be completed within the time frames required of one level.³⁶

The "fullness" category relates to improved access to information by persons appealing an adverse determination. As an initial matter, the plan must provide all plan members with a full description of the plan's claims and appeals procedures. Claimants appealing an adverse determination must have access to any information relevant to their claim upon request and free of charge. Relevant information includes any information the health plan relied on in making the initial decision; any information submitted, considered, or generated while making the initial decision; and any statements of policy or guidance concerning the denied treatment or benefit, even if such documents were not relied upon in making the decision.³⁷ In addition, when a health plan denies a claim based on a protocol or guidelines, the plan must disclose such reliance and inform the claimant that a copy of the protocol is available upon request. Similarly, when the denial is based on medical necessity, the rule requires the plan either to explain the scientific or clinical judgment used in applying the plan's terms or to include a statement that such an explanation will be provided free of charge if requested.³⁸

With disclosure of protocols and explanations of the application of medical necessity, the Federal full and fair review regulations exceed the reach of State utilization and independent review statutes and regulations.

Office of Personnel Management Standards: FEHBP

Another relevant Federal law establishes separate standards for reviewing claims involving the denial of medical necessity for Federal employees. The Federal Employees Health Benefit Plan (FEHBP)³⁹ provides health insurance coverage to more than nine million Federal employees and their dependents. The U.S. Office of Personnel Management (OPM), which contracts with health plans to serve Federal employees, administers the FEHBP.

Neither the FEHBP statute nor its implementing regulations define "medical necessity" or how health plans are to make such determinations. The FEHBP regulations, however, do offer enrollees a right to appeal to OPM if the health plan denies a claim a second time after reviewing its first denial or if it fails to respond to an enrollee's request for reconsideration of a claim's denial.⁴⁰ The enrollee must exercise the right to appeal within 90 days of the health plan's decision, or within 120 days of the request for reconsideration if the health plan failed to respond. In reviewing the claim denied by the health plan, OPM may (1) request that the claimant submit additional information; (2) obtain an advisory opinion from an independent physician; (3) obtain any other information it believes is required to make a decision; or (4) make its determination based solely on the information the claimant submitted with the request for OPM review.⁴¹ Neither the OPM statute nor its implementing regulations specify the standard OPM is to use in reviewing denied claims. If a claimant wishes to sue, the suit must be filed in Federal court to review OPM's final action on the claim, but the claimant is limited to ERISA remedies. The suit must be brought against OPM, not the health plan or its contractors, and a recovery in such a suit is limited to a court order directing OPM to require the health plan to pay the amount of the benefits in dispute.⁴²

Figure 5 presents the key elements of medical necessity review and compares ERISA procedures with those established by OPM.

Although the ERISA full and fair hearing regulations and the FEHBP provide further procedural safeguards to health plan enrollees, both have important limitations. The ERISA regulations do not contain a right to an external appeal, despite providing important additional access to information and better claims procedures not previously available. The FEHBP, limited to Federal employees, provides a right to appeal outside the health plan to the OPM or to Federal court if necessary, but, as with ERISA plans, monetary damages are limited to payment for the cost of the denied benefit itself (i.e., punitive and "pain and suffering" damages are not available).

As a result of the modest reach of Federal law, the definition of medical necessity is still governed by the terms of the contract negotiated between buyers and sellers.

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