Medical Necessity in Private Health Plans

State Law Regulation of Medical Necessity

In their capacity as insurance regulators, States have developed an extensive body of law related to the insurance industry. State laws fall into two basic categories: laws that regulate the actual content of the insurance contract itself (e.g., mandated benefit laws); and laws that regulate other aspects of the business of insurance (e.g., consumer protection laws, antidiscrimination law, corporate law, laws providing for oversight of insurance practice, and administrative and judicial review of insurer determinations). This section examines two types of State insurance laws that address medical necessity: insurance contract statutes and laws that establish independent review procedures for medical necessity determinations.

Laws That Regulate the Content of Insurance Contracts

In addition to detailing specific classes of benefits and services that must be included in a contract of insurance sold in the State (e.g., pediatric immunizations, in vitro fertilization, inpatient psychiatric care),²⁰ a number of States have attempted to define medical necessity. This effort to define medical necessity by statute is relatively recent and tracks the growth of (and backlash against) managed care. It probably would be incorrect to view the evolution of medical necessity definitions in State law solely in the context of consumer protection. Indeed, codifying a medical necessity definition in statute actually might favor the industry, since once a statutory definition exists, a court cannot insert its own definition into the contract. Today it is still relatively common to find insurance contracts that authorize an insurer to decide issues of medical necessity without a precise definition of the term.²¹ In the face of this silence, a court can fashion its own definition under common law principles of jurisprudence.²² In so doing, a court might be inclined to use principles of professional liability law to arrive at a definition and adopt a standard that measures the recommended treatment against accepted standards of professional practice, as established through the testimony of experts.²³

The absence of a medical necessity definition can be as harmful to insurers as it might be to patients. In this situation, it would be in the interest of the industry as well as consumers to adopt a definition, particularly if the definition adopted is multidimensional, giving the insurer discretion to select among competing schools of thought in accordance with criteria other than whether the treatment meets professional standards of practice.

Seventeen definitions of medical necessity were found in the course of this review. Table 4 sets forth these definitions, which vary considerably in length and scope. For example, at one end of the spectrum, Massachusetts defines medical necessity as "health care services that are consistent with generally accepted principles of professional medical practice."²⁴ At the other end, Hawaii offers:

A health intervention is medically necessary if it is recommended by the treating physician or treating licensed health care provider, is approved by the health plan's medical director or physician designee, and is: (1) For the purpose of treating a medical condition; (2) The most appropriate delivery or level of service, considering potential benefits and harms to the patient; (3) Known to be effective in improving health outcomes; provided that: (A) Effectiveness is determined first by scientific evidence; (B) If no scientific evidence exists, then by professional standards of care; and (C) If no professional standards of care exist or if they exist but are outdated or contradictory, then by expert opinion; and (4) Cost-effective for the medical condition being treated compared to alternative health interventions, including no intervention. For the purposes of this paragraph, cost-effective shall not necessarily mean lowest price.²⁵

It is evident that Hawaii's definition approximates those found in modern industry practices, while Massachusetts's definition tracks the unidimensional standard that limits the authority of the industry to choose among equally appropriate types of treatments. Of special note is the fact that Hawaii's definition, enacted in 2000, is virtually identical to the prototype definition proposed in 1999 by Singer et al. (see Part 1 and Table 1).

Independent Review Statutes

By 2002, 40 States and the District of Columbia had enacted external review laws that allow enrollees to appeal to an independent review organization (IRO) health plan decisions to deny, reduce, or terminate care. Nearly half of these States have drafted regulations pursuant to their IRO statutes.²⁶ Table 5 lists the statutory and regulatory citations of these laws.

External review laws are a recent development. Only Michigan (1978) and Florida (1985) had external review statutes prior to 1990. By 1998, the number of statutes had grown to 13 (Dallek & Pollitz, 2000), with the remaining 28 statutes enacted within the past 4 years.

IRO statutes and administrative regulations raise, and try to answer, many questions. This section focuses on questions in three critical areas that courts consider to be basic issues of fairness in decisionmaking: (1) whether the States are tailoring statutes specifically to address appeals of denials involving behavioral health care; (2) the key procedural elements of the statutes, including who may serve as an IRO and the qualifications of IRO reviewers (including the possession of expertise relevant to the case under review); and (3) how much deference the IRO must give to the initial decision and whether new evidence may be introduced during the IRO review. In addition, the statutes were reviewed to determine whether they specify who has the burden of proof in the appeal (i.e., whether the insurer must present evidence defending its initial decision or the claimant must present evidence to challenge it). Only one State, Maryland, addresses the specific burden of proof and places it on the MCO to demonstrate that its initial adverse decision was correct.²⁷

In States that regulate the definition of medical necessity under their insurance content statutes, the IRO presumably would be guided by this definition. Among States that do not have a definition of medical necessity in their insurance laws but that have enacted IRO statutes, seven include a definition of medical necessity in the IRO statute itself. Table 6 lists these States and the definition of medical necessity that they have adopted for IRO purposes.

Only two States, Pennsylvania and Vermont, specifically mention behavioral health care in their IRO statutes.²⁸ Table 7 sets forth the relevant provisions from State law. Pennsylvania's statute identifies licensed psychologists as qualified reviewers; Vermont specifies an independent review system for appeals involving mental health services and substance abuse treatment. While most State IRO statutes use broad language that could include a range of providers to review behavioral health determinations, the Vermont statute is unique in its explicit recognition of behavioral health reviewers.

The independent reviewer: Who, how chosen, and what qualifications? Central to the process of obtaining external review are questions about who performs the review, how the reviewer is chosen, and what qualifications the reviewer possesses. Table 8 sets forth information on the review process. All 41 statutes provide some detail about what entities qualify to perform IRO functions. Most States require that the IRO obtain certification or a license from the State insurance or health department, and many States use accreditation by a national accrediting organization as a proxy for State certification.

Thirty-seven of the 41 States require that reviewers used by the IRO have appropriate license, board certification (if applicable), and experience in the medical condition or health care service under review. Of the remaining four States, three do not specify such a requirement, and the last makes utilizing relevant expertise an option "when necessary," but does not define when that is or who makes that determination.

In seven States, the MCO chooses the independent review organization to perform the review (either from an approved insurance/health department list or from any qualified IRO). The insurance or health departments assign the reviewer in the remaining States. A number of States require a rotation of the IRO so no MCO is reviewed by the same organization for every case.

Thirty states disqualify an IRO from serving as a reviewer if the entity has financial or other conflicts of interest with the parties to the case. Nine of the 11 remaining States do not explicitly prohibit conflicts, and one State requires only that the conflict be disclosed.

Standard of review and permissible evidence: Table 9 addresses the issue of standard of review, identifying those States in which review is de novo (i.e., brand new) and those in which additional evidence of necessity can be submitted. The standard of review specifies how much deference, if any, the IRO should or must give to the prior decision made by the MCO. In a de novo review, the IRO is not bound at all by an earlier decision and no deference is required. Six States accord this absolute review power to their IROs. Few States specify any level of review short of de novo, and the majority of State IRO statutes and regulations are silent on what standard of review to apply to prior decisions by the MCO.

Twenty-seven of the States permit the enrollee requesting the review to submit additional evidence for consideration by the IRO. The statutes range from allowing specific additional medical evidence to allowing any evidence the enrollee considers relevant to the appeal. Three States allow the enrollee to request or attend a review hearing.

Additional process questions: The statutes and regulations compiled in this review contain additional process questions worth noting. Most States require an enrollee to exhaust an MCO's internal appeals process before filing a request for external review, but there are notable exceptions. Some States require a preliminary review by the department of insurance or IRO to determine whether the request is eligible for review. Many States require the enrollee seeking review to pay a filing fee. Most States require the MCO to pay the cost of each appeal, but other States have assessed a fee for each MCO operating in the State to cover the costs of the entire appeals system. Almost every statute includes detailed timelines for filing requests for appeal and responses, and some States require that the appeal be filed on specific forms. While none of these process questions answer large questions, taken together, they allow an examination of the burdens that enrollees face when attempting to invoke the right to an external review.

Viewed as a whole, State independent review statutes suggest a desire on the part of States to afford insured persons a right to a second opinion in the case of medical necessity determinations. While State insurance law contains minimal regulation of insurers' internal utilization management and internal appeals processes, these statutes suggest that States are willing to establish minimum standards for how insurer decisions are to be reviewed, including absolute review powers, impartial reviewers, and the authority to consider new evidence in reviewing a medical necessity determination. Few IRO statutes contain independent definitions of medical necessity, although the State's content definition presumably would apply where one exists.

The power of the procedural standards to support the overturning of a denial may be somewhat limited, however. For example, if the definition of medical necessity gives the insurer discretion to select from among several professionally acceptable courses of treatment, one would expect an independent reviewer to uphold the insurer's decision unless it was not supported by the evidence (i.e., the insurer's choice among selected treatments was not grounded in sufficient evidence to justify a rejection of other choices).

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