Medical Necessity

By Aaron Resar

      A patient’s ability to receive medical treatment is often determined by whether the treatment is medically necessary/a medical necessity. Medical necessity is usually a contractual term defined within an insurance policy.  It is the term most often used by health insurance companies in their policies when defining what procedures are and are not covered.  Medical necessity is an ambiguous term which cannot be easily defined, but rather, it must often be applied to facts in order to understand its meaning.  The term medical necessity will be heavily scrutinized in this essay in an effort to give you a better understanding of its use and importance.  However, like many terms that are best defined by fact patterns and situations, medical necessity is best defined by the approach, “I know it when I see it.” 

     The definitions of medically necessary and medical necessity vary widely among jurisdictions.  South Dakota’s definition of medically necessary has a list of five criteria that must be met in order for a service to be considered medically necessary.[1] 

      Medically necessary hospital services are services provided in a hospital which meet the following criteria:

(1) Are consistent with the person’s symptoms, diagnosis, condition, or injury;

(2) are recognized as the prevailing standard and are consistent with generally accepted professional medical standards of the provider’s peer group;

(3) Are provided in response to a life-threatening condition; to treat pain, injury, illness, or infection, to treat a condition which would result in physical or mental disability; or to achieve a level of physical or mental function consistent with prevailing standards for the diagnosis or condition;

(4) Are not furnished primarily for the convenience of the person or the provider; and

(5) There is no other equally effective course of treatment available or suitable for the person needing the services which is more conservative or substantially less costly.

A county shall rely on the attending physician‘s determination as to medical necessity of hospital services unless evidence exists to the contrary.[2]   

      Although the state of South Dakota has defined medically necessary, that does not mean it is the only definition used in South Dakota.  Since the issue of medical care coverage is primarily contractual in nature, the definition of medical necessity given by an insurance company can be quite different and it is usually the one applied in analyzing if a procedure is medically necessary.  In 2001, only eleven states of which South Dakota was not one, required that a standard definition of medical necessity be used in insurance contracts.[3]  Due to this lack of regulation in the area, medical necessity has numerous definitions and applications in South Dakota and across the country. 

     Although there are many definitions of medical necessity, they are all very similar in that they “define coverage by reference to a purely medical criterion such as: In accordance with generally accepted medical practice, widely accepted standards, or the medical standard of the community.”[4]  “This ambiguous criterion demonstrates the difficulty that contract drafters face in precisely defining the limits of plan coverage.”[5]  This ambiguity also has many consequences, the most obvious of which is litigation.  Since there is no exact definition of medical necessity, cases are likely to turn into a battle of experts trying to determine what “widely accepted standards” are.

Unfortunately for insurance companies, “ambiguity will be strictly construed against the insurer and in favor of the insured.”[6]  Although ambiguity is to be construed against insurers, it appears the term medical necessity has over time become more accepted and is being construed by courts less as being ambiguous.  As a result of this evolution, “medical necessity has gone from initially being used to ensure that providers were paid for services performed, to being used primarily as a tool to control the use of scarce resources [by insurance companies].”[7] 

     Criticism of current definitions of medical necessity is vast and has led to more detailed definitions that are much easier for a layperson to understand.  The problem with comprehensive and precise definitions is that they often exclude persons and ailments that normally would be covered under a less precise definition.  Part of the problem with precise definitions is that they do not account for technological advances.  A procedure can go from experimental to widely accepted very rapidly and a rigid definition will not adapt for this change leading to inappropriate exclusions of payment.     

     As stated earlier, regulation of the term medical necessity is very limited which can lead to variation.  This variation applies not only to the inclusion of treatments but also the exclusion of treatments.  If an exclusion applies to a treatment, it is not that the treatment is a medical necessity but an exclusion applies, that treatment is not a medical necessity.  The two most prevalent exclusions are the experimental procedures exclusion and the cosmetic surgery exclusion.

The experimental procedures exclusion is “an exclusion of experimental and investigative medical procedures, drugs or equipment on the grounds that they are not proved to be medically effective.”[8] A cosmetic surgery exclusion is an exclusion of surgical procedures whose “primary purpose is to improve, alter, or enhance appearance.”[9]  Cosmetic surgery exclusions are unique in that they take the cause of a particular condition into account when determining if treatment for it would be a medical necessity.[10]  As a general rule, if the surgery’s only purpose is cosmetic it is not medically necessary unless the condition was caused by some sort of accident.[11]  This approach can lead to identical conditions having different classifications resulting in one person receiving treatment while the other is left without.

In Aetna Life Ins. Co. v. Martin, a woman born with several birth defects including the absence of her right chest muscle was denied coverage by her medical insurance policy for a breast augmentation to make her right breast approximately the same size as her left one.[12]  The court held that the “surgery was merely cosmetic and that it was not for the prompt repair of a nonoccupational accidental injury, and further, that it did not improve functioning of a malformed body member.”[13]  The result in Berger v. Acting Commissioner, Division of Medical Assistance was quite different than that in Aetna.  In Berger, a 49 year-old Medicaid recipient received breast implants as part of her sex-reassignment.[14]  Although her initial breast implants were not paid for by Medicaid because they were not a medical necessity, their replacement after one had developed a leak and had to be removed.[15]  In both cases, the women had the same condition, but only the one that occurred due to an accident was held to be a medical necessity.

In addition to the experimental procedures exclusion and the cosmetic surgery exclusion, there are numerous other exclusions.  Many of these exclusion provisions provided in insurance contracts are nothing more than laundry lists of procedures and treatments that a policy will not cover despite the fact that they could otherwise be medical necessity.  No laundry list can be totally exhaustive and unlike the inclusionary aspect of the term medical necessity, they cannot be interpreted to adapt for technological advances, so these lists of conditions are ever changing.

One of the most unique exclusions that makes an otherwise medically necessary treatment not medically necessary is cost effectiveness.  Unlike other specific exclusions, cost effectiveness can be a bit ambiguous which opens it up to litigation.  Typical factors in determining cost-effectiveness are:

        -The intervention is furnished in the most cost-effective manner  that may be provided safely and effectively to the member.

-There is no other equally effective course of treatment available which is less costly.

-It provides the same or greater benefit at the same or lower cost, compared to the next best alternative.

-The benefits and harms relative to costs for the treatment represent an economically efficient use of resources for patients with this condition compared to alternative treatments.[16]  

     In 2001, only two states had addressed cost-effectiveness as a factor in determining medical necessity.[17]  Nevada requires insurance companies to use cost-effectiveness as criteria in making a medical necessity determination, while Minnesota prohibits it.[18]  As for the other forty-eight states, there is no regulation so insurance companies are free to treat cost-effectiveness as they wish with regard to their contractual definitions.[19]

     There is great confusion with regard to medical necessity and coverage for medically necessary treatments.  This confusion is found everywhere from consumers, to insurance companies, to regulators in the departments of health and insurance.  In a recent survey, regulators in the departments of health and insurance were asked to define medical necessity.  The results of this survey are somewhat disturbing in that responses varied greatly.[20]  Despite the confusion surrounding medical necessity, it continues to be the basis for coverage in the process of determining coverage called Utilization Review. 

     “Utilization review is a set of formal techniques used by a managed care plan or utilization review organization to monitor and evaluate the medical necessity, appropriateness, and efficiency of health care services and procedures. . .”[21]  In utilization review, health care professionals order services they deem to be appropriate for their patients.  They then submit those orders to the patients’ insurance company or appropriate governmental body in the case of Medicaid or Medicare, where utilization review is performed.  During the utilization review process, the hospital may be required to provide documentation such as medical records and physicians’ orders to support that the request is a medical necessity by the insurer’s definition.[22]  

Unlike the definition of medical necessity, there is tremendous state regulation with regard to utilization review.  State regulations of utilization review are designed to protect persons applying for coverage from delay and other various bad faith practices by insurance companies.  Some of the most common regulations pertain to documentation by insurers of their utilization review program and also time frames for procedures and determinations.  For example, health carriers must maintain very detailed written utilization review procedures that are always available to their covered persons.[23]  More importantly however, are the regulations relating to time frames that must be followed by insurance companies.  Time frame regulations generally apply to how long an insurer has in order to make a coverage determination.  The importance of time frame regulations is that they not only protect covered persons[24] from delay, but also that violations alone are often grounds for damages through bad faith legislation.

     There are three types of utilization review, precertification, concurrent review, and retrospective review.[25]  “Precertification is the process of collecting information prior to impatient admissions and performance of selected ambulatory procedures and services.”[26]  “Concurrent review encompasses those aspects of patient management that take place during the provision of services at impatient level of care or during an ongoing outpatient course of treatment.”[27]  Concurrent review usually occurs in the context of reviewing a request for an extension of coverage.[28]  The third and final type of utilization review is retrospective review.  “Retrospective review is the process of reviewing coverage requests for initial certification after the service has been provided, or when the member is no longer an impatient or receiving the service.”[29]  As a general rule, retrospective review is not where a covered person wants his/her coverage to be analyzed.  If coverage is denied at the retrospective review level, the covered person will have to pay for the already performed treatment him/herself, subject to any grievances or lawsuits to follow.

     Utilization review does not occur in every instance of medical treatment and coverage or denial of coverage by an insurance company.  The best example of medical treatment where utilization review is not likely to occur is when emergency services are provided. Utilization review cannot occur until after the emergency services of screening and stabilization have occurred.[30]  Health carriers are required by statute to cover “services necessary to screen and stabilize a covered person. . . if a prudent layperson would have reasonably believed that an emergency medical condition existed.”[31]  Even after emergency services to screen and stabilize have been performed, an insurance company is unlikely to perform a utilization review because “[a] health carrier may not subsequently retract its authorization after the emergency services have been provided. . . unless the approval was based on a material misrepresentation about the covered person’s health condition made by the provider of emergency services.”[32]

     In the event treatment is denied because it was determined not to be a medical necessity, the patient will be sent a written adverse determination notification.[33]  The adverse determination notification must include certain items which can vary somewhat from state to state.  In South Dakota, an adverse determination notification must include

        (1)The specific reason or reasons for the adverse determination;

(2)A reference to the specific plan provision on which the determination is based;

(3)A description of additional material or information necessary of the covered person to complete the benefit request, including an explanation of why the material or information is necessary to complete the request;

(4)A description of the health carrier’s grievance procedures. . . including time limits applicable to those procedures;

(5)If the health carrier relied upon an internal rule, guideline, protocol, or other similar criterion to make the adverse determination. . . that a copy of [it] will be provided free of charge to the covered person upon request;

(6)If the adverse determination is based on a medical necessity or experimental or investigational treatment or similar exclusion or limit, either an explanation of the scientific or clinical judgment for making the determination, applying the terms of the health benefit plan to the covered person’s medical circumstances or a statement that an explanation will be provided to the covered person free of charge upon request;. . .[34] 

     Provided health carriers adhere to regulations like the one set out above, patients should be made aware of how to fight an adverse determination.

     Grievance systems established by health carriers may vary somewhat depending on state regulation, but for the most part they are fairly similar.  An aggrieved covered person should notify the health carrier that a review of the adverse determination is desired.  There is typically a time frame in which such a request must be made.  A common time frame for requesting a review is 180 days.[35]  Upon receiving the request for review, “the health carrier will designate a health care provider or providers [not previously involved in the original adverse determination] who have appropriate training and experience in the field of medicine to evaluate the adverse determination.”[36]  Covered persons are encouraged to support their position that coverage is appropriate by submitting written comments, documents, records, and other material relating to the request.[37]  In South Dakota however, no person has the right to attend his or her grievance review.[38]  Covered persons using grievance review must be given notice of the outcome within a reasonable period of time that is appropriate given the covered person’s medical condition, but in no case later than thirty days after the date of the health carrier’s receipt of the grievance involving a prospective review and sixty days for retrospective reviews.[39]

     In South Dakota, if a covered person’s grievance review results in another denial of coverage, he/she can get review of the grievance review in front of a voluntary review panel.[40]  This review is quite different from the first review.  The most obvious difference is that the covered person has the opportunity to appear in person in front of the panel.[41]  Also, the review panel is to be comprised of different persons than those who conducted the first review and unlike the first review, not all members of this panel are required to be health care professionals.[42]  Voluntary review panel decisions are to be issued in writing within five working days after a review where the covered person appeared[43] or within fifty working days after the health carrier received notice of the request for voluntary review if the covered person did not appear in person.[44] 

     Following exhaustion of a covered person’s “in house” options for payment for a treatment, there is little left other than filing a lawsuit.  Lawsuits challenging an insurance company’s willingness to pay for treatment can be brought under contract law seeking a declaratory judgment for reimbursement or protection prior to undergoing a treatment;[45] these contract claims can be brought individually applying specific facts, or as a group in a class action to establish generally the medical necessity of certain procedures, equipment or supplies.[46]  Lawsuits against insurers can also be filed as tort actions if their refusal was in bad faith or represented outrageous conduct.  Bad faith claims can result in attorney’s fees and punitive damages in addition to actual damages.[47]

     In conclusion, the definition of medical necessity is subject to great disagreement.  In general, medical necessity is defined by the contract in which it is contained.  This contract approach to defining medical necessity is partly to blame for the confusion in its definition because everybody is working under a similar yet very different definition.  These different definitions of medical necessity are then used interchangeably as if there is only one universal definition, blurring their differences.  With that being said, even if there were one universal definition, its application would still be difficult because of the numerous variables depending on existing facts.  This is an area that will continue to see disagreement, but thankfully for state regulation, many laws have been enacted to protect covered persons by giving them multiple opportunities to have their treatment declared a medical necessity.