By Daniel Schwarcz and Amy B. Monahan
Increasingly, health insurers are crafting their coverage terms in ways that undermine a vital consumer protection created by the Affordable Care Act (ACA): the right to appeal health plan claim denials that are based on medical judgments to an independent, external reviewer. The ACA extended this right to all health plans to protect consumers against the risk of unreasonable coverage determinations — a risk that is all too familiar given insurers’ financial incentives to deny claims.
Yet, as revealed by our new article, Rules of Medical Necessity, this essential consumer protection is becoming increasingly illusory as health insurers shift from broad standards to concrete rules for defining when care is medically necessary. For that reason, this post proposes that the Biden/Harris administration should promulgate rules allowing external reviewers to set aside insurers’ rules of medical necessity even when they are contained in insurance policies or formal health plan documents. Instead, federal regulations should make clear that the ACA requires external reviewers to apply traditional, standard-based, definitions of medical necessity when reviewing denials of coverage that are premised on medical judgments.
Health plans have long promised to cover care that is “medically necessary” and “non-experimental.” And they have long defined these pivotal contractual terms using broad standards rather than formulaic rules. For instance, “medically necessary” care might be defined as care that is “generally accepted in the medical community.” Similarly, “experimental care” might be defined as care about which “the peer-reviewed medical literature does not permit conclusions concerning its effect on health outcomes.”
The ACA’s external review provisions were crafted with this contractual structure in mind: allowing independent experts to overturn an insurer’s application of these broad standards would ensure coverage of appropriate health care for consumers, irrespective of their insurers’ financially conflicted medical judgments.
But the contractual structure of health plans is shifting dramatically, in ways that significantly undermine external review. Our research found that health plans are increasingly adopting formulaic rules that restrict when generally covered treatments will be paid for based on judgments about the treatment’s medical and scientific appropriateness in specific circumstances.
Such “rules of medical necessity” are often directly incorporated into health plan’s contracts. For instance, a plan might restrict coverage of bariatric surgery to insureds who have a “body mass index (BMI) of greater than 40, or greater than 35 with complicating coexisting medical conditions or diseases (such as sleep apnea or diabetes) directly related to, or made worse by, obesity.”
In other cases, health plans have developed detailed rules of medical necessity in lengthy documents or sets of documents that are separate from their insurance policies or formal plan terms, but which are — to varying degrees — described or incorporated by reference therein. These libraries of documents have labels like “medical policies,” “clinical bulletins,” “utilization review procedures” or “medical criteria.” Rules of medical necessity that are incorporated-by-reference into health plans often cover a vast range of medical interventions, thus completely transforming the standard-based determination of whether a treatment is medically appropriate into a rules-based exercise that requires no exercise of medical or scientific judgment.
This accelerating rulification of medical necessity, we argue, undermines the capacity of external review to meaningfully limit insurers’ conflicted claims determinations in two ways.
The first is a byproduct of provisions in the ACA that only make external review available for claims denied on the basis of medical judgments. By definition, rules of medical necessity limit or eliminate the application of medical or scientific judgment from claims processing. No longer must an insurer’s medical director make a tough call about the appropriateness of a treatment that an insured’s doctor has recommended. Instead, a claims processor applies a checklist to determine whether the conditions of coverage have been met. For this reason, coverage denials premised on an insurer’s rules of medical necessity may be ineligible for external review, even though the development of these rules obviously involves extensive medical and scientific judgments that can be distorted by financial interests.
The second way that insurers’ embrace of rules of medical necessity can undermine external review arises from provisions in the ACA that are often interpreted to limit external reviewers’ capacity to order coverage of a treatment or service that is excluded in the relevant plan document or insurance policy. By incorporating their rules of medical necessity into their governing legal documents, health plans can consequently eliminate an external reviewer’s power to overturn claims denials that are consistent with the insurer’s rules. This is true irrespective of whether those rules are out of date, over-inclusive, or simply medically and scientifically inaccurate.
This is problematic, of course, because insurers face clear conflicts of interest when assessing whether medical or scientific knowledge warrants covering care that an insured’s treating physician has recommended. By adopting rules of medical necessity that broadly restrict coverage for expensive forms of care whenever there is any plausible medical or scientific basis for doing so, insurers can simultaneously limit their payouts for expensive care and make their plans less attractive for high-cost insureds.
To be clear, rules of medical necessity can also benefit the health care system. Insurers may sometimes be better positioned than individual providers to keep up to date with the relevant clinical literature, and clear rules that reflect best clinical practices can provide certainty and guidance to patients and providers alike. Rules also allow for efficient and consistent claims processing, thereby helping to keep administrative costs low.
But there is currently no effective check on the substance of these rules. They might reflect best clinical practices, or they might represent an attempt to limit costly care. While various health plan accreditations and state utilization review laws require these rules to be based on “sound clinical evidence,” there is limited guidance about what this means; fundamental questions such as whether insurers’ rules of medical necessity may incorporate cost or cost-effectiveness are not addressed. Perhaps even more importantly, there is limited evidence that this requirement is actually enforced.
While there are many possible legal responses to health plans’ increasing use of rules of medical necessity that we discuss in our full article, here we propose that the Biden/Harris administration allow external reviewers to disregard insurer-drafted coverage rules that attempt to delineate when and under what circumstances a treatment that is covered for some insureds will be provided to a particular insured. Instead, external reviewers should be empowered to rely on traditional, standard-based, definitions of “medically necessary” and “non-experimental” care to assess whether an insurer should cover recommended treatment, irrespective of a health plan’s fine print. This reform could likely be achieved through federal regulations clarifying that the minimum consumer protections the ACA requires for external review — which are themselves contained in a National Association of Insurance Commissioners model law — require this result. It is possible, though, that statutory reform might be necessary to achieve this result.
However accomplished, this reform would provide individuals with the opportunity for a full and fair review of their insurer’s medical judgments, while preserving many of the benefits that rules of medical necessity can deliver, such as efficient claims administration and reliable guidance for providers and consumers. After all, only a tiny fraction of all coverage denials are contested, and fewer still progress to external review. While this proposal may appear modest, it could be life-changing or even life-saving for individuals seeking medical care that an insurer refuses to cover due to its mechanistic rules of medical necessity.
Daniel Schwarcz is the Fredrikson & Byron Professor of Law at the University of Minnesota Law School.
Amy B. Monahan is a Distinguished McKnight University Professor, Associate Dean for Research & Planning, and the Melvin Steen & Corporate Donors Professor at the University of Minnesota Law School.
