It should come as no surprise that insurance companies only pay for services they deem “medically necessary,” especially when it comes to a costly procedure, expensive medication or innovative medical device. Critics of the industry, however, point out that insurance companies have a habit of turning down claims for coverage using “medical necessity” as a tactic solely to avoid paying for treatment. For the most part, “medical necessity” is whatever the insurance company says it is, and policyholders who are told their requested treatment is not medically necessary either accept that decision or fight it through an arduous process of internal reviews and appeals. Some even take their case to state or federal court, alleging the insurance company is acting in bad faith by unreasonably and incorrectly turning down coverage on medical necessity grounds.

Part of the problem has been that although state law has required insurance companies to cover medically necessary treatments, it has never included a definition of what “medically necessary” means, leaving the carriers with broad leeway to define the term as they see fit. That state of affairs changed on September 25, 2020, when California Governor Gavin Newsom signed a bill into law regarding insurance coverage for mental health or substance use disorders. That law defined medically necessary, apparently for the first time in any healthcare legislation.

The new law passed as SB 855 in the 2019-2020 legislative session requires health insurance or disability policies issued, amended or renewed on or after January 1, 2021, to cover medically necessary treatment of mental health and substance use disorders under the same terms and conditions that apply to other medical conditions. Prior existing law, specifically the California Mental Health Parity Act, required health plans to cover diagnosis and medically necessary treatment of “severe mental illnesses” of persons of any age and “serious emotional disturbances” of a child. The new law greatly expands the scope of mental health coverage by broadly defining “mental health and substance use disorders” and requiring coverage on the same terms as other medical conditions (parity).

The new law not only includes a broad definition of “mental health and substance use disorders,” but it also defines what constitutes “medically necessary treatment of a mental health or substance use disorder.”

Specifically, the term is defined to mean:

“a service or product addressing the specific needs of that patient, for the purpose of preventing, diagnosing, or treating an illness, injury, condition, or its symptoms, including minimizing the progression of that illness, injury, condition, or its symptoms, in a manner that is all of the following:

(i) In accordance with the generally accepted standards of mental health and substance use disorder care.

(ii) Clinically appropriate in terms of type, frequency, extent, site, and duration.

(iii) Not primarily for the economic benefit of the health care service plan and subscribers or for the convenience of the patient, treating physician, or other health care provider.”

The new law further goes into great detail about what “generally accepted standards of mental health and substance use disorder care” means. The law is specific about the criteria and guidelines insurance companies must use in conducting utilization reviews and that all determinations must be made in accordance with the law.

Another provision of SB 855 makes it clear that once a specific type of treatment is authorized, the insurer cannot rescind or modify its authorization after the provider renders care in good faith pursuant to the authorization, even if the plan is rescinded, canceled or modified, or the carrier later determines it did not make an accurate determination of eligibility.

As the bill points out, under existing law, a willful violation of these requirements is a crime.

Medical Necessity Left Undefined in Other Areas of Health Care Law

Presumably, this occasion marks the first time the legislature has defined medical necessity, despite the fact that the requirement to cover medically necessary treatments has long been an established feature of California law under the Knox-Keene Health Care Service Plan Act of 1975.

This new definition of medical necessity is specific to and limited to treatment for mental health and substance use disorders.

Other health insurance coverage laws leave the determination of medically necessary up to the plan provider or the treating physician or surgeon, but nowhere else does the law provide any guidance or definition on what medically necessary means.

Insurance companies are known to issue blanket denials of specific treatments based on internal coverage guidelines that state a particular form of therapy is not medically necessary. However, simply stating that a given treatment is not medically necessary in all instances, without conducting an individual assessment of the policyholder’s individual needs, is arguably an abdication of the insurance company’s responsibility to conduct a utilization review of a request for treatment. Some policyholders in this situation have sued their insurance company for acting in bad faith by using “not medically necessary” as an excuse to deny coverage.