What is medical necessity?

Medical necessity refers to healthcare services, procedures, supplies, or treatments considered essential for diagnosing, treating, or managing a patient's medical condition. These services must meet specific criteria established by medical standards, professional guidelines, and insurance policies. 

The Institute of Medicine's analysis in Appendix G of Essential Health Benefits: Balancing Coverage and Cost identifies the difficulty in defining medical necessity. According to their research, "Significant elements identified in definitions include: who has the authority to decide, what the purpose of an intervention is, what the scope of services would entail, what constitutes acceptable evidence of efficacy, and whether the service has value for potential health gain, is not performed simply for convenience, and is applicable to the individual case."

According to Perspectives on Essential Health Benefits: Workshop Report, it's important to understand the distinction between coverage decisions and medical necessity determinations. As noted by Dr. Alan Garber in his presentation to the Institute of Medicine committee, "A coverage decision is a policy decision based on the general needs of the broad population group insured under a benefit plan... A medical necessity determination, on the other hand, determines whether the insurer will pay for an intervention in a very specific instance."

The definition of medical necessity includes several elements. According to standard insurance guidelines published by the South Dakota Department of Labor and Regulation, medically necessary treatments or services must "evaluate, diagnose, or treat an illness, injury, disease, or its symptoms" and "follow generally accepted standards of medical practice." Additionally, these services should be "clinically appropriate," meaning the level of care would be effective to treat the patient's illness, injury, or disease. The service must not be primarily for the convenience of the patient or healthcare provider, should not cost more than another service that would be equally effective, and must not be for experimental, investigational, or cosmetic purposes.

From an academic perspective, bioethicist Dominic JC Wilkinson in What is 'medical necessity'? provides a clinical definition, noting that treatment is medically necessary when "patient P will suffer from, or has a high chance of suffering from, a significant deterioration in health." 

According to Wilkinson's analysis, medical necessity contains two central elements: the concept of need as a deviation from normal wellbeing that occurs without intervention, and the medical nature of that need relating to poor health states. This academic perspective helps distinguish between medical effects or benefits and genuine medical need, providing a more stringent standard than terms like "appropriate" or "reasonable" that are commonly used in healthcare settings.

The national settlement definition

A milestone in standardizing medical necessity definitions came through a class action court case that resulted in what the Institute of Medicine document describes as a definition now "in widespread practice in the private market." This National Settlement definition states:

"'Medically Necessary' or 'Medical Necessity' shall mean health care services that a physician, exercising prudent clinical judgment, would provide to a patient for the purpose of preventing, evaluating, diagnosing or treating an illness, injury, disease or its symptoms, and that are: a) in accordance with generally accepted standards of medical practice; b) clinically appropriate, in terms of type, frequency, extent, site and duration, and considered effective for the patient's illness, injury or disease; and c) not primarily for the convenience of the patient, physician or other health care provider."

According to the Workshop Report, this definition was "agreed to by more than 900,000 physicians and major insurance companies" and represents a consensus approach that balances clinical judgment with practical coverage considerations. The workshop report also notes that the settlement "clarified that medical necessity decisions must be individualized, also affirming that consideration of cost or comparative effectiveness was acceptable."

The individualized nature of medical necessity determinations received important legal clarification in the Second Circuit Court of Appeals case Mario v. P & C Food Markets, Inc. As documented in the Workshop Report, the court specifically ruled that "Unless the contrary is specified, the term 'medical necessity' must refer to what is medically necessary for a particular patient, and hence entails an individual assessment rather than a general determination of what works in the ordinary case."

Healthcare providers, insurance companies, and government programs each may have slightly different interpretations of what constitutes medical necessity, leading to variations in coverage decisions and treatment approvals. 

Evolution of medical practice standards

The concept of what constitutes "generally accepted standards of medical practice" has changed over time. According to Perspectives on Essential Health Benefits: Workshop Report, Dr. Garber noted that "A 'sea change has occurred over the decades in what is meant by generally accepted standards of medical practice'... standards that are based on credible scientific evidence published in peer-reviewed medical literature."

This evolution represents a change from physician judgment alone to evidence-based medicine, reflecting what the workshop report describes as "an increased reliance in the provider community on the published clinical and scientific literature."

The Role of medical necessity in insurance coverage

Insurance companies rely on medical necessity determinations to make coverage decisions. When a healthcare provider requests authorization for a procedure, treatment, or service, the insurance company evaluates whether the request meets their criteria for medical necessity. This evaluation process involves reviewing medical records, diagnostic information, and treatment plans against established medical guidelines and the insurance policy's terms.

The medical necessity review process can occur at different times depending on the situation. As noted in the insurance guidelines, in a "prior authorization review," the plan decides if a requested treatment or service is medically necessary before it is provided. The health plan normally reviews a healthcare professional's Letter of Medical Necessity, medical records, and the plan's medical guidelines. In a "concurrent review," the plan decides if the treatment or service is medically necessary while the patient is receiving it, for instance while receiving in-patient care at a hospital. In a "retrospective review," the plan decides if healthcare already provided was medically necessary, with the decision made after the patient receives the care.

When an insurance company determines that a service is not medically necessary, they may deny coverage entirely or approve only a portion of the requested services. However, as the insurance guideline notes, "if your health plan denied payment for lack of medical necessity and you and your health care professional believe the services were medically necessary, you have the right to file an appeal."

Medicare's approach to medical necessity

Medicare and Medicaid programs use medical necessity criteria to determine coverage, often serving as benchmarks for private insurance companies. These government programs have established guidelines and coverage policies that define medical necessity for various conditions and treatments.

According to Medical necessity: What it means with Medicare, Medicare has a specific definition: Medicare defines medically necessary as "supplies or services that are reasonable and necessary to diagnose or treat an illness or injury" and these "services or supplies must also meet the accepted standards of medical practice." This definition aligns closely with the broader healthcare industry standards while providing specific guidance for Medicare beneficiaries.

The process for determining medical necessity at the federal level is systematic and evidence-based. As noted in Medical necessity: What it means with Medicare, "The Centers for Medicare and Medicaid Services (CMS) determines what constitutes medically necessary services and supplies nationally. These determinations are known as National Coverage Determinations (NCDs)." Furthermore, "The CMS determines NCDs through evidence-based processes that also allow public participation."

Medicare's coverage scope reflects its medical necessity standards, covering "inpatient care in hospitals and skilled nursing facilities, outpatient care, durable medical equipment (DME), some in-home healthcare, and hospice care" as outlined in "Medical necessity: What it means with Medicare."

What medicare considers not medically necessary

Medicare's exclusions provide examples of what fails to meet medical necessity criteria. According to Medical necessity: What it means with Medicare, Medicare does not cover services such as those "provided in a hospital setting that a person could have received in a lower cost setting, such as at home or in a nursing home" and "excessive diagnostic or therapy procedures." These exclusions reflect the principle that medically necessary care must be appropriate to the setting and not excessive relative to the patient's condition.

State-level variations in medicaid programs

According to Appendix G of Essential Health Benefits: Balancing Coverage and Cost, "The Medicaid statute does not define 'medically necessary' or 'medical necessity,' and each state is allowed to develop its own definition." This variation creates different standards across the country, potentially affecting patient access to care depending on their geographic location.

The Institute of Medicine document provides examples of this variation, noting that "a recent examination of Medicaid definitions used by Medicaid programs in Connecticut, Massachusetts, New York, and Rhode Island illustrates the diversity of approaches to definition, with variation even within a single state depending on the applicable population." This state-by-state variation can create confusion for patients and providers, particularly those who operate across state lines or serve populations that move between states.

Cost considerations in medical necessity

According to the Workshop Report, the class action settlement definition explicitly recognizes that relative costs can and should play a role by stating that medically necessary services should be "not more costly than an alternative service or sequence of services at least as likely to produce equivalent therapeutic or diagnostic results."

As noted in the workshop report, this cost consideration aspect is "often a controversial aspect of medical decision making." The report documents that an earlier survey of insurers found that "only 40 percent of plans conducted formal cost-effectiveness analysis, and about half selectively applied cost considerations in pre-authorizations for some interventions."

Special considerations for emergency services and experimental treatments

Medical necessity determinations have unique applications in specific healthcare scenarios. For emergency services, according to the insurance guidelines, "after you receive emergency services, your health plan will review your case to decide if emergency care was appropriate for your symptoms and medically necessary." Health plans use a "prudent layperson" standard to make this determination, recognizing that getting approval before receiving medical services isn't necessary if a reasonable person would believe there was an emergency condition and delaying treatment would worsen that condition.

Regarding experimental or investigational treatments, insurance definitions typically specify that healthcare for "experimental, investigational, or cosmetic purposes" isn't medically necessary. However, some cosmetic treatments may be considered medically necessary if they also serve a medical purpose. The health plan follows its medical guidelines and may use medical records and available scientific literature to make these determinations.

FAQs

Who ultimately decides what is medically necessary?

In practice, physicians, insurers, and government programs each play a role.

Can patients appeal when care is denied as not medically necessary?

Yes, patients generally have the right to appeal and request reconsideration of denied claims.

Do definitions of medical necessity vary internationally?

Yes, while the U.S. relies on insurer and government standards, other countries often use national health systems with broader definitions.

How does evidence-based medicine influence medical necessity?

Modern determinations rely on published scientific research rather than physician judgment alone.

Are mental health services judged differently under medical necessity rules?

Mental health often faces stricter scrutiny, though parity laws now require insurers to apply standards comparable to physical health care.