FOR IMMEDIATE RELEASE
"Medical Necessity" and Health Plan Contracts
Is it sound public policy for legislators to shift the responsibility
for interpreting "medical necessity"—a key concept in health
insurance policies—from insurers to providers? This is the core question
addressed by this white paper, which is based on a legal opinion
commissioned by the Health Insurance Association of America in January
1999 from William G. Schiffbauer, Esq.
The question is provoked by legislation that has been proposed on
Capitol Hill1 and in many states. At first blush, such
legislation, which would place determinations of "medical necessity"
solely into the hands of treating physicians, seems innocuous, even
reasonable: Why shouldn’t treating physicians define what is
medically necessary? But, in fact, this proposed change—which would
have a detrimental effect on health care in America—reflects the
widespread public confusion about "medical necessity" as a boundary of
health coverage and "medical necessity" as a clinical determination by a
The "medical necessity" provisions in currently proposed federal
legislation represent a radical rewriting by public officials of the
contract between insurers and health plans and their customers. When the
provider, rather than the health plan or insurer, interprets the scope of
coverage under the contract, health plans and fiduciaries cannot guarantee
to the insured that health care dollars are being spent fairly and
equitably on medical treatments that are safe, proven, and effective.
Indeed, such legislation could give some providers incentives to overtreat
patients to enhance their incomes. Under such a regime, who can doubt that
insurers’ denials of payment or determinations of noncoverage would be
In effect, the proposed "medical necessity" provisions represent
an attempt to turn back the clock. Such proposals would do more than
simply return the health care system to the unconstrained fee-for-service
system of payment that was responsible for the double-digit inflation in
health care costs of the 1970s and 1980s. It would undermine efforts by
all types of health plan delivery models, from HMOs through PPOs and
fee-for-service coverage. Even in the earlier era of fee-for-service
medical coverage, insurers reviewed claims to ensure that the services
already delivered had in fact been medically necessary.
Far from protecting patients, passage of such legislation would be
deeply inimical to the interests of health care consumers, driving up the
cost of medical care and possibly even placing patients in harm’s
way. The legislation would needlessly raise costs for plans,
thereby promoting premium increases and reducing the affordability of
health insurance. In the long run, such legislation threatens to diminish
the availability of coverage and increase the number of the uninsured.
The basis for these misguided proposals is the perception that insurers
routinely make numerous, unfounded adverse coverage determinations. A 1997
study based on a survey of over 2,000 physicians caring for patients
covered under plans utilizing managed care techniques found that the final
overall coverage denial rate for physician-proposed treatment plans in
eight categories of care was less than 3 percent, and that the figure was
much less for most of the categories of care2. The majority of
physicians reported no coverage denials whatsoever. Under specific types
of care, coverage for hospitalization was denied only 1 percent of the
time; surgical procedures, 1.2 percent; and specialist referrals, 2.6
percent. The rate of initial denials was higher, but between one-half and
two-thirds of these first level denials were reversed by the health plans,
resulting in the lower final denial rate.
Health plans use national standards validated by evidence-based
scientific studies or prepared by prominent medical experts to understand
what treatments and services are appropriate. Using those standards,
medical professionals at health plans make decisions about which
procedures should be covered. These decisions are coverage determinations
for payment purposes. Treating physicians are ultimately responsible for
recommending a course of treatment for their patients, regardless of
To illustrate some of the most egregious problems which could result
from this legislation that would give physicians authority over plan
coverage determinations, we have analyzed legislation under debate in the
106th Congress: the Patients’ Bill of Rights (S. 6/H.R.
358).3 Section 151 of this bill states that insurers and health
plans may not "arbitrarily interfere with or alter the decision" of a
treating physician for services that the physician has determined to be
"medically necessary."4 This proscription would apply to health
plans of all designs, from fee-for-service indemnity to staff model health
maintenance organizations and those of other managed care organizations
If enacted, the proposed law would:
(1) Undermine utilization management and increase costs
- turning over coverage determinations based on medical necessity
solely to the treating physicians who have both economic and
non-economic incentives to inflate reimbursement;
- eliminating, or sharply curtailing, effective
utilization review and other cost-containment mechanisms; and
- imposing extra-contractual obligations on insurers and plans,
thereby driving up premiums.
(2) Encourage fraud and abuse, especially by providers.
(3) Undermine quality and perhaps even expose patients to danger.
(4) Undermine contract law by:
(a) permitting public officials to change essential terms and
conditions of the agreement between contracting parties, to the benefit of
an interest group that is not party to the contract;
(b) preventing insurers from making appropriate coverage
determinations, thus limiting their ability to meet their contractual
obligations to premium payers and patients; and
(c) changing the essence of the fiduciary responsibility of plan
(5) Create a unique coverage regime for private insurance inconsistent
with governmentally funded programs.
This proposal is a solution in search of a problem. Currently,
according to two studies,6 in 97 percent of the cases involving
utilization review, the physicians’ recommended courses of treatment were
approved. Therefore, this proposed change would remake the world—
threatening utilization management, increasing fraud, increasing cost,
increasing the risk of harm to patients, undermining quality, and
abrogating fiduciary responsibility under ERISA—because of adverse
determinations in less than 3 percent of the coverage determinations made
under current practices.
"Medical Necessity" and Health Plan Contracts:
Complete Provider Deference Means Higher Costs, Lower
Proposals have been advanced to remove the interpretation of a private
health insurance contract’s medical necessity requirement from the private
contract process and place it in the hands of providers. For example,
federal legislation, such as the Patients’ Bill of Rights, would propose
that a health plan may not arbitrarily interfere with or alter the
decision of a treating physician regarding services that the physician has
determined to be "medically necessary." As discussed below, the direct
object of this legislation is the substitution of the provider for the
group health plan or issuer of the health insurance coverage as the party
who will interpret and determine the scope of coverage and payment under
the group health plan or health insurance contract.
This proposal would:
- convert coverage and payment determinations for health care
expenses into medical decisions;
- disable the private contract structure and process for coverage
and payment determinations in every type of plan design ranging from
fee-for-service indemnity to staff-model health maintenance
- eliminate the utilization review process that is fundamental to
the managed care "choice";
- foster opportunities for fraud and abuse;
- diminish health care quality; and
- impose unforeseen, extra-contractual obligations that will require
premium increases or threaten health plan and insurer solvency.
The proposed legislation, if enacted, would simply shift control of
coverage and payment decisions from insurers and managed care plans to
providers, and it would have the effect of raising costs, thereby possibly
reducing the availability of coverage and increasing the number of
II. Description of Proposal
A. In General
The core change that would be brought about by the Patients’ Bill of
Rights is that individual providers would be granted statutory deference
to control coverage and payment decisions. Section 151 of S. 6/H.R. 358,
the Patients’ Bill of Rights, would prohibit group health plans and
issuers of health insurance coverage from "arbitrarily interfering with"
or "altering the manner or setting" of covered health care services when
that care is determined by the treating physician to be medically
necessary or appropriate.7 The treating physician may be the
patient’s primary care physician or a specialist to whom the patient has
been referred. "Manner or setting" would be defined as the location of
treatment (such as inpatient or outpatient) and the duration of a service
(such as number of days in a hospital).8 Finally, the section
defines "medically necessary or appropriate" as a service or benefit that
is "consistent with generally accepted principles of professional medical
practice."9 Separately, the legislation provides that consumers
may appeal the plan’s or insurer’s adherence to this section to an
external review entity.10 Additionally, other legal options,
including judicial review, may be pursued.11 Finally of note,
the legislation would preempt state laws that would "prevent application"
of federal law, including Section 151.12
While the sponsors of this legislation contend that it is aimed at
reforming the practices of "managed care" plans, in fact, Section 151
would apply to any group health plan or health insurance coverage
regardless of the type of plan.13 The legislation incorporates
the definitions of the Health Insurance Portability and Accountability Act
of 1996 (HIPAA);14 under this definition, a "group health plan"
subject to this provider-determined coverage and reimbursement rule is any
employee welfare benefit plan that provides coverage for medical
care.15 In addition, this rule would apply to any "health
insurance coverage," meaning those benefits consisting of medical care
provided directly, through insurance or reimbursement or otherwise, and
including items and services paid for as medical care under any hospital
or medical service policy or certificate, or insurance or HMO contract or
certificate.16 The legislation would amend the Public Health
Service Act’s group health plan provisions of Title XXVII, incorporating
this rule and other provisions by reference.17 It would also
amend the individual health insurance rules of Title XXVII.18
Finally, the proposed legislation would incorporate the rule and other new
mandates into the Employee Retirement Income Security Act
The proposed legislation does include a limited safeguard in that all
services determined by a treating physician to be medically necessary must
be "otherwise a covered benefit."20 However, whether a benefit
is itself "covered" is often the subject of interpretation and
litigation21— and Section 151 would clearly lead to even
greater litigation in this area. Although the "covered benefit" rule may
offer some protection against physicians’ attempts to impose payments for
excluded "experimental or investigational" treatments, that interpretation
of the proposed bill must be weighed against the potential breadth of the
"generally accepted principles of medical practice" standard for
treatment—which, if interpreted liberally, may sweep in excluded therapies
and procedures.22 In addition, many coverage disputes center on
whether certain facilities are included in the word
"hospital."23 The legislation would, however, specifically
protect a treating physician’s determination of the "manner or setting" of
B. Consequences of Establishing Statutory Deference for
Clearly, the proposed legislation is far reaching and would bring
dramatic changes to how health care is financed. Nor would the legislation
be easy to understand, interpret, and administer. The terminology alone
would provoke nearly endless litigation. For example, since the plain
meaning of the word "arbitrary" is "without adequate determining
principle, or not according to reason or judgment,"25 the
question will arise as to whose standard of reason or judgment is
adequate. The words "interference" and "alteration" are equally debatable.
Indeed, the very ambiguity of these terms would serve as a deterrent to
any challenge of a provider’s treatment decisions. At best, it would take
years and years of litigation in jurisdictions across the country to
provide some guidance in this area. The CBO cost estimate, prepared in
relation to the identical Section 151 in the 1998 version of current S.
6/H.R. 358, stated that:
This provision would increase the volume of internal and external
appeals above and beyond the volume expected from other provisions. Not
only would the provision provide additional incentives to appeal decisions
by plans, but it would probably also lead to a higher rate of reversal on
appeal. Although the external appeals bodies and the courts might
eventually settle on uniform and easily interpreted standards of medical
necessity, the variability of medical practice styles across the country
would ensure continuing challenges to decisions by plans over
the 10-year estimating period.26
In addition to litigation, the consequences of providing legal
deference to provider coverage determinations would be far-reaching and
would affect the entire health care system. If enacted, Section 151 and
other similar proposals:
- would—at a minimum—have a chilling effect on health plan
utilization management, increasing costs to the plans;
- would lead to increased fraud and abuse in the private health care
sector, diverting enormous resources from patient care;
- would have both direct and indirect impacts on the cost of
providing coverage to patients;
- would have an adverse effect on quality as providers
would have increased incentives to overtreat, which could be
contrary to the patient’s best interests and to the delivery of
quality care; and
- would abrogate the well-established fiduciary responsibility of
health plans and plan administrators to the people covered under the
Health insurance premiums could again spike as the effects of Section
151 requirements on utilization review are felt, and plan operational and
administrative costs increase. These new legal barriers to health plan
oversight could even place patients in harm’s way. These requirements
would radically rewrite the terms of private contracts through government
fiat in a manner that is fundamentally inconsistent with the nearly
identical rules followed for over three decades by public programs. Each of these concerns is discussed in greater detail
A. Concerns About Increased Fraud and Abuse
1. Fraud Would Become More Difficult to Challenge
Section 151 raises significant legal barriers to private sector efforts
to combat waste, fraud, and abuse in the health care system. Treating
providers, who would be required only to observe the "generally
accepted principles of professional medical practice" (even if such
practices have been shown to be unnecessary or only marginally
beneficial), would be able to challenge health plan coverage
denials as arbitrary interference in or alteration of their decision
making. This provision, therefore, would stand in marked contrast to
increased recognition of the pervasiveness of fraud and abuse during the
past decade and the commensurate expansion of public and private resources
to combat fraud and abuse.27
In a 1992 report to Congress, the General Accounting Office estimated
that fraud accounted for 10 percent ($70 billion) of the nation’s health
care spending in 1991.28 Today, that 10 percent would be more
than $100 billion.29 Testifying before the House Committee on
Ways and Means in 1997, Charles L. Owens, Chief of the FBI’s Financial
Crimes Section, stated that health care fraud has become the number one
white collar crime in America.30 In testimony before the Senate
Permanent Subcommittee on Investigations of the Senate Committee on
Governmental Affairs earlier in that year, Mr. Owens had stated that
"[h]ealth care fraud is causing a serious financial drain on the country,
and we must continue our collective efforts to combat it."31 A
study by the Health Insurance Association of America found that 78 percent
of all reported health care fraud cases were the result of provider
Taxpayers pay higher taxes because of fraud and abuse in public
programs such as Medicare and Medicaid, and employers and individuals pay
higher private health insurance premiums because of fraud and abuse in the
private health care sector. Moreover, the resources wasted paying
fraudulent claims reduce the number of dollars available to be spent on
As awareness of health care fraud and abuse and their increasing
pervasiveness has grown during the past few years, both the government and
private sector payers have significantly increased their anti-fraud
activities. For example, HIPAA significantly strengthened penalties
against health care fraud and established and provided funding for a
coordinated fraud and abuse control program.33 Penalties for
committing fraud against federal government programs were further enhanced
by the Balanced Budget Act of 1997.34
As part of these stepped-up anti-fraud activities, in February 1999,
the Office of the Inspector General (OIG) of the Department of Health and
Human Services announced that improper Medicare payments to doctors,
hospitals, and other health care providers declined 45 percent from fiscal
year 1996 to fiscal year 1998. HHS reported that a heightened focus since
1993 by the OIG, the FBI, the Health Care Financing Administration, the
Department of Justice, and others in government had yielded "a new, more
detailed picture of fraudulent activities aimed at" government health care
Moreover, HHS has launched Operation Restore Trust, a project to
coordinate federal, state, local, and private resources to fight fraud.
According to HHS, during its two-year demonstration phase, the project
identified $23 in overpayments for every $1 in project costs.
The stepped-up efforts resulted from years of abuse of Medicare payment
policy. The Medicare program is rife with examples of fraudulent schemes
designed to bilk taxpayers by claiming that items and services are
"medically necessary" when they are not. For example, the government
overpaid more than $1.5 million to a New York durable medical equipment
(DME) supplier that gave Medicare beneficiaries angora underwear, power
massagers, air conditioners, and microwave ovens as an inducement for
beneficiaries’ Medicare billing numbers so that the company could charge
for items that never were delivered.36 A Texas DME supplier
defrauded Medicare of over $1 million by charging the government for
$1,300 orthotic body jackets while instead providing inferior wheelchair
pads that cost less than $100 to manufacture—a mark-up of over 2,500
Government investigators also have uncovered numerous instances of
providers billing for phantom psychotherapy sessions or grossly inflating
the number of psychotherapy hours provided to reap overpayments from
Medicare and private insurers.38 A New York community center
director was indicted for stealing nearly $1 million by fraudulently
billing the state for over 25,000 sessions that never
occurred.39 The billings were so excessive that staff
psychiatrists would have had to work well over 24 hours a day to handle
the number of visits claimed. In Pennsylvania, the owner of a
rehabilitation service was indicted for defrauding Medicare by falsifying
patient medical records so that they would appear to be eligible for
"medically necessary" speech therapy.40 And a Pennsylvania
physician was convicted on 59 counts of illicit distribution of Valium,
Apidex, Darvocet, and Vicodin for writing prescriptions to drug abusers
and dealers that he claimed were "medically necessary."41
The private sector has also been active in combating fraud. A recent
report by the Health Insurance Association of America indicates that
nearly 90 percent of private health insurance companies have established
anti-fraud programs, including employee training, claims audits, consumer
hotlines, and information-sharing among payers and law enforcement
agencies.42 These activities are beginning to bear results.
Private-sector anti-fraud operations saved over $7.50 for every dollar
spent in 1995, compared to $4.30 just two years earlier.43
2. Marginal or Unnecessary Care Could Be Covered and Become More
Saddling private health plans with additional legal barriers to
challenging coverage determinations on the basis of "medical necessity"
would encourage fraudulent claims, and they would become much more
commonplace in the private sector. In fact, several classic court
decisions demonstrate how fraud and abuse would increase in the private
sector if significant deference were to be conferred upon providers in
making "medical necessity" decisions.
There have been many cases where payment has been required for
treatments that were of dubious value. In one instance, a court required
payment for medical services to an insured at a Bahamian clinic utilizing
a cancer treatment that had never been approved by any agency of the U.S.
government, because the court deferred to the physician’s determination of
medical necessity over that of the health plan.44 Indeed, many
patients—or their providers, who were seeking reimbursement—have prevailed
even when the treatment (whether preventive, exploratory, or investigative
or experimental) was explicitly not covered under the terms of the
plan.45 Courts (and juries) often rely on the "good faith
judgment" of treating physicians as to the medical necessity of services,
especially in the absence of an explicit contractual provision to the
contrary.46 Sometimes, however, decisions even fly in the face
of contractual provisions.47
In addition, the line between inappropriate care and fraud could again
become less distinct, as in the classic Duncan case. There, the
court, deferring to a treating physician, required insurance coverage
under multiple policies for two three-week periods of hospitalization for
a husband and wife who suffered bruises and sprains. The facts of the case
strongly indicated a motive on the part of the couple to "reap financial
B. Concerns About Rising Costs and Inflation
1. Every Service Could Be Deemed Covered and Payment Required
Since the advent of managed care, premium increases, which had risen
sky-high under fee-for-service medicine, leveled off dramatically, and are
now roughly parallel with the consumer-price index. The application of the
concept of "medical necessity" in managed care has been responsible for
much of its success to date.
The concept of "medical necessity" was developed in tandem with the
fee-for-service system, in an early attempt to prevent the unconstrained
flow of reimbursement for health care services that persistently drove up
costs. While the cost-increasing characteristics of the fee-for-service
system have been exhaustively documented,49 it may bear
repeating that when economic incentives to increase both the types and
frequency of medical services marry up with noneconomic incentives, bad
results obtain. These perverse incentives not only drive up costs
but could also be detrimental to patient care or could even harm patients.
Providers could overprescribe treatments to ensure their patients every
possible advantage, no matter how remote; to decrease a perceived risk of
medical malpractice liability; or simply because the money is available.
But it simply is not feasible to provide every conceivable treatment for
every patient without driving up costs substantially for all customers.
While concerns about cost and quality are not new, and payers of
medical expenses have always had to assess claims, pressure mounted in the
mid-1960s as the medical economy absorbed an ever-growing and
disproportionate share of our nation’s resources. Private insurers used
medical necessity standards to examine claims and, as technological
developments accelerated in the 1970s, added exclusions for experimental
or investigational procedures. The federal government adopted the
medically necessary and appropriate language used by private insurers for
Medicare, Medicaid, and other government health programs.50
2. Standard of Care Could Become Lowest Common Denominator
Under Section 151, nearly every medical service that a treating
physician determines to be necessary, whether appropriate for the patient,
could be deemed covered and would trigger payment. Indeed, the bill so
broadly defines medical necessity that the term could apply to any service
or treatment consistent with "generally accepted principles of medical
practice."51 Inevitably, questions would arise as to whether
practices are "generally accepted" nationally, regionally, or locally. To
make matters worse, the term "generally accepted" could apply to practices
that may be inappropriate for a particular patient or are no longer
considered effective. This is because once a treatment is considered
medically necessary, few—if any—treatments are discredited as such,
regardless of whether other treatments for the condition being treated
have been developed and are considered to be "best practices." In
addition, statutory protection for what is "generally accepted medical
practice" in a given locality could provide a legal basis for resisting a
more appropriate setting for the treatment.
3. Increased Risk of Health Plan Insolvency Due to Infinite Coverage
In essence, Section 151 would encourage "extra-contractual"
benefits—benefits and coverage that are not part of the original bargain
between policyholder and insurer. Moreover, if providers were able to
obligate health plans to pay for costs related to medical services that
had not been reflected in the actuarial assumptions used to price the
policy, they would not simply drive up reimbursement costs, but could also
threaten the financial stability of the plans. Thus, the basic principle
of health economics—the greater the volume and intensity of medical
services delivered, the higher the cost to patients and insurers—has a
corollary: that unanticipated costs can lead to health plan insolvency.
In short, the terms and conditions of the contract between the health
plan or insurer and the customer regarding medically necessary and
appropriate services would be eviscerated and replaced with a system that
grants the treating provider a presumption of correctness. That could
result in increased plan liability. Other provisions in the Patients’ Bill
of Rights legislation would explicitly expand liability.
At present, in policies that provide coverage for providers not
affiliated with the plan, those providers are not part of the coverage
contract between the insurer and the policyholder and become involved in
the claim payment determination process as such only if patients "assign"
payment for medical services rendered directly to them. In most managed
care plans providing such coverage, the patient would have to meet the
prior authorization requirements of the plan, except in emergency
treatment cases. Indeed, third-party review of the treating
physician’s determination of medical necessity—particularly if done before
the delivery of services—provides a useful check on the appropriate use of
health care resources. But should providers become the sole decision
makers as to whether a service is medically necessary and appropriate,
this system of checks and balances that works to provide good medicine at
an affordable price would be seriously undermined, if not destroyed.
4. Utilization Review and Other Quality and Cost Controls Rendered
Utilization management and other quality and cost-containment
mechanisms would fall before the juggernaut of Section 151. Utilization
review is a process, or series of processes, to address quality of care.
Within a plan, it is developed and managed by health care professionals to
assess whether a treatment plan is medically necessary or appropriate and,
therefore, a covered benefit deserving of payment under the coverage plan.
A well-functioning utilization review program, under the direction of
medical professionals, manages the use of available resources to optimize
the effectiveness of the care. Physicians and nurses review requests for
prior authorization or precertification determinations to make sure that a
planned procedure is a covered benefit and to determine that it is
medically appropriate (i.e., the right procedure in the right setting, at
the right time). Precertification determinations not only protect plan
participants from undergoing unnecessary procedures, they also offer other
protections, such as care provided in a contracted facility that has met
the health plan’s standards, provided by a physician who is credentialed
by the health plan. It’s unclear at this time how extensively this
proposal would undermine the emerging health plan programs targeting
management of specific diseases such as asthma, diabetes, and heart
disease. Under Section 151, however, utilization review and other
quality and cost-containment mechanisms could arguably be
characterized as "arbitrary interference with" or "alteration of" the
physician’s medically necessary treatment plan.
Moreover, Section 151’s deference to the treating physician’s decision
with respect to the "manner or setting" of treatment also would weaken
utilization review. Indeed, under such strictures, health plans may well
be tempted, in the words of the CBO Report, "to reduce the
frequency with which they challenge[d] physicians’ decisions," regardless
of their medical necessity to avoid the administrative costs of
adjudicating challenges. (See endnote 26.)
Resources to pay for health care services are limited for both
government and private payers. The proposed legislation would put pressure
on health plans to approve requests for utilization review determinations
that would be questioned under the current system, and to pay any and all
claims regardless of their true medical necessity, simply to avoid
the expanded liability for denial of payment. This would have an adverse
effect on the quality and cost of the care.
5. Provider Financial Conflicts Could Become More Problematic
Insurers—public and private—have relied on the medical necessity
standard to help discourage overuse of medical services. Studies comparing
the use of certain medical procedures by geographic region have found
large differences in physician practice patterns not clearly justified by
patient demographics or outcomes. This raises concerns about the efficacy
and basis of many medical practices.52 Indeed, a myriad of
studies have shown that many services patients received had no significant
medical benefit and were, in some instances, harmful.53
Unfortunately, Section 151, by providing the physician with statutory
"leverage" over the coverage and payment determinations, could motivate
physicians to overtreat.54 Incentives to overtreat include:
- the inherent and intractable nature of fee-for-service itself;
- payment and receipt of inducements or kickbacks for
referrals—currently illegal only in Medicare and Medicaid;
- income earned by a physician referring patients to medical
facilities owned or invested in by the physician—limited in only
certain instances in Medicare;
- income earned by a physician for dispensing drugs, products, and
other ancillary medical services;
- payments made by hospitals to doctors to purchase physicians’
medical practices and pressure to increase admissions;
- hospital joint ventures and income guarantee arrangements and
loans to physicians to promote referrals to the sponsoring hospital;
- hospital provision of management functions such as billings,
collections, and accounting to promote referrals to the sponsoring
- gifts to doctors from medical suppliers offering products that
require a physician’s prescription to be sold; and
- sale of information from patients’ files by doctors to marketing
firms, pharmaceutical firms, and others.
C. Concerns About Diminished Quality of Care
1. Evidence-Based Quality Standards Rendered Moot
Each year, as many as 120,000 Americans die, and about 1 million are
injured, because of medical mishaps and errors.55 In some
cases, doctors prescribe unorthodox or unnecessary courses of treatment
that could be defended as consistent with "generally acceptable principles
of professional medical practice" under Section 151, but that place
patients at significant risk for injury or death.
Patient injuries resulting from medication occur at the rate of about
2,000 a year in each large teaching hospital; about 28 percent are
preventable based on current knowledge.56 The 1984 Harvard
Medical Practice Study of New York State Hospitals, published in the New
England Journal of Medicine in 1991, estimated that more than 27,000
patient injuries are due to negligent care.57 Section 151 could
exacerbate these problems because it would give individual providers the
authority to bypass the carrier’s utilization review process and its
application of practice guidelines to coverage decisions.
Broad-based criteria used by health plans and insurers are objective,
measurable decision-making criteria based on sound clinical evidence,
consistent with the plan’s clinical practice guidelines, based on
"best practices" that reflect up-to-date scientific research. These
guidelines—optimal clinical benchmarks for a given condition with no
complications—are reviewed by the health plan’s quality committee whose
members include network physicians practicing in the area. The use of
guidelines in medical decision making is not new. The medical community
has traditionally used guidelines. In making prior authorization
determinations, health plan medical professionals apply plan guidelines on
a case-by-case basis.
The proposed legislation could "lower the bar" for physicians by
permitting merely the "generally accepted" standard to prevail. In effect,
it would allow an individual provider to ignore decisions made by
professional peers and adopted by a health plan as part of its
2. Concerns about the Use of Risky Medical Procedures
Because Section 151 would give providers virtually unlimited autonomy
with regard to the "manner" or "setting" in which care was delivered, it
could subject patients to harm by leading to unnecessary hospital stays
and/or possible over- or under-utilization of services. To the extent that
treating physicians rather than health plans and insurers would be
decision makers regarding plan coverage determinations, the Patients’ Bill
of Rights Act would increase health plans’ exposure to civil lawsuits for
punitive and other non-compensatory damages resulting in injury or
The following are examples of problems related to inappropriate
treatment involving both overtreatment and undertreatment typical of those
that health plan utilization management currently addresses:
- A study done by HCIA with William Mercer found that if all
hospitals performed at the benchmark levels of the top 100 hospitals,
inpatient mortality and complication rates would drop 22 percent, and
the average length of stay would be cut by about half a
- A study published in the Journal of the American Medical
Association (JAMA) in 1993 found that 16 percent of hysterectomies
performed were inappropriate.60
- Twenty percent of cardiac pacemakers were found to have been
inserted for clearly inappropriate reasons, according to a study
published in the New England Journal of Medicine in
- Twenty-three percent of children proposed for tympanostomy tube
insertion (the most common surgical procedure in childhood) had been
recommended for inappropriate reasons according to a study published
in JAMA in 1994 and referred to in 1998.62
- Two 1992 studies of ambulatory adults and children, published in
JAMA in 1997 and 1998, found that 21 percent of all antibiotic
prescriptions (a total of 23.8 million prescriptions) were used to
treat colds, other upper respiratory tract infections, or
bronchitis—conditions for which antibiotics are ineffective and pose
the risk of life-threatening adverse drug reactions and an increase in
- A study by the University of Maryland Medical School showed that
cholesterol-lowering drugs are given to only 35 percent of the women
and 54 percent of men diagnosed as at risk of having a heart
- Approximately one-third of the heart attack victims who could
benefit from the use of beta blockers, the widely accepted drug for
secondary prevention after acute myocardial infarction, are not
prescribed the drug, resulting in about 18,000 deaths a
- The use of beta blockers varies significantly across the country,
from a low of 30.3 percent of the appropriate subject population to a
high of 77.1 percent. Beta blockers are associated with a 14 percent
lower risk of mortality one year after hospital
- A study conducted by Yale University found that only about 38
percent of the people who could benefit from taking Warfarin, a drug
that prevents up to 80 percent of strokes in people with atrial
fibrillation, receive prescriptions for it.67
D. Concerns About Abrogation of Contracts
1. Insurers’ Fundamental Fiduciary Duty Would Be Abolished
Health insurance policies are private contracts that spell out the
rights and responsibilities of both consumers and issuers or providers of
the coverage. These contracts establish the details of the relations
between insurers and the insured, health plans and administrators, and
health plans and networks of providers. Moreover, standards for private
health insurance contracts also appear in state laws, including general
contract law, common law, and insurance laws and regulations.68
Government health care programs, including Medicare and FEHBP, also rely
on similar "contractual" terms to delineate eligibility, coverage
obligations, and various other matters.69 In the case of
publicly financed health care, the statutes and regulations that govern
both state and federal programs function as contract terms, and adherence
to these terms is enforceable.
By defining medical necessity, and mandating that only the treating
physician may determine whether particular services are "medically
necessary or appropriate," the proposed law would both undermine the
ability of the health plan or insurer to define "medical necessity" and to
determine whether, for purposes of coverage and reimbursement, particular
services are "medically necessary." Accordingly, the proposed law would
remove the cornerstone of the private contract, leaving only eligibility
and payment rates as subjects for contractual agreement. While the law
would permit a general outline of benefits, the treating physician would
decide which particular services are required for treatment, how those
services are provided, in what setting, and for how long.
In doing so, the law would abrogate the central tenet of insurance
contracts, which are in fact agreements in which the insurer pledges to
maximize the pooled resources of the many to the advantage of all
beneficiaries. This obligation to make the best use of pooled resources
is fundamental to all forms of insurance. With health coverage,
insurers fulfill this responsibility to those who have paid premiums by
agreeing to pay only for "covered" items and services determined to be
medically necessary and appropriate. By contract, then, the employer or
the sponsor of a group health insurance plan has obligated the health plan
or insurer to reserve coverage and payment for only medically necessary
care. Similarly, an individual purchasing individual coverage has entered
into the same type of contract with the health plan or insurer. Indeed,
the insurer is legally obligated to exclude items and services "not
reasonable and necessary" for the diagnosis or treatment of illness or
injury. This is true of all health care contracts, be they for a managed
care arrangement or for fee-for-service coverage.70
2. Fiduciary Deference Under ERISA Would Be Abolished
In addition, the proposed legislation would also play havoc with claims
administration of employer-provided benefit plans. This is because the new
law would amend ERISA, which was in part passed to foster uniformity and
predictability in the administration and structure of benefits. Subjecting
coverage and payment decisions to each provider’s medical necessity
determination breaches ERISA’s long-standing principle of uniform claims
administration and subjects employers to covering many different
procedures. Thus, it would impede employer-sponsored group health plans
from granting fiduciaries discretion to interpret established contractual
terms and conditions for determining coverage provided by employee plans,
and would prevent performance of the duty owed to the plan by that
Under current law, where ERISA plans provide discretionary authority to
administrators to interpret the plan’s terms and conditions, judicial
review of a denial of a benefit is based on an "arbitrary and capricious"
standard. This developed under the trust-law model of ERISA, and deference
is provided to the fiduciary who is empowered to exercise discretionary
authority over benefit claims.71 The proposed legislation would
instead give deference to the treating physician, overturning years of
judicial precedent. ERISA common law has developed important safeguards,
ensuring that decisions by administrators of ERISA group health plans are
properly made solely in the interest of participants and beneficiaries.
Courts have established a much more narrow deference to such decisions
where the financial interests of a fiduciary come into play. A significant
line of case law requires that plan administrators carefully review issues
of medical necessity including adherence to the plan’s precise definition,
review of all medical evidence, and consultation with treating
The proposed law also would change the nature of the fiduciary duty
owed by plan administrators. Currently, ERISA imposes strict
fiduciary obligations on employer plans, requiring administrators to act
solely in the interest of the beneficiary and to pay valid claims. A
fiduciary can be held personally liable for a breach of that
duty.73 The bill appears to alter one of the principles
fundamental to this body of law: changing the concept of fiduciary duty
from "prudent management of the plan assets for the use of all
beneficiaries" to "ensuring that the treating physician of each single
beneficiary is paid for services rendered."74 Accordingly, a
fiduciary’s duty is narrowed significantly, with a greater duty of
deference owed to the physician treating an individual covered under the
group health plan.
E. Concerns About Conflict with Public Programs
1. Separate Standard Continued for Public Programs
"Medical necessity" is common to private health insurance contracts and
governmental health insurance programs, a touchstone of "contractual"
obligation for determining coverage and payment of medical items and
services. Public health insurance programs, including Medicare and FEHBP,
premise payment on "medical necessity" in order to maximize resources and
to protect health care consumers. Medicare, for example, excludes coverage
for items and services "not reasonable and necessary."75 The
Health Care Financing Administration (HCFA) has issued regulations and
circular letters instructing medical intermediaries to adopt claims
payment practices based on determination of medical necessity. Medicare
may refuse reimbursement for certain kinds of services and prohibit
payment of benefits for experimental, investigational, or unproven
Federal courts have distinguished this coverage determination from
medical decisions and have opined that Medicare’s denial of payment for
services "not medically necessary" does not constitute the practice of
medicine.76 Indeed, in one key case, a court held that
while excluding coverage for services determined "not reasonable or
necessary" may certainly influence medical decisions, without such an
exclusion the Secretary of Health and Human Services would scarcely be
able to regulate the Medicare program at all.77 The court
further declared that the provision does not direct or prohibit any kind
of treatment, but only determines its subsequent
The federal Medicaid program uses medical necessity as a standard of
coverage and payment.79 As a consequence, states have
conditioned benefits upon medical necessity.80 For example,
troubled by reports of significant numbers of unnecessary surgeries
performed in the United States, in 1974 the State of New York formulated
more restrictive guidelines and controls for authorized surgical
procedures in hopes of saving up to $65 million in Medicaid costs. The
state defined its "medical assistance" to mean payment for medically
necessary care. Similarly, Massachusetts restricts the amount, duration,
and scope of Medicaid benefits based upon such criteria as "medical
The Military Health Services System, the Civilian Health and Medical
Program of the Uniformed Services ("CHAMPUS"), which provides benefits to
active duty dependents, retirees, and retirees’ dependents, employs
a medical necessity standard.81 For example, in defining the
scope of benefits for the program, the statute specifies that coverage is
not provided for any service that is not medically necessary.
2. Public Program Principles Apply to Private Contracts
These same key principles are applicable to private contracts for
health care coverage, including managed care arrangements under which
coverage and payment determinations may occur before services are
rendered.82 Some treatments have been determined not to be
medically necessary because they were not reimbursable by Medicare under
the terms of the program and occurred in connection with medical
research.83 However, the Patients’ Bill of Rights legislation
would alter this result because such standards become irrelevant in the
face of the treating physician’s determination. Because every service
would in fact be deemed covered (unless the insurer can prove otherwise),
public and private insurance would be running on two different tracks. The
congruence between private and public insurance would be destroyed.
Hundreds of private contracts referencing the Medicare standard, for
example, would need to be amended, causing many controversies and
making any reliance on this standard uncertain at best.
The proposed legislation would fundamentally alter the health care
market by relegating plans and insurers to the role of writing "blank
checks" to the medical community. Key coverage and reimbursement decisions
would in fact be made by physicians, who would have both economic and
noneconomic incentives to overtreat, thereby driving up costs and lowering
the quality of care.
Eliminating medical necessity determinations by plans and insurers also
changes the nature of the health insurance contract. It disables the
private contract structure for insurers and policyholders, leaving the
provider community in command of interpreting essential terms and
conditions of contracts to which they often are not parties. It also
radically changes the nature of fiduciary responsibilities, especially for
ERISA plans. Additional confusion would arise because the law would not
apply to government health insurance programs, which would continue to use
this mechanism to assure beneficiaries of appropriate health care and
proper expenditure of scarce health care dollars.
In sum, this legislation is not an effort to protect patients but to
reintroduce fee-for-service reimbursement to the private marketplace,
wrest control of coverage determinations from insurers, and maximize
provider incomes. It undermines all health care delivery models, including
managed care which has served as a protective mechanism for consumers and
for society as a whole. It would return our health care system to an
unconstrained fee-for-service environment. By turning medical necessity
determinations over to providers, the legislation threatens to undermine
the considerable progress made with respect to quality and cost. This
result would be contrary to sound public policy.
1See, for example, S. 2529, 105th Cong., 2d Sess.
§ 151 (a)
(1998), S. 6/H.R. 358, 106th Cong., 1 Sess. § 151 (1999)(hereinafter
2Remler, Dahlia K., Karen Donelan, Robert J. Blendon, Georghe D.
Lundberg, M.D., David R. Calkins, M.D., Lucian L. Leape, M.D., Katherine
Binns, and Joseph P. Newhouse. "What Do Managed Care Plans Do to Affect
Care? Results from a Survey of Physicians," Inquiry 34:196-204
(Fall 1997). See also Anderson, Gerard, Mark A. Hall, Teresa R. Smith.
"When Courts Review Medical Appropriateness," 36 Med. Care 1295
3HIAA Legislative Summary, S. 6/H.R. 358, The Democrats’
Patients’ Bill of Rights Act of 1999.
4See PBOR § 151, (a) (1).
5See PBOR § 151, (a) (1).
6Remler et al. (Fall 1997). See also Anderson et al.
7See the Public Health Service Act (PHSA) § 2791 (b) (1).
8See PHSA § 2791 (b) (1).
9See PHSA § 2791 (b) (1).
10See PHSA § 2791 (b) (1).
11See PHSA § 2791 (b) (1).
12See PHSA § 2791 (b) (1).
13See PBOR § 151 (a) (1).
15See PHSA § 2791 (a) (1).
16See PHSA § 2791 (b) (1).
17See PBOR § 201.
18See PBOR § 202.
19See PBOR § 301.
20See PBOR § 151 (a) (1).
21See Furrow, Barry R. et al. Health Law § 11-2 at 8 (1995).
22See Furrow, Barry R. et al. Health Law § 11-2 at 12 (1995).
23See e.g., Dungan v. Travelers Ins. Co., 480 P.2d 418
(1971); Cullop v. Rogue Valley Physicians’ Service, Inc., 503 P.2d
699 (1972); Trine v. Prudential Ins. Co., 645 F.2d 39 (1981 C.A.10
Colo.); Hanson v. Prudential Ins. Co., 783 F.2d 762 (1985 CA9
Cal.); Kravitz v. Equitable Life Assur. SOC., 453 F. Supp. 381
(1978, DC Pa.)
24See PBOR § 151 (a) (1) and (3).
25See Blacks Law Dictionary at 104-105 (6th Ed.
26July 16, 1998, CBO cost estimate for H.R. 3605/S. 1890, the
Patients’ Bill of Rights Act of 1998, 15. (Emphasis added.)
27Fraud: The Hidden Cost of Health Care, Health Insurance
Association of America, Washington, DC: 1996, 15-48.
28Vulnerable Payers Lose Billions to Fraud and Abuse.
Washington, DC: Government Accounting Office, 1992.
29Health Care Financing Administration, Office of the Actuary,
30Testimony of Charles L. Owens, Chief, Financial Crimes Section,
Federal Bureau of Investigation, before the House Ways and Means Health
Subcommittee, October 9, 1997, serial 105-33.
31Testimony of Charles L. Owens, Chief, Financial Crimes Section,
Federal Bureau of Investigation, before the Permanent Subcommittee on
Investigations of the Senate Committee on Government Affairs, June 26,
1997, S. Hrg. 105-154,. 20.
32Health Insurers Anti-Fraud Programs. Washington, DC: Health
Insurance Association of America, June 1997.
33P.L. 104-191,. §§ 211-217.
35"A Comprehensive Strategy to Fight Health Care Waste, Fraud and
Abuse," HHS Fact Sheet, February 10, 1999. See also Pear, Robert,
"Improper Medicare Payments Fall but Still Cost $12 Billion," The New
York Times, February 10, 1999, A17.
36Fraud: The Hidden Cost of Health Care, Washington, DC:
Health Insurance Association of America, 1996, 223.
42See Endnote 31.
43See Endnote 31.
44See Dallis v. Aetna Life Ins. Co., 768 F.2d 1303 (1985).
But see Trustees of the Northwest Laundry and Dry Cleaners Health and
Welfare Fund v. Burzynski, 27 F.3d 153 (5th Cir. 1994)
(denying coverage of unorthodox cancer treatments determined "medically
necessary" by treating physicians).
45See Marker v. Union Fidelity Life Ins. Co., 907 F.2d
1138 (4th Cir. 1990) (awarding summary judgment to the patient
for his appendectomy done for purely preventive, exploratory reasons and
asserting that "the determination of what was reasonable and necessary was
for the licensed, treating physician").
46See Van Vactor v. Blue Cross Association, 365 N.E.2d
638, 643 (Ill. App. Ct. 1977) (stating that where patient was hospitalized
to remove impacted teeth, "there was sufficient evidence . . . that the
insured was justified in relying on the good faith judgment of his
treating physician as to the medical necessity of services prescribed");
Carrao v. Health Care Serv. Corp., 454 N.E.2d 781, 788 (Ill. App.
Ct. 1983) (stating that Van Vactor remains good law in the absence of an
explicit contractual provision to the contrary).
47See Taylor v. Prudential Ins. Co., 388 So. 2d 470
48See Duncan v. J.C. Penny Life Ins. Co., 388 So. 2d 470
49See "Managed Care Savings for Employers and Households: 1990
through 2000," a study conducted by The Lewin Group for the American
Association of Health Plans, June 1997. According to the study, "without
managed care, average health spending for non-aged families in 1996 would
have been higher by an average of $406 under a high-range scenario and an
average of $304 under a low-range scenario."
50See Social Security Act § § 1862 (a) (1), 1901. See also Hall, Mark A.,
and Gerard F. Anderson, "Health Insurers’ Assessment of Medical
Necessity," 140 Penn.L.Rev. 1637, 1647 (1992).
51See PBOR § 151 (c).
52See Rosenblatt, Rand E., et al., Law and the American Health
Care System (1997) at 212-213.
53See Sharpe, Virginia A, Faden, Alan I., "Appropriateness in
Patient Care: A New Conceptual Framework," The Milbank Quarterly,
74:115 (March 22, 1996).
54See Rodwin, Marc A. Medicine, Money, and Morals: Physicians
Conflict of Interest, Oxford University Press.
55Beeman, Douglas E., "When Mistakes Are Fatal: A Medical
Researcher Says Doctors’ Errors May Cause Up to 120,000 Deaths and 1
Million Injuries Each Year," The Press-Enterprise, Riverside,
California, October 14, 1996.
56The Journal of the American Medical Association (JAMA)
58See PBOR, § 302.
59Managed Healthcare, 1/98.
64USA Today, 6/19/98.
65USA Today, 6/17/98.
67USA Today, 6/17/98.
68See Furrow, Barry R., et al., Health Law § 11-1 at 4 (1995).
69See Social Security Act § 1862 (a) (1) (A); and 5 U.S.C. § 8902 (n). See also 42
C.F.R. § 411.15
(k) (1997); and 5 C.F.R. § 890.105(a), (b) (1998).
70See Havinghurst, Clark C., Health Care Choices: Private
Contracts as Instruments of Health Reform at 15 (1995).
71 See Firestone Tire & Rubber Co. v. Bruch 489 U.S.
72 See Bedrick v. Travelers Ins. Co., 93 F.3d 149
(4th Cir. 1996); McGraw v. Prudential Ins. Co. of Amer.
(10th Cir. 1998); Friends Hospital v. MetraHealth Serv.
Corp., 9 F. Supp. 2d 528 (E.D. Pa. 1998); Dowden v. Blue Cross
& Blue Shield of Tex., Inc., 126 F. 3d 641 (5th Cir.
73 See ERISA § 409 (a)
74 See Brown v. Blue Cross & Blue Shield, 898 F.2d
1556 (11th Cir. 1990).
75 See Social Security Act § 1862
76 See Goodman v. Sullivan, 891, F.2d 449 (2nd
Cir. 1989). See also State of New York on Behalf of Bodnar v. Sec. Of
Health and Human Services, 903 F.2d 122 (1990); Wilkins v.
Sullivan, 889 F.2d 135 (1989); Vorster v. Bowen, 709 F. Supp.
934 (1989); Bedford County General Hosp. v. Heckler, 574 F. Supp.
943 (D.C. Tenn. 1983); Torphy v. Weinberger, 384 F. Supp. 1117
(D.C. Wisc. 1974).
77 See Goodman v. Sullivan, 891 F.2d 449, 451.
78 See Goodman v. Sullivan, 891 F.2d 499, 451.
79 See Social Security Act § 1901 (limiting appropriations
to cover "necessary" medical services); and Social Security Act § 1902 (a)
(30) (A) (requiring state plans to provide for procedures
"necessary to safeguard against unnecessary utilization of care and
services"). See also 42 C.F.R. § 440.230 (d) (authorizing
states to limit services based upon "medical necessity" or utilization
80 See e.g. Calif. Welf. & Inst. Code §§ 14059.5,
14137.8; Ann L. Mass. Chap. 118E § 15; Mich. C.L. Ann. §§ 400.111a (3)
(b), (7) (e), (8); and N.Y. Social Services Law § 365-a (2).
81 See 10 U.S.C. § 1079 (a) (13) (excluding coverage for
any service or supply which is not "medically necessary"). See
also 32 C.F.R. §§ 199.2 (defining "medically necessary"); 199.4 (a)
(1) (I) (limiting the scope of benefits paid for to those "medically
necessary"); 199.4 (a) (1) (i) (limiting the scope of benefits paid for to
those "medically necessary"); 199.17 (h) (authorizing review for "medical
necessity" under TRICARE).
82 See, e.g., Trustees of the Northwest Laundry and Dry
Cleaners Health & Welfare Trust Fund v. Burzynski, 27 F.3d 153
(5th Cir. 1994), cert. denied, 115 S.Ct. 1110 (1995)
(physician's "antineoplastons cancer treatments" were not medically
necessary" and physician was not entitled to reimbursement); Farley v.
Benefit Trust Life Ins. Co., 979 F.2d 653 (8th Cir. 1992)
(insured's high-dose chemotherapy treatment accompanied by autologous bone
marrow transplant procedure was not "medically necessary").
83 Compare Grethe v. Trustmark Ins. Co., 881 F. Supp. 1160
(N.D. III 1995) (50-year-old person suffering from inoperable, terminal
breast cancer is not entitled to preliminary injunction requiring insurer
to pay for HDCT/ABMT or peripheral stem cell rescue, such treatment is not
"medically necessary" because it is not reimbursable by Medicare and is
administered in connection with medical research).