‘Medical Necessity’ in Psychiatry: Whose Definition Is It Anyway?

Want a surefire way to elicit groans among a group of psychiatrists? Ask them about the last time they tried obtaining a preauthorization for a patient. It becomes difficult to suppress feelings of rage and cynicism when, after a time-consuming phone conversation, one’s clinical decision is deemed “not medically necessary” (see related article).

This situation is especially common for psychiatrists trying to help patients obtain insurance reimbursement for psychotherapy. While psychotherapy is clinically accepted as a first-line treatment for multiple psychiatric diagnoses, insurance companies, citing their own views of “medical necessity,” routinely refuse to cover it altogether or at the prescribed frequencies.

Psychiatrists hoping to clarify medical necessity standards may be surprised to find no universally accepted definition of medical necessity. Without a federally mandated definition, it is no surprise that insurance companies interpret this concept on their own terms, often choosing cost savings over treatments widely accepted as standards of care in psychiatry.

In 2014, a class-action lawsuit filed against United Behavioral Health (UBH) directly challenged medical necessity criteria used to deny outpatient mental health care to several plaintiffs prescribed twice weekly sessions. The plaintiffs argued that UBH ignored its duties of loyalty and care when it implemented coverage guidelines inconsistent with generally accepted standards of care. Publicly available, UBH’s Level of Care Guidelines specify that medical necessity decisions “are for payment purposes only.”

Though the guidelines maintain that treatment decisions must be “in accordance with generally accepted standards of medical practice,” it is clear from UBH’s overemphasis of acute factors that the most salient determinant of coverage is “whether services are cost-effective.” The criteria create a prescriptive, one-size-fits-all approach that leaves little room for anything beyond brief, crisis-oriented treatment. Paradoxically, when payment structures unduly favor acute treatment of chronic, severe mental illness, both utilization and undertreatment costs inevitably accrue over the long term, rendering even the primary goal of “cost-effectiveness” illusory.

Though insurers clearly use “medical necessity” to mean “cost-effective” rather than “clinically effective,” their view is at odds with positions taken by nonprofit medical specialty associations. For example, the AMA defines “medically necessary” to mean “in accordance with generally accepted standards of medical practice,” while clearly advocating for coverage that is “not primarily for the economic benefit of the health plans.” Similarly, the Centers for Medicare and Medicaid Services, the American College of Medical Quality, and the American Association of Community Psychiatrists emphasize accepted standards of medical practice over financial considerations in their definitions of medical necessity.

How did the term “medical necessity” evolve? It first arose in the 1940s, when private insurers emerged from the hospital industry. It was used to describe any medical service covered by insurance. Insurers set monetary limits but avoided judgments about the appropriateness of clinical decisions. Physician choices regarding treatment were autonomous.

By the 1960s, however, insurance companies began creating written guidelines defining medical necessity. The introduction of Medicaid led to state-specific definitions in which “cost-effectiveness” became part of the criteria.

In the 1970s, private insurers and Medicare began requiring physicians to justify the necessity of medical treatments. Consequently, economic rather than medical standards became the most common justification for denying treatment. By the 1980s, the pendulum shifted further when Congress set up peer-review organizations to evaluate Medicare benefits, and private insurance companies initiated prospective reviews and precertifications.

Efforts at health care reform in the 1990s brought attempts to define standards of medical necessity through federal legislation, introducing an alternate term, “medical appropriateness.” According to the proposed criteria, if a medical treatment was “effective,” “beneficial,” and “judicious” (with all three of these terms having specific definitions), it would be deemed medically appropriate. However, this language was excised from the final health reform bill, which in the end failed to pass. In 2000, a Florida class-action suit against multiple insurers required their use of a standard definition of medical necessity with criteria similar to those for “medical appropriateness.”

The Mental Health Parity and Addiction Equity Act of 2008 also lacks a federal definition of medical necessity, but it requires insurers to release their proprietary coverage guidelines. Some states have gone one step further by mandating the use of certain clinical guidelines developed by nonprofit, physician specialty groups, including the American Academy of Child and Adolescent Psychiatry and the American Society of Addiction Medicine.

Without universal medical necessity criteria for mental health care, clinicians and their patients are saddled with a concept highly susceptible to abuse by insurers. For now, multiple class-action suits are the main fronts in the battle against restrictive coverage criteria that limit access to appropriate psychiatric care. Hopefully, a combination of favorable court rulings, advocacy, education, and ultimately legislation will universalize a humane definition of medical necessity and create true parity. ■

Bergthold LA. Medical Necessity: Do We Need It? Health Affairs. 14(4):180-190.

Hall Mark A, Anderson GF. Health Insurers' Assessment of Medical Necessity. University of Pennsylvania Law Review. 140(5):1637-1712.

Kessler S. Mental Health Parity: The Patient Protection and Affordable Care Act and the Parity Definition Implications. Hastings Sci. and Tech. LJ 6: 145-166.

Statement of the American Medical Association to the Institute of Medicine’s Committee on Determination of Essential Health Benefits; Division of Legislative Counsel, Washington DC, January 14, 2011.

Policy 8 Definition and Application of Medical Necessity, American Medical Association.

Principles for Defining Medical Necessity in Mental Health Treatment, American Association of Community Psychiatrists.

The Level of Care Guidelines, Optum OptumHealth Behavioral Solutions of California.