Managed Care's Crimea: Medical Necessity, Therapeutic Benefit, and the Goals of Administrative Process in Health Insurance
Sage, William M., Duke Law Journal
Reading news headlines, one would think that the managed care wars were over. By the end of 2001, forty-two states had enacted laws subjecting coverage determinations by managed care companies to "external" or "independent" review, with twenty-seven states adopting them in the preceding three years. (1) In June 2002, the Supreme Court held that the federal ERISA statute (2) did not preempt an Illinois law requiring health maintenance organizations (HMOs) to submit coverage denials to binding independent review. (3) In February 2003, the Second Circuit joined a growing number of federal courts of appeals in allowing individual plaintiffs to sue managed care health plans in state court alleging that faulty decisionmaking caused physical harm. (4) In May 2003, Aetna settled a nationwide class action brought by physicians by agreeing, among other things, to apply generally accepted medical standards in determining the medical necessity of proposed treatments. (5) Congress has all but abandoned efforts to enact a "Patients' Bill of Rights," and has placed managed care on a legislative back burner in order to deal with medical malpractice reform and a Medicare prescription drug benefit. Doctors who only a few years ago were clamoring for expanded rights to sue health plans are now standing shoulder-to-shoulder with the managed care industry against the predations of the personal injury bar.
Can one conclude from these events that the era of lawless managed care has ended? Is the relationship among patients, physicians, and health insurers now governed by a well-accepted framework of contractual obligations and readily available independent administrative review, with predictable recourse to private litigation as a last resort? Hardly. Although many of these regulatory and self-regulatory developments hold promise for improving both health insurance and medical care, they suffer from three substantial infirmities. First, they oversimplify the economic and clinical effects of managed care by focusing attention primarily on the determination of "medical necessity," a term of art in health insurance contracts used to distinguish, at the margin, covered from noncovered services. (6) Second, their universality is easily exaggerated; the Supreme Court in Rush Prudential HMO v. Moran (7) strongly suggested that, without new federal legislation, states may not mandate independent review for the tens of millions of patients covered by "self-funded" ERISA plans, (8) and that the state law in question applied narrowly to HMOs, not all health insurance. (9) Third, they take insufficient account of underlying variation in health plan structure, financial incentives, and clinical acumen and resources. (10) Second-best theory suggests that layering a uniform review and appeals system atop such a variable decisionmaking process may, at the end of the day, make access to medical care less--rather than more--consistent. (11)
This Essay explores the concept of medical necessity as it has evolved in the judicial and administrative oversight of managed care. The goals of the Essay are to illustrate the range of plausible rationales for establishing administrative procedures to govern medical necessity disputes, and to demonstrate the difficulty of incorporating into those procedures the most important professional and social responsibilities of managed care in today's health care system. Part I of the Essay explains the ideological and practical significance of medical necessity as managed care has evolved. Part II examines medical necessity as a legal problem, and questions whether current independent review programs match social needs. Part III offers an alternative perspective on oversight of decisionmaking in managed care that emphasizes therapeutic effect rather than contractual enforcement. Part IV describes improvements in both independent review and overall medical necessity policy that would better serve therapeutic objectives. …