History of Medical Necessity and the Beginning Of a Denial Prevention Program

For years hospitals have been held liable for a loss of payment due to a lack of medical necessity that demonstrated why a patient needed an admission to an acute level of care. Hospitals have struggled devising programs to ensure payment and most efforts were concentrated on the back end. Denial prevention begins at the point of entry. The following is an excerpt from a book I published in 2009 with some updates to chapter 1 on Medical Necessity and how it is the basis to prevent denials but also how insurance companies see it as the main point for establishing the authorization processes. I begin with the history of Medical Necessity. In the bool I discuss areas that are tried and true methodologies that have led to successful outcomes as I implemented or assisted others in implementing the strategies outlined herein which I have then turned into a successful consulting and executive career over the last 20 years.

History of Medical Necessity

Medical necessity is used in today’s healthcare environment to dictate and drive the cost of care so that is it spread as evenly as possible for all beneficiaries. By dividing the cost of care in an even distribution pattern based on need, insurance companies state that they can better server their populace and have sufficient funds to meet the demands of care. From a denial management perspective, medical necessity is the one most important element to grasp to be successful in capturing reimbursement for services. Denial prevention and recuperation starts with understanding the importance of a medically necessary admission and the elements that need to be in the medical record to demonstrate the need for admission to guarantee payment.

The conundrum of medical necessity is how it is defined. To better understand the definition, we must first look back at its creation.

During the 1940s medical insurance plans became a part of the American healthcare system and medical necessity was born to provide cost savings and spread the ability to provide care for many. The determination of the necessity of care was still relegated to the judgment of the treating physician. The Social Security act of 1965 established Medicare and Medicaid and in 1966 Medicare was fully implemented. To control costs, certain mandates were enacted, which included review of each admission for medical necessity. The judgment of the physician under the Medicare and Medicaid program was questioned although their admitting criteria stated otherwise. Oversight of the program mandated that payment would be made for appropriate and necessary care.

What is Medical Necessity?

Medical necessity was established by Medicare as a means to provide cost effective care and limit the treating physician from indiscriminately requesting admission or testing Congress wrote within the Social Security act provisions that “health services ordered for government patients are provided economically and only when, and to the extent, medically necessary” (Blanchard, 2004) [1]The problem with that provision was that no true definition of medical necessity was provided. The best interpretation seems to be that the government wanted to ensure physicians provided care “in the context of the shortest, least expensive or least intense in terms of level of treatment of care or service provided” [2]

In the 1970s private insurance companies began to require that physicians justify their decisions. The change in stance by the companies led Medicare to begin to issue coverage determinations and begin a list of non-covered services. Also thrown into the fray were the Medicaid programs in each state. Some of their definitions included language such as “accepted medical practice or community standards of care; not for the convenience of the patient or provider; not experimental or investigational; and appropriate and effective”.[3]

The Supreme Court joined in the discussion in the case of Beal v Doe U.S 438,444 (1977) stated that medical necessity within the Medicaid programs, Medicaid was “conferred broad discretion on the states to adopt standards for determining the extent of medical assistance” They further stated that “nothing in the language of Title XIX requires a participating State to fund every medical procedure falling within the delineated categories of medical care. Each State is given broad discretion to determine the extent of medical assistance that is "reasonable" and "consistent with the objectives" Also form the case the court stated that “the Social Security Act does not require participating state to fund every medical procedure falling within delineated categories of medical need, but each state is given broad discretion to determine extent of medical assistance that is reasonable and consistent with objectives of the Act, and, although serious questions might be presented if state Medicaid plans did not cover necessary medical treatment, it is not inconsistent with Act's goals to refuse to fund unnecessary, though perhaps desirable, medical services.”[4] Again there was a failure to describe or determine what medically necessary care is.

The 8th circuit court of appeals in 1980 in the case of Pinneke v Preisser (623 F 2d 546, 550) recognized that “the decision of whether or not certain treatment or a particular type of treatment is medically necessary rests with the individual recipient’s physician and not with clerical personnel or government officials” [5]

In 1998 the American Medical Association released the following definition of medical necessity:

Healthcare services or products that a prudent physician would provide to a patient for the purpose of preventing, diagnosing, or treating an illness, injury disease or its symptoms in a manner that is: (a) in accordance with generally accepted standards of medical practice; (b) clinically appropriate in terms of type, frequency, extent, site and duration; and (c) not primarily… for the convenience of the patient, treating physician, or other healthcare provider. [6]

Most healthcare plans followed suit and provided similar definitions that also included provisions to:

· Prevent the onset or worsening of an illness, condition, or disability

· Provide palliative, curative, or restorative treatment for physical and/or mental health conditions

· Establish a diagnosis

· Assist the individual to achieve or maintain maximum functional capacity in performing daily activities, taking into account both the functional capacity of the individual and those functional capacities that are appropriate for individual of the same age. [7]

As recently as the Clinton administration, a better definition of medical necessity was debated in Congress, but no consensus was reached. Some of the language included in the debate was; effective, beneficial, and judicious. Each of these terms carries their own interpretation that can be ambiguous and can lead to further confusion. What is beneficial and to whom is the benefit applied? What about judicious, how would that apply to the beneficiary against what the plan determines to be judicious. Since there were many stakeholders each with their own needs and agenda including the different political parties, the drive to create a national health plan that included a working definition of medical necessity died a slow death in Congress.

At the same time, private insurance companies began to list covered and non-covered services and procedures in their summary plan descriptions.

Further moves to define medical necessity have remained stagnant for some time. Private insurers continually use the term as a means to direct the review of any claim, which can be a pre-service, concurrent or retrospective review. These same companies have added an additional layer to medical necessity by publishing their own internal guidelines on what are or are not covered items and relegating them under the umbrella of a medical necessity review. The guidelines are most often based on their own research of evidence-based medicine, but seldom include research conducted in other countries, which limits the scope of accepted practice. What one company calls investigational under its medically necessary care may have been a prescribed treatment regime in other countries for years.

Medicare and Medical Necessity

Medicare has published its latest version of medical necessity in the Medicare Benefit Policy Manual (Pub 100-02). It is defined not in the terms of medically necessary care but in terms of who inpatients are and how physicians must judge who is to be admitted. Medicare defines inpatients in the following way:

An inpatient is a person who has been admitted to a hospital for bed occupancy for purposes of receiving inpatient hospital services. Generally, a patient is considered an inpatient if formally admitted as inpatient with the expectation that he or she will remain at least overnight and occupy a bed even though it later develops that the patient can be discharged or transferred to another hospital and not actually use a hospital bed overnight.

The physician or other practitioner responsible for a patient's care at the hospital is also responsible for deciding whether the patient should be admitted as an inpatient. Physicians should use a 24-hour period as a benchmark, i.e., they should order admission for patients who are expected to need hospital care for 24 hours or more, and treat other patients on an outpatient basis. However, the decision to admit a patient is a complex medical judgment which can be made only after the physician has considered a number of factors, including the patient's medical history and current medical needs, the types of facilities available to inpatients and to outpatients, the hospital's by-laws and admissions policies, and the relative appropriateness of treatment in each setting. Factors to be considered when making the decision to admit include such things as:

· The severity of the signs and symptoms exhibited by the patient;

· The medical predictability of something adverse happening to the patient;

· The need for diagnostic studies that appropriately are outpatient services (i.e., their performance does not ordinarily require the patient to remain at the hospital for 24 hours or more) to assist in assessing whether the patient should be admitted; and

· The availability of diagnostic procedures at the time when and at the location where the patient presents.

Admissions of particular patients are not covered—or non-covered—solely on the basis of the length of time the patient actually spends in the hospital.

The terms above lead one to believe the judgment of the physician is the determining factor to meet medical necessity for admission and to prevent a denial. In the real world a physician’s judgment is generally insufficient if not accompanied with documentation of an adverse outcome and the description of a patient that is acutely ill and receiving treatment at an acute level of care.

Even with the change in the two-midnight rule Medicare has not changed it’s language in its benefit manual in terms of trying to define what is necessary for medical care. What you can find on Medicare.gov is the following: “Health care services or supplies needed to diagnose or treat an illness, injury, condition, disease, or its symptoms and that meet accepted standards of medicine.” Which in terms of clarity it is better than what is in the benefit manual, but it cannot be used as the defining statement since it does not come from one of the myriad manuals that will be used to adjudicate payment. The Medicare Integrity Manual does speak to reasonable and necessary provisions but only in terms of Local Determination Coverages and in 2020 after 50 years there was movement to further codify language to clear up what it meant but to date it seems the old language from 2019 is still there but at least some progress is finally being made. You can drive yourself into madness searching for days to try to reconcile the manuals. If you follow the information contained herein you will avoid the pitfalls of the navigation of the definitions of CMS and come out on top.

Defining Medical Necessity

Due to Employee Retirement Income Security Act (ERISA), regulations companies that provide insurance for purchase by their employees must generate a summary plan description (SPD) that contains information on how the plan works, how to file a claim, what is a covered and non-covered service and how determinations are made, to name a few of the standards. Within most summary plan descriptions there is generally a section on medical necessity. The following is typical information contained in the SPDs:

Medically necessary: (medical necessity)

The determination of medical necessity is made by the applicable healthcare company. Care is considered medically necessary if:

· It is accepted by the healthcare profession in the U.S. as appropriate and effective for the condition being treated,

· It is based upon recognized standards of the healthcare specialty involved,

· It represents the most appropriate level of care: the frequency of services, the duration of services, and the site of services, depending on the seriousness of the condition being treated (such as in the hospital or in the physician’s office), and

· It is not experimental or investigative.

Most insurance companies follow the above but also now add the use of criteria such as InterQual or MCG under the guise of establishing medical necessity based on evidenced based medicine and research. With the advent of some of the newer AI tools such as seen with Optum and others changes are being made on how insurance companies provide pre-auth and authorization so knowing how to work denials from an ERISA standpoint to acquire internal documents is even more important when you are not on the same page as the insurance companies any longer.

Perhaps in the future if medicine in the United States becomes more uniform a standardized definition will exist, as such those that deal with “medical necessity denials” and those that wish to prevent them should have a working knowledge of the current “definition” of medically necessary care from wherever they come from. It is essential to use the definition of medical necessity as delineated by the authority in which you are relying for reimbursement and work within that parameter. I have methodologies on how to apply medical necessity criteria to prevent and overturn denials if so interested.

Hospital Based Case Management

Case Management has been in existence in the hospital setting for over 20 years. New England Medical Center in Massachusetts is given credit for establishing the first case management model. They were able to develop a clinical case management approach by using CareMaps which had well-defined patient interventions from admission to discharge. From that original hospital model there have been developments that have created a variety of practices. A review of the literature reveals that no true definition of a model exists but rather that many organizations have used any combination of models.

The initial impetus to create a hospital-based case management department was primarily driven by cost. Case management has been in existence since the early 1900s with social programs with progression to insurance companies to assist in cost containment. The hospital case manager (HCM) had its roots in both areas as well as being propagated due to institutional influences to achieve the same level of success as their competitors. Case managers in the hospital now focus on many areas that include a “collaborative process that assesses, plans, implements, coordinates and evaluates the options and services required to meet an individual’s health needs using communication and available resources to promote quality and cost-effective outcomes.”[8] Within the current practice case managers have progressed to specialized areas within their scope of practice to include disease or population specific practice, utilization review, clinical documentation, coding and others

Today’s Emergency Departments (ED) in the United States face challenges that are unprecedented. Increased volume, decreased throughput, consumer expectations and scorecards, regulatory and insurance compliance and fiscal responsibility are among the myriad obstacles that need to be navigated to be considered successful. The demand for high quality care in a setting that allows for quick turnaround while not missing vital information can put a strain on the capabilities of any well-run Emergency Room. The question that almost all the country is asking is how to manage the challenges and how to come up on top. One of the solutions that many are turning to is Case Management. Case Management has been a successful part of the hospital setting. In the last decade there has been an increase in the number of facilities engaging Case Management to be part of the ED. In the 2007 American Case Management Survey it was reported that 83 to 93 % of facilities with bed capacity from 200 beds to over 500 beds respectively had ED case management. Of those reporting that they do have case management in the ED only an average 67% cover on Saturdays and 70% on Sundays both had 91 to 95 % responsibility to assist in other areas of the hospital. Since that time growth has continued in one format or another whether that is the so called “boots on the ground” in person coverage or virtual/remote coverage for utilization review or with Social Work coverage. In the 2021 survey 69% had staff directly in the ED and another 28% had staff following in the ED and only 3% stated they had no coverage in the ED.

Why has this happened? The benefits of having case management in the ED are numerous. Some of the advantages are in the ability of the Case Manager (CM) to assess for post-discharge needs prior to the patient arriving on the floor thus meeting regulatory compliance such as Joint Commission, Centers for Medicare and Medicaid Services (CMS) and Social Security Acts Condition of Participation that the discharge process begins at admission. CMs most often perform Utilization Review (UR) and act as the gate keepers to ensure that inappropriate admissions do not occur. Management of the “frequent flyers” as an adjunct to community resources and quality improvement are also among some of the duties of the ED Case Manager.

Discharge Planning

Discharge planning is essential to the role of any successful hospital. Post-acute care planning is essential in maintaining a length of stay (LOS) that is consistent with severity and case mix. Financial stability comes from managing utilization and patient days. In the ED this translates to ensuring that a CM obtains vital data that starts the discharge process. Opportunities to communicate with family members or the healthcare proxy may be lost or delayed once the patient is admitted thus delaying the discharge process. “The process of case management focuses on the coordination of healthcare services to facilitate cost effective positive patient outcomes. Having patients and family members actively participate in the planning process enhances compliance with the discharge plan” (Bristow & Herrick, 2002). Case managers can assess for placement issues, Durable Medical Equipment or home health thus assisting the in-house case manager in the discharge process. The emergency room case manager can also assist in placing patients directly from the ED without the need for a costly inappropriate admission which leads to the prevention of a denial.

Utilization Review

Utilization Review is a cornerstone of the ED CM. As gate keepers the CM has knowledge of admitting criteria and can assist the ED physician in making the determination for placement. “Case Managers can assist admitting physicians with identifying patients that do not meet acute care admission criteria. Once this is determined, efforts are then made to seek out the appropriate level/place of care for the patient” (Romania, 2006). Placement to skilled nursing homes, mental health facilities, drug, and alcohol rehabilitation and or shelters are among the discharge locations that a case manager can assist with, thereby stopping the inappropriate admission and increasing throughput by saving a bed for those meeting admission criteria. This also assists in preventing an admission denial and lack of reimbursement.

Observation Status and the RAC

Being able to review admissions, leads to savings by placing the patient at the correct level of care. Using observation status for those patents that meet criteria can save the hospital money by decreasing denials. There are over 7.6 million ED visits for chest pain alone with “ about 600,000 chest pain patients are admitted to the hospital for inpatient care and are later diagnosed without any significant disease” (Gautney, Stanton, Crowe & Tracey, 2004). When the Recovery Audit Contract (RAC) was in full swing with their reviews they focused on many short stays and chest pain admits was a high priority for denials. One day, three day, and appropriate admissions are on the RACs radar. With the end of the PHE, we can expect that the RACs and other surveys to begin again and “loose” admissions will again begin to be scrutinized. The PEPPER is a great source of information and should be analyzed to determine your at risk pool of admission for 1 and 2 day stays if you do not have a committee yet in place that does this as a routine.

RACs can go back four years to review and will issue denials for improperly admitted patients. Thus, the chest pain patient that should have been a one-day observation stay that had a full admission and work-up will be a denial. Other diagnosis fit this category such as abdominal pain, headaches, the so called “failure to thrive” and the infamous unsafe to discharge. Bringing a patient in for a 3-day qualifying stay without meeting criteria also places the facility at risk for a denial. This is where the case manager can intervene for placement directly from the ED, gather the necessary information for discharge planning if they are admitted and placing the patient into the correct admission status to ensure correct reimbursement.

Many hospitals financial executives are leery of using observation status due to the minimal reimbursement that goes along with it. The risk reward benefit of placing the patient into a full admission was on the reward side due to the lack of audits conducted by Medicare. As stated above the RAC audits have changed the landscape of the reviews being conducted by Medicare. Medicare published a report on the RAC demonstration project in February 2008, in which it states that 3.9 % of the Medicare dollars paid, did not comply with one or more Medicare coverage, coding billing or payment rules. That equates to $10.8 billion in Medicare Fee for Service (FFS) overpayments and underpayments. In 2006 Congress required that the Department of Health and Human Services make the RAC program permanent and nationwide by no later than January 1, 2010. Page 6 of the document states the following.

Fiscal integrity

Improper payments can occur in the Medicare FFS program when:

Payments are made for services that were not medically necessary or did not meet the Medicare medical necessity criteria for the setting where the service was rendered.

In New York $99.2 million was collected from inpatient hospitals in 2007. Heart Failure and Shock accounted for $7.8 million of the overpayments collected by the RAC audits. Permanent RAC expansion is to commence in 2008 for New York. How can Case Management assist with the RAC? Reviewing admissions for proper status and placement is a key to decreasing the possibility of a medically unnecessary denial. The CM in the ED should be an expert in admitting criteria be it InterQual, Milliman or national coverage determinations as well as being able to articulate this to the physician admitting the patient. A bond must be created within the ED to assure that the ED CM is appraised and involved in the admission process.

“Frequent Flyers” take up a lot of time in the ED. They usually are categorized as a frequent flyer if they have 3 or more visits per month. Assumptions are usually made about the patient due to the nature of the relationship that is created by the frequent visits. This can be dangerous as many of these patients have many comorbidities, poor living conditions, addictions and afflictions that undermine their health coupled with an inability to seek and get care outside of the Emergency Room. Good case management will be able to intervene by providing resources and making clinic appointments, helping to secure financial assistance, and providing education. There have been few studies in this area with mixed results. Further investigation is needed to positively state that this is a benefit, but it has been established that case management interventions help decrease readmissions so it could be stated that interventions as listed above in the ED can lead to similar results.

Hospital case management will continue to develop in the years ahead and facilities need to stay abreast of regulatory changes that can impact the financial health of the institution. Economic forces are currently making all of healthcare in the United States reevaluate the processes and financial data to cut or eliminate cost. Emphasis is and should be placed on reduction of potential revenue loss. Preventing denials using an HCM is a method to capitalize on the investment of the case manager.

The Birth of Evidence-Based Criteria

Prior to the development of criteria that assisted in supporting decision making in regard to who to admit and when to discharge the discretion fell solely on the treating physician.

Since there was no oversight the admissions, discharges and length of stay varied across geographical areas as well as between physicians.

With the establishment of Medicare came regulations such as “each provider organization was required to have an admissions committee to review medical necessity of admission, the length of stay, the discharge practice and the necessity of the services requested by the physician” [9]

At the time that Medicare began the regulations providers turned to the Professional Activity Study (PAS) book which was a compilation of data from medical record information which was computerized and received the information thorough a voluntary exchange. The information gathering began in 1953. The PAS had three components which included basic data, patient care data and optional concurrent review data used for utilization review. The optional data elements were number of days spent in care units, whether consulting physicians were used and the total charges for the hospitalization.[10] It was from this data that hospitals began to look at comparative length of stay data. What was lacking was any type of guidelines for best practice. The information provided was simply historical in nature and did not have benchmarks.

Other limitations of the PAS were the collection of the data and the analysis based on the coding that was not uniform and had discrepancies as high as 43 % mostly based on the selection of the primary diagnosis.[11]

At the time that PAS was being used other companies were developing and selling criteria to assist in the utilization decisions. Along with this an amendment in 1972 to the Social Security Act authorized the creation of the Professional Standards Review Organizations (PSRO) who were set up to cut costs and to monitor medical necessity and improve the quality of the care being provided. Public Law 92-603 stated in section 249F that the PSRO be set up “in order to promote the effective, efficient and economical delivery of heath care services of proper quality for which payment can be made, in whole or in part, under the Social Security Act…” [12]

In 1973 a nurse named Joanne Lamprey along with an attorney Charles Jacob and a physician responded to a government request for proposal for assistance in developing a quality assurance program. Lamprey’s work as a utilization review nurse allowed her to recognize the failures of the PAS and the need to create better criteria for utilization review. Jacobs had been working with the Joint Commission when he met Lamprey and shortly thereafter he started what would become InterQual. They published their fist criteria for Severity of Illness and Intensity of Service in 1978. [13]

During this timeframe the HMO act of 1973 was established with the hopes of decreasing cost but in essence it raised cost to individuals.

The proliferation of managed-care organizations (MCOs) in general, and HMOs, resulted from the 1965 enactment of Medicare for the elderly and Medicaid for the poor. Literally overnight, on July 1, 1966, millions of Americans lost all financial responsibility for their health-care decisions. Offering "free care" led to predictable results. Because Congress placed no restrictions on benefits and removed all sense of cost-consciousness, healthcare use and medical costs skyrocketed. Congressional testimony reveals that between 1965 and 1971, physician fees increased 7 % and hospital charges jumped 13 %, while the Consumer Price Index rose only 5.3 %. The nation's health-care bill, which was only $39 billion in 1965, increased to $75 billion in 1971.

As patients have since discovered, the HMO--staffed by physicians employed by and beholden to corporations--was not much of a Christmas present or an insurance product. It promises coverage but often denies access. The HMO, like other prepaid MCOs, requires enrollees to pay in advance for a long list of routine and major medical benefits, whether the health-care services are needed, wanted, or ever used. The HMOs are then allowed to manage care--withhold access to dollars and service--through definitions of medical necessity, restrictive drug formularies, and HMO-approved clinical guidelines. As a result, HMOs can keep millions of dollars from premium-paying patients. [14]

PSROs have turned into Quality Improvement Organizations QIOs) and HMOs and PPOs have propagated to include the Medicare Advantage plans each with their own review process, guidelines and evidenced based criteria to determine the medical necessity of a patients care. Recently one of the largest and most successful QIOs, the Island Peer Review Organization in New York signed a contract to begin to use Milliman Care Guidelines as its screening tool, to provide guidance on who and when to admit as well as when to discharge patients. One of the permanent RAC contractors has also signed a contract to use Milliman.

The quandary for hospitals is that there are more than one set of criteria each with their pros and cons, but the biggest con is the cost associated with leasing the guidelines. Few hospitals can afford to have more than one criterion set and therefore run the risk of incorrectly interpreting the medical necessity based on the insurance provider’s choice. Evidence-based research is a valuable tool in providing care that is proven to work but when that same evidence is used to deny reimbursement those in a position to stop and or appeal a denial can find themselves grasping for a lifeline on how to proceed. Through out the next chapters you will learn methods on how to decrease the potential for a denial, how to use the evidence-based guidelines in a beneficial manner and when to appeal with the use of those guidelines.

[1] “Medical Necessity Determinations – A continuing Healthcare Policy Problem, Blanchard, P, Journal of Health Law – Fall 2004 pg 601

[1]“Medical Necessity Determinations – A continuing Healthcare Policy Problem, Blanchard, P, Journal of Health Law – Fall 2004 pg 601 2. Beal v Doe 432 U.S. 438 (1977). [3] Medical necessity; Do we need it? Bergthold, L. A. Health Affairs. Chevy Chase; winter 1995 Vol 14 iss 4 pg 180 [4] Beal v Doe 432 U.S. 438 (1997) [5] Pinneke v Preisser 623 F 2d 546, 550 (1980) [6] Am Med Ass’n American Medical Association Policy H-320.953: Definition of “Screening” and medical “Necessity” [7] “Medical Necessity Determinations – A continuing Healthcare Policy Problem, Blanchard, P, Journal of Health Law – Fall 2004 pg 602 [8] Powell, S.K, & Ignatavicius, D (2001) Core curriculum for case management, Philadelphia: Lippincott p. 3 [9] Mitus, J.A. The Birth of InterQual, Evidenced Based Decision Support Criteria that Helped Change Healthcare. [10] Mullener, R & Kobrinksi E. J. The Professional Activity Study of the Commission on Professional Hospital Activities Health Services Research 18:2 (Summer 1983, Part II) [11] Luft, H, The Professional Activity Study of the Commission on Hospital and Professional Activities: A User’s Perspective. Health Services Research 18:2 (Summer 1983, Part II) [12] California Medicine, The Western Journal of Medicine, p 39 [13] Mitus, J.A. The Birth of InterQual, Evidenced Based Decision Support Criteria that Helped Change Healthcare. [14] Brase, T Blame Congress for HMOs, Ideas on Liberty, Feb 2001 – Foundation for Economic Education