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The Keckley Report

Medical Necessity and Unnecessary Care – the Full Story

By January 26, 2015March 1st, 2023No Comments

The following is an excerpt from Navigant Healthcare’s Pulse Weekly. Click here for a complete copy of this week’s article.

Unnecessary care that’s not evidence-based—usually associated with excess testing, surgical procedures or over-prescribing—accounts for up to 30% of what is spent in healthcare. In recent months, enforcement actions against physicians and hospitals have gained increased attention. But unnecessary care and over-utilization is not a new story or one that’s easy to understand.


Medical necessity means something slightly different in every part of the healthcare industry. Varied definitions and interpretations are used by providers, physicians, courts, pharmacy benefits managers, government insurers, private insurers, and consumers. Perhaps the two most important are from the largest and most influential payer, Medicare, and the industry’s most important clinical authority, the American Medical Association (AMA).

In the Medicare program, “medical necessity” is defined under Title XVIII of the Social Security Act, Section 1862 (a) (1) (a): “Notwithstanding any other provision of this title, no payment may be made under part A or part B for any expenses incurred for items or services which, except for items and services described in a succeeding subparagraph, are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member.” It is a legal doctrine by which evidence-based clinical standards are used to determine whether a treatment or procedure is reasonable, necessary and/or appropriate.

“It is improper to bill Medicare for services or treatment that is not medically necessary. To knowingly do so is a violation of the False Claims Act… A physician who knowingly bills for services which are not medically necessary can be prosecuted for fraud by the Office of Inspector General (OIG). Violators face penalties of up to $10,000 for each service, an assessment of up to three times the amount billed, and exclusion from federal and state healthcare programs.” Saul Helman, M.D., Managing Director and Leader, Navigant’s Healthcare and Life Sciences Disputes, Regulatory, Compliance and Investigations practice; 31 U.S. Code § 3729 – False claims (a) (1) (G)

The AMA defines medical necessity as: “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 economic benefit of the health plans and purchasers or for the convenience of the patient, treating physician, or other healthcare provider.” Statement of the American Medical Association to the Institute of Medicine’s Committee on Determination of Essential Health Benefits,” American Medical Association, January 14, 2011

So based on these definitions, the application of “medical necessity” leaves lots of room for variation in how doctors and hospitals determine what’s done, and how payers (Medicare, Medicaid, employers, individuals) assess the appropriateness of their activities and costs. Therein is the conundrum about medical necessity and unnecessary care and the need for fresh thinking about the issue.

The basic facts:

  1. Over-utilization and unnecessary care is prevalent and costly: Several reputable studies point to systemic over-utilization costing the U.S. system up to 30% more than what’s necessary (Exhibit A). The U.S. health system is the world’s most expensive, and health costs, per the Congressional Budget Office, will continue to increase at least 2-3% faster than the overall economy for the next decade. The costs associated with unnecessary care (a.k.a. medical necessity) are significant and growing.The 2014 Long-Term Budget Outlook,” Congressional Budget Office, July 2014
  2. The government is cracking down on unnecessary care: Hospitals are increasingly being held accountable for the practice patterns of the physicians on their medical staff via the False Claims Act. Enforcement actions against both are on the rise and financial penalties harsh (see Exhibit B for recent cases).
  3. Media attention is sparking public attention to unnecessary care: The Wall Street Journal calls its series, “Secrets of the System.” National broadcast and print news organizations have increased coverage of healthcare including its tendencies around medical necessity and unnecessary care. And social media is a hotbed for anecdotal assessments of “medical necessity”—some supported with objective data, most supported by personal experience, and a few judiciously studied and reported.

So if health costs are a looming problem in U.S. healthcare, and lack of consistency around the delivery of medically-necessary care is a systemic challenge that’s increasingly transparent, why isn’t more done? Most industry insiders offer these reasons:

  • The body of scientific evidence about what works best is expanding and changes fast. There are 20,000 medical journals. Keeping track of the latest innovations is almost impossible without using a clinical knowledge management software program that captures and filters relevant information useful to making patient diagnostic treatment decisions.
  • The strength of evidence about what works best and why is often weak. As more information about a patient’s signs, symptoms, risk factors and co-morbidities are factored into a treatment determination, the less likely it is that a clear “medical necessity” directive is found. Ironically, the more information (data) a clinician has about a specific patient, the less likely it is that a “medically necessary service” is dictated through a clinical algorithm or guideline.
  • Most consumers assume everything recommended is “medically necessary. The majority of consumers assume that what their physician recommends is evidence-based, and few feel confident to challenge their view. Therefore, consumers want MORE not less in the majority of cases. And social media and media coverage is complicating matters as treatments-de jour become more widely known to consumers searching the latest and best treatments. The burden to stay abreast about traditional and nontraditional methods for diagnosing and treating is daunting, especially if reimbursements are cutting into time spent with patients.
  • Most providers necessarily err on the side of over-treatment. The majority of physicians and the institutions that credential them to practice tend to over-treat fearing liability exposure or the possibility of an inaccurate diagnosis. It’s precautionary and a business imperative (discounting it can be lucrative at the same time).
  • The health information technology tools that allow for real-time, accurate matching of a patient’s signs, symptoms, risk factors and co-morbidities to the latest and best evidence don’t exist or are too expensive. The integration of smart medical record systems shared by clinically-integrated networks and with their patients is still aspirational in most communities. These systems are expensive. Clinicians doubt that these systems will pay for themselves in improved efficiency (less paperwork), nor do they trust that payers will pay them more if they make the investment. And most consumers aren’t demanding them to make the investment. Instead, basic access, convenient locations and an assuring experience with doctor are of higher importance.

These views provide a defensible rationale as to why medical necessity and unnecessary care is a systemic challenge in our system, but in coming months, they may be seen more as lame excuses. The spotlight on unnecessary care and medical necessity is likely to shine brighter because:

  • Unnecessary care contributes significantly to the impressive profitability in many parts of the health system. Crackdowns on self-referrals and false claims routinely originate from the appearance of ill-gotten gain, whether justified or not. While providers complain of lower reimbursement, they are frequently guilty of doing more, whether necessary or not, and in some sectors, that translates to healthy profits and high compensation.
  • Unnecessary care can be harmful to consumers. There’s growing concern about over-use, especially among Millennials on behalf of their families. Compounding these suspicions, higher co-pays and deductibles, lack of price transparency and inadequate access to definitive clinical trial data (the evidence) is fueling consumer frustration. There’s ample reason to believe consumers are paying attention to unnecessary care because it’s risk they bear directly—physically, emotionally and financially.
  • The data and sophisticated analytic tools upon which determinations of medical necessity and unnecessary care are increasingly available. Defaults that “my patients are different” and “we don’t have the data” will fall on deaf ears.

What does it mean?

  • Documentation is key. Accurate clinical documentation across sites and systems of care is table stakes.
  • Transparency about medical necessity and unnecessary care is assured.Data about the performance of every practitioner, hospital, and health system will be widely accessible. And the evidence supporting coverage and denial decisions by insurers, formulary design by Pharmacy Business Managers (PBMs) and benefits managers, and the justification for narrow networks will be equally available.
  • Payments and penalties will follow. Payers and enforcement agencies are watching. Enforcement actions and application of penalties will likely increase, and programs like bundled payments and accountable care will be judged by adherence to medical necessity and avoidance of unnecessary care.
  • Physician leadership is vital. The role and scope of the Chief Clinical Officer in each organization will be more complicated, more clinical-data dependent and in some cases more adversarial with peers.

Medical necessity is not a simple term nor is its application in an organization a straightforward set of operating procedures and business processes. It is not an inside baseball topic. More are watching, and expectations are more targeted and direct.

Responding appropriately requires fresh thinking, urgent attention and ongoing vigilance. That’s the full story about medical necessity and unnecessary care.


P.S. Much thanks to two of my colleagues for their insight and counsel in preparing this article: Saul Helman, M.D. and Kevin Cornish, Managing Directors in Navigant’s Healthcare and Life Sciences Disputes, Regulatory, Compliance and Investigations practice.

The opinions expressed in this article are those of the author and do not necessarily represent the views of Navigant Consulting, Inc. The information contained in this article is a summary and reflects current impressions based on industry data and news available at the time of publication. Any predictions and expectations noted herein are inherently uncertain and actual results may differ materially from those contained in this article. Navigant undertakes no obligation to update any of the information contained in the article.

© 2015 Navigant Consulting, Inc.