The Definition of Medical Necessity in Health Insurance

Health insurance plans provide coverage only for health-related services that they consider to be medically necessary. This article will explain what medical necessity means and how health insurance plans determine whether a particular service is considered medically necessary.

Medical necessity refers to a decision by your health plan that your treatment, test, or procedure is necessary to maintain or restore your health or to treat a diagnosed medical problem. In order to be covered under the health plan, a service must be considered medically necessary.

(Keep in mind that "covered" doesn't mean the health plan pays for it. You still have to pay your required cost-sharing—copay, deductible, and/or coinsurance—before the health plan starts to pay any of the cost, even for covered services. And you'll likely be responsible for at least some of the cost until you've met your health plan's out-of-pocket maximum for the year.)

Medicare, for example, defines medically necessary as: “Services or supplies that are needed to diagnose or treat your medical condition and that meet accepted standards of medical practice.”

(Note that while Medicare Advantage plans are required to cover the same services that are covered under Original Medicare, Advantage plans often have prior authorization requirements for services—which includes a determination of medical necessity—before coverage can be provided. But prior authorization is almost never needed with Original Medicare.)

Most health plans will not pay for healthcare services that they deem to be not medically necessary. The most common example is a cosmetic procedure, such as the injection of medications, such as Botox, to decrease facial wrinkles or tummy-tuck surgery. Many health insurance companies also will not cover procedures that they determine to be experimental or not proven to work.

But "cosmetic" procedures done for restorative purposes are generally covered by health insurance, such as breast reconstruction after a mastectomy, plastic surgery after an injury, or repair of congenital defects such as cleft palate.

Criteria to Determine Medical Necessity

Medicare and private insurers have varying criteria for determining whether a given procedure is medically necessary based on the patient's circumstances. Medicare uses National Coverage Determinations and private Medicare plans (i.e., Medicare Advantage) use Local Coverage Determinations in order to ensure that the criteria for medical necessity are met.

Private insurers that offer non-Medicare plans can set their own criteria (which may or may not mirror Medicare's criteria), although they're required to provide coverage that's in compliance with state and federal benefit mandates.

For individual and small group health plans with effective dates of January 2014 or later, this includes coverage for the essential health benefits defined by the Affordable Care Act. But states determine the exact standards plans have to meet in order to be in compliance with the essential health benefits requirements. So there is some state-to-state variation in terms of the specific services that are covered for each essential health benefit.

But regardless of the type of coverage or the applicable state/federal rules, no plan will cover care that isn't considered medically necessary. Prior authorization is often used to make this determination. If not, the plan will have a protocol that's used during the processing of claims to ensure that the procedure was medically necessary.

Medical Uses of Marijuana

The use of marijuana for medical reasons is a prominent 'medical necessity' case. Cannabis is a plant with active ingredients that are widely reported by sufferers to be effective in pain control for various conditions, usually neuropathic in nature, where common pharmaceutical painkillers have not worked well.

Medical marijuana first became legal under state statute with the passage of California's Proposition 215 in 1996. As of 2023, the medical use of cannabis is legal in 38 states and the District of Columbia, as well as three of the five U.S. territories.

However, as a Schedule I drug under the Controlled Substance Act, marijuana is illegal under federal law. Schedule I drugs are defined by the Drug Enforcement Administration as having "no currently accepted medical use and a high potential for abuse."

(Interestingly, cocaine and methamphetamine are both classified as Schedule II drugs, putting them one rung lower on the DEA's system for classifying "acceptable medical use and the drug’s abuse or dependency potential.")

Marijuana has also not been approved by the FDA, in part because its Schedule 1 classification has made it difficult for the FDA to conduct adequate trials to determine safety and efficacy.

Over the last four decades, there have been repeated proposals to change the Schedule 1 classification for marijuana. Although the DEA has thus far refused to change the classification of marijuana, the agency did downgrade certain FDA-approved CBD products (with THC content below 0.1%) from Schedule 1 to Schedule 5 in 2018.

The DEA also agreed in 2016 to increase the number of DEA-approved facilities growing marijuana for research purposes. (For decades, there had only been one such facility, at the University of Mississippi, with the product only used for research by the National Institute on Drug Abuse.) The DEA noted in 2019 that they were "making progress in the program to register additional marijuana growers for federally authorized research, and will work with other relevant federal agencies to expedite the necessary next steps."

In 2021, the DEA indicated that "a number of [additional] manufacturers’ applications to cultivate marijuana for research needs in the United States appears to be consistent with applicable legal standards and relevant laws," and that the DEA was continuing the process of working with those manufacturers to complete the approval process.

For the time being, however, due to marijuana's classification as a Schedule I drug (with "no currently accepted medical use"), its illegality under federal laws, and the lack of any FDA approval, health insurance plans do not cover medical marijuana, regardless of whether state law deems it legal, and regardless of whether a healthcare provider deems it medically necessary. However, certain FDA-approved synthetic THC can be included in a health insurance plan's covered drug list.

Prior Authorization, Referrals, and Network Rules: Check With Your Health Plan

It’s important to remember that what you or your healthcare provider defines as medically necessary may not be consistent with your health plan’s coverage rules. Before you have any procedure, especially one that is potentially expensive, review your benefits handbook to make sure it is covered. If you are not sure, call your health plan’s customer service representative.

And as touched on above, it's also important to understand any rules your health plan may have regarding pre-authorization. Your plan might require you and your healthcare provider to get approval from the health plan before a non-emergency procedure is performed—even if it's considered medically necessary and is covered by the plan—or else the plan can deny the claim. (Part of the prior authorization process will include the health plan confirming that the care is medically necessary.)

Depending on your health plan's rules, you may also have to obtain a referral from your primary care healthcare provider and/or receive your treatment from a medical provider within the health plan's network. If you don't follow the rules your plan has in place, they can deny the claim even if the treatment is medically necessary.

For certain expensive prescriptions, your health plan might have a step therapy protocol in place. This would mean that you have to try lower-cost medications first, and the health plan would only pay for the more expensive drug if and when the other options don't work.

Understand Your Right to Appeal

Health plans have appeals processes (made more robust under the Affordable Care Act) that allow patients and their healthcare providers to appeal when a pre-authorization request is rejected or a claim is denied.

While there's no guarantee that the appeal will be successful, the Affordable Care Act (ACA) guarantees your right to an external review if your appeal isn't successful via your health insurer's internal review process, assuming you don't have a grandfathered health plan.

Even if you do have a grandfathered plan, you have the right to an external appeal if the insurer's adverse decision (ie, claim or prior authorization denial) is for a scenario that falls under the scope of the No Surprises Act. (ie, an out-of-network provider sending a balance bill for emergency care or services that were provided at an in-network facility.)

Summary

A service has to be deemed medically necessary in order to be covered by health insurance. Health plans use various guidelines, including state and federal benefit mandates, and case management procedures, to determine what services are considered medically necessary.

Even if a service is medically necessary, the patient may have to pay for some or all of the cost due to copays, deductibles, and coinsurance. And the patient may have to pay for a medically necessary service if the health plan's rules for prior authorization or step therapy are not followed.

A Word From Verywell

In most cases, the medical care that your doctor recommends will be considered medically necessary by your health plan. But to avoid surprise medical bills, it's wise to be sure you're following all of the procedures your health plan has in place, including things like obtaining prior authorization, staying in-network, and following step therapy rules, if applicable. It's always better to check first with your health insurance plan, as opposed to assuming that a particular service will be covered.