In this episode, we are joined by Dr. Aaron Schwartz, Assistant Professor at the University of Pennsylvania to discuss their research into coverage denials for medical services that do not meet medical necessity criteria.
You can find the study discussed today “Coverage Denials in Medicare Advantage: What’s Not Medically Necessary?” HERE.
Highlights of this episode include:
- The research specifics
- The methodology
- Primary findings
- Key takeaways for hospital finance teams
Mike Passanante: Hi, this is Mike Passanante and welcome back to the award-winning Hospital Finance podcast. Little is publicly known about coverage denials for medical services that do not meet medical necessity criteria. Recently, a group of researchers set out to understand the nature and extent of these denials. Today, I’m joined by Dr. Aaron Schwartz. Dr. Schwartz is an assistant professor in the Department of Medical Ethics and Health Policy and the Department of Medicine at the Perelman School of Medicine at the University of Pennsylvania. Dr. Schwartz, welcome to the show.
Dr. Aaron Schwartz: Thank you so much for having me. It’s great to be here.
Mike: So I think this is going to be a very important topic for our audience here today, as it speaks directly to how they get reimbursed and paid. So why don’t you start out by telling us what you were specifically looking at with this research?
Dr. Schwartz: So we were interested in measuring key characteristics of coverage denials for medical necessity criteria, specifically. So people who are at the front lines of reimbursement, either on the insurer’s side or the provider’s side, have first-hand experience in this issue. A claim is sent to an insurance company for a service that’s been rendered, and it may be covered and reimbursed, or it may be denied for one of several reasons. One reason that’s particularly interesting is if the service has been determined by the insurer to not meet a medical necessity criteria. It’s not thought to be reasonable and necessary. However, there’s really little research that systematically characterizes how common this happens and what types of services are the subject of denials like this. So our goal was to look into this using data from a large Medicare Advantage insurer where we had access to not just the claims that have been paid, which is typical for a lot of the data sets used in healthcare policy research, but also had access to the claims that had been denied.
Mike: Excellent. And could you briefly expand and explain your methodology for us?
Dr. Schwartz: Sure. Basically, we had access to paid claims and denied claims for a large Medicare Advantage insurer. We were especially interested in looking at claims in Medicare Advantage because there are two sets of important medical necessity criteria that apply in this setting. One set of medical necessity criteria are determined by the government, Medicare, and its agents, the local coverage determinations that are created by the Medicare MACs, which are regional contractors that work for Medicare. So this is the government taking a stand on what it believes are reasonable and necessary services. However, when the government doesn’t explicitly state whether a certain service is or is not medically necessary, then the Medicare Advantage insurer, which is a private business, also has the ability to decide what it considers medically necessary. So we were interested in specifically examining which claims were denied according to each set of necessity criteria, which were being denied based on government medical necessity criteria, and which were being denied on the basis of this private insurer’s medical necessity criteria.
So we were specifically looking at those claims. Importantly, we were not looking at claims denials that were denied for what I would call administrative reasons, which is basically any other reason that doesn’t relate to the service’s medical necessity. So that covers a lot of different types of denials, and that wasn’t the subject of our study. So basically, we looked at the Medicare Advantage claims for this insurer from 2014 to 2019, and we looked at the proportion of services and the proportion of spending that were denied according to medical necessity criteria. And we looked at what types of services were being denied, what categories of medical services, and what justifications the insurers were giving, and whether that was changing substantially over time.
Mike: Very interesting. Looking forward to digging into this with you. So at a high level, what were your primary findings?
Dr. Schwartz: The basic finding was that coverage denials for medical necessity criteria are rare but not nonexistent. So about 1% of services and medical spending are denied on the basis of medical necessity criteria. So once we’re talking about 1% in medical spending, I think that’s a substantial amount in that any insurer that could shave 1% of medical spending off, I think, would be happy with that. Similarly, given the margins in both healthcare delivery and insurance, this is a substantial proportion of revenue. So I think it’s important, but we shouldn’t think that this is going to– this practice has resulted in extremely high denial rates. So a lot of people say that up to a third of medical spending could be wasteful. We’re not seeing that a third of medical spending is being denied according to medical necessity criteria. It’s a much smaller proportion, but it’s not insignificant. So I think that’s the overall takeaway, is that as a phenomenon denials for medical necessity do happen. They happen in a substantial amount, but we’re talking about about 1% of medical spending.
The other most interesting finding, I think, is that the majority of this denied spending was denied according to the government’s own rules for medical necessity criteria, so the rules that are set by Medicare and set by Medicare’s contractors. But a large minority, about a third, of the spending that was denied was denied according to a private insurer’s own rules. So to me, this means that both the government and both these private insurers are developing somewhat different rules related to what is and is not medically necessary, and both are substantially contributing to the denials. It’s not just one group.
Mike: So if you’re working in a hospital finance function, what do you think are some of the key takeaways from this research?
Dr. Schwartz: So I think that many of the people working in hospital finance would say that these aren’t surprising findings because they get to see it firsthand. I think one notable piece of information is that the types of denials that we’re seeing are highly concentrated in particular types of medical services. So the vast majority of the denials were due to laboratory services. Also, a large minority of the denied spending, especially the denials from the private insurers’ rules, came from oncology procedures, so things like chemotherapy. So my sense is that people working in hospital finance probably have a pretty good idea of the types of services that they can and can’t get reimbursed. But this study provides a bit more of a systematic look into that, in that we’re seeing the overall picture and not just a window into denials that a single hospital has, or a single hospital finance department. So I imagine that folks working in hospital finance could look at these results and have a sense of how generalizable their experience is as a hospital when it comes to denials when compared to a much larger community of hospitals. We analyzed a set of over five million claims denials, so we’re looking at a very large group of services here, much more than a single hospital would have the ability to look into.
Mike: Was there anything in the study that surprised you in the findings?
Dr. Schwartz: Yes. I think the most surprising finding for me was the high concentration of denials for laboratory services, especially according to Medicare’s rules. So I was surprised to learn that Medicare has a fairly extensive set of rules relating to when a laboratory service is considered reasonable or necessary. So as a part of trying to understand why we were finding so many denials for laboratory services, I realized that the Medicare manual on laboratory diagnostic coding is more than 2,000 pages long. So this might not be a surprise to many of your listeners, but it was to me, especially because some of the most commonly denied services for medical necessity criteria were not the kinds of services that I, as a general internist, would immediately think of as particularly wasteful. So hemoglobin A1C testing for diabetes was one of the most denied services according to Medicare’s own rules. And I think if you were to ask health policy folks where is the source of avoidable waste in the healthcare system, I think it’s a pretty safe bet that no one would say excess screening for diabetes.
Mike: Yeah, that is pretty interesting when you think about comorbidities and what they’re looking at in patients and trying to understand the severity of illness, etc. That is pretty surprising.
Dr. Schwartz: Yeah. It’s hard for me to understand the basis of all of the criteria that we evaluated because, really, what we’re seeing is the result of that. We’re looking at the denials, so it’s only part of the picture. So we’re not seeing, for example, services that never happened because there was the expectation that they wouldn’t be covered by insurance. So we’re kind of seeing the back end of these policies. We see what happens after a service is conducted that is not covered by the insurer and is denied on medical necessity grounds. So I think that’s an important limitation to this research, is that we don’t know the overall impact of these policies because the denials that we see are just part of the effect of the policies. So these policies are going to lead to some services being denied, but they’re also going to lead to certain services never being done, so those would be deterred services. We’re also going to see, probably, some increase in other services that are substitutes for the non-covered services. So a full understanding of what these denials do or what the medical necessity criteria accomplish would need to account for all of these different mechanisms and the ways that they affect medical care and spending.
Mike: That makes sense. Based on what you found, what do you think this means for healthcare providers moving forward?
Dr. Schwartz: Well, one thing we found was that the rates of denials were increasing a bit over time. So these are small numbers to begin with in terms of the overall proportion of services or spending being denied. But there was a pretty clear trend that this was increasing, where we’re talking at the beginning about denials, that’s at a rate of approximately half a percent to six-tenths of a percent of overall spending, and by the end of our study period, which was six years, these are more like eight-tenths of a percent. So I think they can expect more scrutiny over time. My sense is that the types of services that are going to get scrutiny will probably continue to be high-priced injectable drugs, like those that fall under oncology, rheumatology, things like that. Those are often delivered in outpatient hospital systems. I’ll say a related study that we did recently was on the topic of prior authorization, and we found that the vast majority of services that fall within prior authorization requirements, in terms of spending, anyway, are in these high-priced injectable drugs that could be covered under Medicare Part B or similar financing mechanisms. So Medicare Part B itself doesn’t have substantial prior authorization, but Medicare Advantage does. And so private insurers are much more likely to have more scrutiny when it comes to these high-priced injectable drugs. So I think providers can expect that to continue or maybe even become more extensive moving forward.
Mike: Well, I appreciate the viewpoint you shared here today. It’s a great contribution to the literature. Dr. Schwartz, if someone wanted to learn more about you or get a copy of the study, where can they go?
Dr. Schwartz: So you can find the study itself on the Health Affairs website. It was in their January issue. It is behind a paywall at this time. Eventually, because some government funding went to this, it will be available through PubMed Central, but that takes a little time. If you want a summary, there’s a blog post, which I think we could link to in your show notes, perhaps, at the Leonard Davis Institute of Health Economics that describes the studies and its findings in some detail as well.
Mike: Well, we would be happy to provide that link, and certainly look forward to more studies in the future from you. Dr. Aaron Schwartz, thanks so much for joining us today on The Hospital Finance Podcast.
Dr. Schwartz: Thank you so much for having me. It was my pleasure.
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