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5
Defining the EHB
The Secretary is charged to define the essential health benefits (EHB) and asked the Institute of Medicine
(IOM) for advice on a process for this task. The committee outlines steps and criteria to achieve the initial
EHB set: first, building from the statutory requirements of a typical employer plan (with the committee
recommending that small employer be used to define what is typical) and 10 categories of care; next,
applying the committee’s recommended criteria to assess the package as a whole and for individual com -
ponents (Figure S-2 in the Summary); and then, adjusting the content so that it could be accommodated
under the expected national average premium for a silver plan for a small employer in 2014. The final
adjustments should be informed by a public deliberative process that advises on preferences in making
tradeoffs. The committee’s advice for the Secretary’s guidance to insurers and the exchanges on the con -
tent of the EHB is to give the greatest degree of specificity that current national data and best practices
in subscriber (enrollee) contracts allow. Additionally, the committee offers suggestions for secretarial
guidance with respect to the required elements for consideration and medical necessity.
Before insurance products that are required to incorporate the essential health benefits (EHB) can be devel -
oped, the Secretary of the Department of Health and Human Services (HHS) must define which benefits constitute
the EHB package. The Patient Protection and Affordable Care Act (ACA) directs that the scope of this package
should reflect benefits offered in typical employer plans and the 10 broad categories of care listed in Section 1302
of the act. In the previous chapter, the committee reached several conclusions related to the legislative language:
• The scope of a typical employer plan should be based on what is typically offered by small employers.
• Because the specificity of national data on covered benefits in the small employer market is limited, scope
should also be interpreted to mean equal financial value to a typical small employer premium.
• Every service or item that might be classified within the 10 categories or the typical employer plan is not
essential.
• To ensure a more consistent national benefit package, initial secretarial guidance should include as much
specificity as can be developed from current best practices in plan documentation because the EHB will
be implemented in policies and programs across multiple jurisdictions each with its own state-based
oversight body.
79
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80 ESSENTIAL HEALTH BENEFITS
These conclusions and the committee’s previously listed criteria frame the process, outlined in this chapter,
by which this IOM committee recommends that the Secretary define the EHB. The process starts with the content
and structure of the typical small employer plan and then broadens the coverage to incorporate ACA-required
categories that are not usually found in those packages (Box 5-1). Because the package must be affordable to
individual purchasers, employees of small firms, and public funders, the committee recommends balancing the
comprehensiveness of the package offered against its potential cost and explores several options for incorporating
costs into the EHB definition before recommending a specific approach. Additionally, the committee comments
on the issue of secretarial guidance regarding the specificity of the EHB package, “required elements for consid -
eration” as stipulated by Section 1302(b)(4)(A) through (E), and definitions of medical necessity.
STEP 1: DEVELOP THE STARTING POINT
Typical Small Employer Policy
The ACA calls for the scope of benefits to reflect those typical of employers today; the committee recommends
that the small employer market define what is typical at the outset. The level of specificity in benefit definition
varies across insurance plan documents, often making it difficult to assess if a benefit is covered or simply not
listed in a plan document. Given the paucity of data to determine typical benefits, the Secretary will likely have
to be guided by the contents of plans that provide more detailed coverage information. To make concrete the level
of coverage that characterizes current contracts covering millions of employees working for small firms, the com -
mittee collected information provided from three major insurers to illustrate which covered benefit inclusions are
national in scope and which are covered only in some states because of market conditions and state mandates
(Appendix C). The committee was not able to assess whether these are “typical” of the entire small group market,
but this plan coverage detail provides a starting point for developing a list of EHB content that can be refined by
both additions and deletions during the following steps.
BOX 5-1
Steps in Recommended Process for Defining
an Essential Health Benefits (EHB) Package
1. Develop the Starting Point for the EHB
a. Start with a typical small employer plan based on available knowledge
b. Develop preliminary service list (with inclusions and exclusions) to fulfill 10 categories
c. Apply the committee-developed criteria and adjust the preliminary list as necessary
2. Incorporate Cost into the Development of the Initial EHB
a. Assess the cost of the package developed in the first step
b. Develop a target budget for the EHB (e.g., national premium target based on typical small
employer plan)
3. Reconcile Preliminary List to the Premium Target
a. Publicly identify actuarial expenditures for components for possible tradeoffs
b. Receive guidance on priorities from public deliberation processes and other public par-
ticipatory processes
c. Review final list by reapplying IOM committee criteria to evaluate the aggregate package
4. Issue Guidance on Inclusions and Permissible Exclusions
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DEFINING THE EHB
Meeting the 10-Category Requirement
The committee noted that the typical employer plan in either the small or large group market does not include
all of the 10 categories of care specified in the ACA; therefore, the Secretary must next identify the gaps. In its
review, the committee found that some areas—habilitation, mental health and substance use disorder services,
some wellness services and chronic disease management, and pediatric oral and vision care—appear less likely
to be covered in standard commercial subscriber contracts. Pediatric oral and vision care have been available as
policy riders, and the contents of those policies can be examined. Habilitation and much of mental health, substance
abuse, and behavioral services have largely been left to the public sector. The committee is guided by the unam -
biguous direction of Section 1302 to start with a commercial health insurance benefit; however, it suggests that
the Secretary compare, in particular, how Medicaid plan benefits for habilitation and mental health and substance
abuse services compare with commercial plans that currently include such services. For example, Maryland has
requirements to cover habilitative services in children under the age of 19 in its Comprehensive Standard Benefit
Plan for Small Businesses although the small business products are not subject to all state-mandated benefits
(Maryland Insurance Administration, 2009; MHCC, 2011). On the basis of this review, the Secretary would add
selected services to the preliminary list to fulfill the 10-category requirement.
Consistency between the exchange-defined benefits and traditional Medicaid program benefits would reduce
the benefit gaps experienced by the large number of people who move between the two types of insurance (Sommers
and Rosenbaum, 2011). The testimony received by the committee was mixed as to whether such consistency should
occur by making exchange benefits look like Medicaid or by changing Medicaid to look like the new exchange
policies. The EHB requirement, however, only applies to the Medicaid expansion benchmark and benchmark-
equivalent programs, which are designed to more closely resemble private sector plans, not traditional Medicaid.
The committee did not recommend specific service expansions beyond the 10 categories required by the
ACA because these, together with the requirement for the scope of services of typical employers, were seen as
sufficiently broad and adding categories beyond these, although not precluded, might prove difficult under the
committee process that requires consideration of the overall cost of the package.
Applying Committee Criteria
The committee expects that at this point in the process the Secretary will have a long and varied list of
potential categories and specific services for inclusion. The description will in all likelihood be a mix of services,
conditions, and treatments that range in level of specificity. This heterogeneity reflects current practice, but the
committee recommends that the definitions of covered services become more specific over time, as HHS monitors
implementation (Chapter 7) and updates the EHB (Chapter 9).
The committee recommends a set of criteria for evaluating both the specific elements for inclusion and the
overall package, as well as criteria to guide the process by which the overall package and its elements are defined
(see Figure S-2 in the Summary). Specifically, in considering whether particular categories or services are included,
the committee recommends evaluating each to determine whether it is safe, effective, likely to enhance patient
outcomes when compared with available alternatives, and that the cost is justified by the health gain. Included
elements should perform acceptably on all of these criteria. The committee also recommends evaluating the over-
all set of benefits to determine whether the package is affordable, likely to maximize the number of people with
insurance, able to protect the most vulnerable, likely to encourage best practices, consistent with the principle of
advancing stewardship of finite resources, likely to protect people against the greatest financial risks, and addresses
the medical concerns of greatest importance for the eligible populations.
To accomplish the initial evaluation in the timeframe required for implementation, the committee recognizes
that a formal value-based analysis cannot be conducted for each possible service in each benefit category. However,
resources are available that can help the Secretary in assessing the relative merits of potential categories or services.
Some of these have been used by states in building benefit structures for existing public insurance programs, by
insurance companies in developing clinical policies, and in the research literature. For example, in Chapter 2, the
committee reviews how the state of Washington applies graded evidence to its decisions on service inclusions for
insurance benefits in its public programs (e.g., insurance coverage for state employees) (CMS, 2010; Thompson,
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82 ESSENTIAL HEALTH BENEFITS
2011). Value-based insurance design and the Oregon prioritized list, as now being adapted for the commercial
sector, provide other examples of how the relative values of different services have been evaluated (Kapowich, 2010;
Oregon Health Services Commission, 2011; Saha et al., 2010; Smith and Saha, 2011). Using existing assessments,
where available, will facilitate the evaluation of categories and services for initial prioritization for inclusion in or
exclusion from the EHB package based on available evidence.
STEP 2: INCORPORATE COST INTO THE DEVELOPMENT OF THE INITIAL EHB
Early in its deliberations, the committee concluded that the costs associated with offering the EHB would
materially affect the likelihood that the ACA would achieve its goal of significantly reducing the number of people
without health insurance. The committee, therefore, incorporates into its recommended process, consideration of
overall costs to frame choices about what would ultimately be included in the EHB package. This section examines
the committee’s rationale for including cost as a criterion and the various approaches considered before arriving
at its recommended approach.
Rationale for Incorporating Costs into the Definition of Essential Health Benefits
The committee had a series of robust conversations about whether to incorporate cost considerations into the
definition of essential health benefits and ultimately decided that costs were a critical component of the definition
for five reasons.
First, and most importantly, cost provides a useful mechanism to help frame tradeoffs between competing
options for inclusion in a benefit package. In fact, the law makes clear that the essential health benefits should
reflect the scope of a typical employer plan, and typical employers commonly use premiums as a key element in
deciding on the benefit package they will offer employees. For employers, establishing a budget creates one way
to explicitly consider benefit package tradeoffs when resources are limited.
Second, in examining the legislative history of the ACA and in testimony received from congressional staff
involved in the development of the law, it is clear that improving access to care by expanding the number of people
with health insurance was the primary goal of the legislation. Because one important determinant of the number
of people who have health insurance is the cost of obtaining coverage (Abraham and Feldman, 2010), the price of
the EHB package will influence the ability to achieve the law’s goal.
Third, the committee observed that the cost estimates developed by the Congressional Budget Office (CBO)
for the ACA were a key element in its ultimate passage. Those cost projections incorporated an estimate of the
average premium price of health insurance to be purchased on the exchanges, which in turn affected the total cost
of the subsidy and the cost of the federal portion of Medicaid.
Fourth, the committee reflected on the current concern around the deficit and the impact of existing open-
ended entitlements, such as Medicare, on the manageability of the federal budget. From a pragmatic viewpoint,
requiring a benefit package that was more expensive than typical packages was not regarded by the committee as
consistent with today’s fiscal realities.
Fifth, the idea of having an explicit budget has been recognized as both an ethical and practical precondition
for expanding access to care in medicine (Levine et al., 2007). The committee recommends three cost-related
criteria—affordability of insurance, stewardship of resources and maximizing access to care—for the Secretary to
use to assess the overall EHB package.
For all of these reasons, the committee concluded that the Secretary must use cost to provide guidance in
developing the essential health benefits package.
Sources and Approaches to Setting the Initial Cost Target
The committee examined different sources and approaches that the Secretary might use in setting the initial
cost target, including (1) CBO’s estimate of premium prices that was used in evaluating the overall cost of the
legislation; (2) an analysis done by the RAND Corporation for the Department of Labor (DOL) that evaluated the
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DEFINING THE EHB
effect of design choices in the exchanges on premiums in the individual and small group markets; and (3) a com -
petitive bidding process such as is currently used for Part D in Medicare. These are discussed below to illustrate
how the Secretary can incorporate costs into the definition of the EHB.
Fixed Target Approach Based on CBO Estimates for the ACA
The CBO, in a letter to Senator Bayh on November 30, 2009, noted that premiums are set to cover the aver-
age amount the insurer expects to pay for services that are eligible for coverage under a plan, plus an amount for
administrative expenses, overhead, and profit (CBO, 2009). The costs for covered services reflect the following:
• The scope of covered benefits (the essential health benefits)
• Cost-sharing requirements (deductibles, co-payments)
• The health status of the covered population and the propensity of that population to use health services
• Provider payment rates
• Degree of medical management
These factors interact with one another. For example, research has demonstrated that cost sharing can affect the
propensity of people to use services (Newhouse et al., 1981; Rosenthal et al., 2009; Rowe et al., 2008). Provider
payment rates may affect both the mix and volume of services offered (Buntin et al., 2009).
The CBO then considered the effect of the proposed legislation on changes to premiums in the small group
market and identified differences in three major areas: (1) the amount (e.g., comprehensiveness of benefits, level
of cost sharing) of insurance purchased due to changes in the scope of benefits; (2) the price for a specific amount
of coverage for a particular group of enrollees; and (3) the characteristics of people obtaining coverage. Table 5-1
shows the CBO-estimated effect on premiums, compared to projected premiums without the law, in the small group
market from each of these factors before accounting for subsidies or small business tax credits. The committee
noted that the average aggregate effect on premiums in the small group market was small.
Although the committee selects the small group market as the basis for establishing the essential health
benefits, it is worth noting that the EHB definition will also apply to policies in the individual market. Based on
its microsimulation model, the CBO also estimated the effects of the law on premiums for individual policies, as
shown in Table 5-2. The expanded scope of benefits in the individual market, coupled with reduced patient cost
sharing, is the main factor contributing to higher premiums in that market under the new law compared to projec -
tions of premiums that would have prevailed had the law not been enacted. The committee noted that the effect
on premiums in the individual market is much larger than for the small group market.
For illustrative purposes, the committee converted the CBO estimates, which were presented in 2016 dol -
lars, to 2014 dollars because that is the year the EHB policy will take effect. The resulting premiums, compared
to premiums if the law had not passed, show little to no change in the small group market but an increase in the
individual market premiums (Table 5-3).
TABLE 5-1 Congressional Budget Office (CBO) Estimates of the Effect of the Law on Premiums in the Small
Group Market, in November 2009 Letter to Senator Bayh
Expected Difference Between Premiums in Small Group Market
Component Affecting Premiums After the Law Compared to Premiums Projected Without the Law
Difference in amount of coveragea 0 to +3%
Difference in price paid for a given amount –1 to –4%
of insurance coverageb
Differences in characteristics of insured –1 to +2%
Total (before subsidies) –2 to +1%
aThis includes both the expanded scope of benefits and lower cost sharing.
bThis takes into account both lower administrative costs and higher fees.
SOURCE: CBO, 2009.
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84 ESSENTIAL HEALTH BENEFITS
TABLE 5-2 Congressional Budget Office (CBO) Estimates of the Effect of the Law on Premiums in the
Individual Market, in November 2009 Letter to Senator Bayh
Expected Difference Between Premiums in Non-group
Market After the Law Compared to Premiums Projected
Component Affecting Premiums Without the Law
Difference in amount of coveragea +27 to +30%
Difference in price paid for a given amount of insurance coverageb –7 to –10%
Differences in characteristics of insured –7 to –10%
Total (before subsidies) +10 to +13%
a This
includes both the expanded scope of benefits and lower cost sharing.
b This
takes into account both lower administrative costs and higher fees.
SOURCE: CBO, 2009.
TABLE 5-3 Congressional Budget Office (CBO) Estimated Premiums for Individual and Family Policies in
Exchange Markets, in Letter to Senator Bayh, Converted to 2014 Dollars
Premiums in the Absence Premiums After Implementation
of the ACA of the ACA
Type of Policy (2014 $) (2014 $)
Small Group Market
Individual 6,933 6,933
Family 17,156 17,067
Individual Market
Individual 4,889 5,156
Family 11,645 13,511
NOTE: ACA = Patient Protection and Affordable Care Act.
Fixed Target Approach Based on RAND Estimates in Department of Labor Study
RAND conducted a study for the Department of Labor examining, among other issues, how some of the design
features of the exchanges might affect coverage, health care spending, and choice of insurance (Eibner et al., 2010).
The RAND study, which utilized microsimulation modeling, also took a more detailed approach to defining and
projecting the behavior of the small group market than had previously been undertaken by any research group.
Table 5-4 shows the premiums used in the RAND analysis (which generates premiums within the model rather
than using an externally selected price).1 Unlike the CBO analysis, which used a single national average premium,
the RAND analysis provides premiums by precious metal tier,2 which demonstrates the effect of the cost-sharing
element on the premium. The committee also converted the RAND estimates from 2010 dollars to 2014 dollars
because that is the year the EHB policy will take effect.
In designing their exchanges, states have the option to either keep the individual and small group markets in
separate risk pools or combine them into a single risk pool. Table 5-5 shows the difference in premiums if the risk
pools are separated.3 Because people who are enrolled in the exchanges as individuals tend to be less healthy than
those who are enrolled through an employer, the premiums for the individually enrolled population are about 40
percent higher. RAND found that if the risk pools were combined, fewer small employers would offer coverage
and many of those who would have otherwise been covered through employer-sponsored insurance (ESI) would
choose to enroll in Medicaid.
This analysis suggests that the Secretary may have to take into account some of the design choices being made
by states in incorporating costs into the determination of essential health benefits. It also suggests that an estimated
1This enables an explicit accounting for health status and change in utilization as a result of newly acquiring insurance.
2ACA Section 1302(d)(1)(A)-(D) describes four “precious” metal tiers of actuarial value (AV): bronze, silver, gold, and platinum; see
Chapter 2 for further description of actuarial value and the metal tiers. The EHB are required in each metal tier.
3 Regardless of risk pool, each metal level contains the EHB.
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DEFINING THE EHB
TABLE 5-4 Premiums for Single Coverage in the Exchange Market in the Absence of the Patient Protection
and Affordable Care Act (ACA) Compared with After Implementation of the ACA (in 2014 dollars) a
Premiums in the Absence Premiums Projected After
Market of the ACA (2014 $) Implementation of the ACA (2014 $)
Employer-sponsored insuranceb 7,022 6,902
Exchange bronze N/A 4,600
Exchange silverc N/A 5,474
Exchange gold N/A 6,831
Exchange platinum N/A 7,323
Non-group (individual market) 7,426 N/A
a Assumes combined individual and small group market risk pools, employers with fewer than 100 full-time equivalent employees able to
enroll, 12 percent administrative load.
b Includes both small and large group markets.
c Subsidy connected to premium of this plan.
TABLE 5-5 Individual and Small Group Premiums in Exchange Markets When Risk Pools Are Split or
Combined (in 2014 dollars)
Split Risk Pools (2014 $)
Combined Risk Pool
Individual Small Group (2014 $)
Bronze 5,379 3,855 4,600
Silver 6,401 4,588 5,474
Gold 7,462 5,348 6,381
Platinum 8,561 6,138 7,323
national average premium price for a particular metal level, such as the silver plan, would be reasonable because
this is the premium price that is used to determine the amount of subsidy for which an individual is eligible.
Competitive Bidding Approach
Rather than the fixed-target approaches described above, the committee also considered a competitive bidding
approach similar to that being used for Medicare Part D (prescription drug coverage). Under Medicare Part D, the
broad elements of the basic benefit package design are established (e.g., the amount of the deductible, the cost-
sharing portion, the level at which catastrophic coverage begins). Plans may offer alternative coverage structures
as long as the alternative is actuarially equivalent to the standard plan. Plans may also offer coverage that goes
beyond the basic benefit package, but such supplemental coverage is not subsidized by Medicare.
The Centers for Medicare & Medicaid Services (CMS) obtains bids annually from plans wishing to offer cov -
erage in this program. The bids are based on covering a standard Medicare population. CMS calculates a national
average premium based on the bids received. Enrollees pay a base premium plus any difference between the bid
of the plan they enroll in and the national average. Those electing more expensive plans pay higher-than-average
premiums, while those electing less expensive plans pay lower-than-average premiums.
A competitive approach in the context of the exchanges would have to be administered at the state level, and
the committee believes that considerable variability exists in the ability of states to execute this function. On the
one hand, states are already responsible for reviewing many aspects of plan operations, so this requirement would
increase the burden on states that do not have an adequate infrastructure in place to review bids. On the other hand,
many states are already involved with competitive bidding in Medicaid managed care programs and Medicaid
pharmacy programs, so the existing infrastructure may be available for this option. Given the considerable pressure
on state budgets, variability in the states’ infrastructure necessary to support reviews of competitive bids, and the
relatively tight timeframe for implementation of the EHB, the committee concluded that this approach was likely
not feasible in all states and thus was not an approach the committee recommends to the Secretary.
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How Costs Could Be Incorporated into Determining the Essential Health Benefits Package
The committee considered how the Secretary might use the sources of data above to set the initial essential
health benefits package within a target cost. Table 5-6 illustrates the steps in the process.
Conceptually as envisioned by the committee, the Secretary would start with a figure like the aggregate CBO
estimate for the small group market ($6,933 for an individual policy) or the RAND estimate for a silver plan
($5,474 for an exchange policy in which the risk pools are combined). Because these base estimates were arrived
at before the ACA was finalized,4 the CMS Chief Actuary would need to update the “starting amount” for 2014
taking into account the provisions of the ACA that have already taken effect. Because neither the RAND nor the
CBO analyses considered in any detail the potential effect of the required 10 categories of coverage on the pre-
miums for those policies, the Secretary would also need to obtain estimates of the incremental costs of expanding
the scope of benefits for a typical small group plan from the CMS Chief Actuary. The committee discussed this
approach with an actuarial expert and determined that it was a feasible approach. 5 Then, the Secretary could obtain
estimates from the CMS Chief Actuary on the incremental costs of all other potentially included elements. The
Secretary will also have to make some assumptions about the degree to which benefit design, on average, is cur-
rently operationalized as a mechanism in controlling premium costs; those assumptions should be made public.
The premium target is created as a mechanism for bounding decisions about what will be included in the EHB.
It establishes a nationwide budget mechanism for the Secretary to work within when defining the EHB package.
The alternative approach, rejected by the committee, would have been to define the EHB without considering
the cost of the resulting package. The committee does not intend for the premium target to be used to specify the
premiums that can be established by qualified health plans. In fact, the committee does not believe that the Secretary
has the authority to specify a premium for any plan. The premiums set by plans in the market that offer the EHB
will vary as they do today. The distribution of resulting premium prices in different locales will reflect the other
elements that determine the cost of health insurance: health status of enrollees, propensity to use services, provider
payment rates, network design, and medical management. However, the committee’s guidance to the Secretary
is to establish the initial package of essential health benefits that are actuarially equivalent to a national average
TABLE 5-6 Sample Approach to Incorporating Costs into the Definition of Essential Health Benefits
Process Result from Step Updated Result
Starting amount from fixed target sources $5,474-$6,933 $5,474-$6,933
estimated to reflect a silver plan
Change due to expanding scope of benefits +$168 $5,642-$7,101
to any of the required 10 categories not
included in small employer plans today
Obtain actuarial estimates of the incremental Dollar amounts by individual areas of Components of overall premium price
cost of each proposed additional element in coverage provided as an actuarial “price list”
the scope of benefits
Conduct public deliberative process to set Package selected to fall within Final description of the scope of essential
priorities budgeted range health benefits eligible for coverage
Final result: benefit package with a estimated $5,474-$6,933
national average premium
4 Note: The modeling by the CBO and RAND does not typically discriminate the inclusion or exclusion of specific small service categories;
deductibles and co-payments are the main drivers of the premium prices observed and/or generated in these models.
5 For example, these estimates could be expressed either as a percentage of current premiums or as a dollar amount per member per
month. Overall, the expert estimated for illustrative purposes that under one assumption about expanded scope, premiums might increase by
approximately $130 per member per year in 2014 dollars. Removing limits that exist today (lifetime and annual dollar amounts) might increase
premiums by $40 per member per year in 2014 dollars. Similar estimates could be obtained by the Secretary from an actuarial consultant.
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DEFINING THE EHB
premium estimate. Each exchange will then set the mechanisms by which it evaluates whether qualified plans
are offering the EHB and whether the premiums proposed by the plans within a particular state are reasonable.
STEP 3: RECONCILE INITIAL LIST TO THE PREMIUM TARGET
The central debate in constructing the EHB package has been balancing the comprehensiveness of benefits
with their costs so as to promote value. This is not an academic exercise but one that has real repercussions for
how many people will be able to afford the premium—because the essential health benefits apply to individual
and small group policies both inside and outside the exchanges. Furthermore, it will have an impact on state and
federal budgets through subsidies and whether people are able to obtain commercial insurance or need to remain
fully on public programs. The committee envisions that the Secretary will be able to calculate the estimated national
average premium, as well as obtain the actuarial estimates for the categories and services that comprise the list of
potential benefits. These may then be compared to reconcile the list to ensure that the incremental cost of all of
the proposed benefits will fit within the premium target.
From an ethical standpoint, if constraints are real and must be acknowledged, this should occur in as fair and
just a fashion as possible per the committee’s criteria on methods (see Figure S-2 in the Summary). In evaluating
the individual components of the EHB and the overall package, the committee encourages the Secretary to engage
in public processes that are transparent, participatory, equitable and consistent, sensitive to value, responsive to
new information, attentive to stewardship, encouraging of innovation, and data-driven.
The use of a public deliberative process for setting priorities, as described in Chapter 6, provides an effective
method for meeting many of these requirements. Thus, the committee recommends, in this stage of the process,
that structured, public deliberation sessions be conducted to set priorities within the concept of a budgetary con -
straint. Actuarial estimates of different components of benefits and choices in benefit design should be publicly
available for consideration in the context of public processes. Recognizing the time limitations for development
of implementation guidance to the states and insurers, the committee envisions that a total of 10-15 of these small
group meetings could be conducted in different areas of the country by a nongovernmental organization funded
by HHS or through philanthropic means. Although the results of this process are advisory only, they must be well
structured to permit full dialogue and consideration of possible tradeoffs. These deliberations differ from simply
receiving comments through stakeholder meetings, in which individuals or groups promote particular benefits.
The deliberations will also serve an important public education function, allowing the public to see the cost
tradeoffs among benefits as well as the impact of different co-insurance and co-payment structures. A national
public deliberation effort, even with a limited number of participants, can serve as a model for states that wish to
replicate the process. The Secretary should additionally seek public comment through the publication of a notice
of proposed options for inclusion in the EHB and actuarial estimates associated with those options simultaneously
with the public deliberation exercise. The availability of actuarial information will enrich the content of public
input through both mechanisms.
Although the committee believes there should be sufficient time to conduct these public deliberations before
finalizing an EHB package by May 2012, the committee is also aware that time pressures may preclude the design
and execution of a credible process prior to HHS issuing initial EHB details. If so, then the Secretary should
arrange for the national public deliberation process to be conducted within the first year following the release of
the initial EHB design.
The Secretary is ultimately responsible for the final definition of the EHB. Before finalizing the list, the Sec -
retary should reassess how well it conforms to the committee’s criteria for the contents of the aggregate package
(see Figure S-2). The Secretary should publicly identify the rationale behind choices in the final package of EHB
that emerges for plans in 2014.
STEP 4: ISSUE GUIDANCE ON INCLUSIONS AND PERMISSIBLE EXCLUSIONS
Once the final EHB package has been determined, the Secretary must communicate these decisions in the
form of guidance and/or regulation. Again, the committee recommends a pragmatic approach, acknowledging the
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reality of mixed methodologies that currently exist in coverage descriptions and working to improve them over time.
Ideally, a description of a benefits package should provide clear and consistent guidance to consumers, providers,
and insurers, resulting in fair, consistent, and easily understood coverage decisions. As discussed in Chapters 4 and
9, the reality falls well short of this ideal. The committee notes that when guidance lacks specificity, considerable
variation will result. The committee urges the Secretary to be as specific as best practices, data, and time allow.
Defining Inclusions and Permissible Exclusions
Consistent with the structure of employer policies, guidance from the Secretary on the EHB must contain
explicit direction about categories and services that must be included and those that it is “permissible to exclude.”
The categories and services included in the EHB are the only ones that count toward limits on deductibles and co-
payments and the only ones to which annual and lifetime dollar limits can be applied. In the absence of specific
secretarial guidance on coverage, the resulting packages offered in exchanges will likely vary considerably with
respect to what is considered an essential benefit. In contrast, benefit design considerations (e.g., provider network
arrangements, medical management, deductibles) will vary and are expected to under the ACA’s metal levels.
Although insurers may offer additional benefits in their packages and states may mandate additional benefits,
those are not subject to all of the ACA limitations.
The HHS guidance on inclusions and permissible exclusions should be designed to achieve consistent benefit
interpretations by qualified health plans, exchange authorities, state-based regulators, medical care providers, and
patients. In anticipation of the EHB definitions being issued by the Secretary, various insurers today are coming
to different conclusions about what might be excluded as nonessential (Anthem, 2011; UnitedHealthcare, 2011).
Plan documents vary in how insurers address exclusions as well as listed inclusions. For example, exclusions
might be defined as specific services (e.g., a plan does not cover cosmetic surgery, bariatric surgery, infertility
services, or orthodontic care for temporomandibular joint syndrome) or more generally stated (e.g., no coverage
for services, drugs, or supplies that are not medically necessary; no coverage for services, drugs, or supplies not
required according to accepted standards of medical, dental, or psychiatric practice in the United States; no cover-
age for services not specifically listed as covered).6 Appendix E presents exclusions in the small group market for
one insurer; Appendix F lists exclusions from a broader spectrum of plans.
At the outset, the committee does not expect that the Secretary’s list will delineate every service that is covered,
because this would require annotation with the medical condition and perhaps circumstances in which it would be
appropriate for use (i.e., deemed medically necessary). However, the Secretary will need to identify permissible
exclusions. Exchanges need to know if it is permissible to exclude certain services when qualifying a health plan.
Guidance should provide the most comprehensive description possible that makes such variables clear and permits
reasonable judgments (both substantive and actuarial) of what is covered. As noted previously, even if a service
is listed as permissible to exclude from the minimum set of benefits that constitute the EHB and the related EHB
limits, an insurer could offer the benefit in one of an array of plans they develop for the market.
The state exchanges and state regulators have an important role in monitoring submitted plan documents to
ensure that they do not contain outlier practices that would undermine the intent of EHB coverage; although exter -
nal appeals data and patient satisfaction surveys will provide important after-the-fact detail, this initial review and
comparison of plans seeking to become qualified is critical and knowledge of what has been typical in the state
should inform what detail is missing from the national list for most categories of care.
In Chapter 7, the committee discusses the degree of ambiguity in classifying different services and whether
certain services are part of the 10 categories or fall outside. There will be considerable pressure on HHS from
many stakeholders to have services classified as falling within the 10 categories of care as well as in being part of
typical small employer plans. Although the committee’s process allows for inclusion of services that are beyond the
10 categories of care or the typical employer plan, realistically, the premium constraint may not allow additions.
6 The committee is not recommending specific exclusions, which was outside its task; these are illustrative of exclusions in existing plans
listed in the Appendixes.
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The committee’s direction on specificity in secretarial guidance and movement toward more uniformity is
focused on what is covered or permissibly excluded by a plan, not on the level and features of deductibles, co-
payments, co-insurance, and out-of-pocket maximums other than those set by the ACA. Some states are consid -
ering limits on the number of plans that could be offered in an exchange. It was outside the committee’s task to
comment on whether exchanges should be allowed to limit the number of plan selections offered in an exchange.
Presenting General Exclusionary Language
Besides listing service-specific and general exclusions in plan evidence of coverage documents, the committee
found the idea of having a standard set of general exclusions attractive so that the simplified six-page documents
for consumer comparisons of plans on the exchanges could list whether a plan adopted or varied from a standard
set of general exclusions. General exclusion language is often too voluminous to fit in the small space allotted on
those consumer documents; for example, the committee found plan documents with seven pages of exclusions.
Box 5-2 lists the general exclusions set out by the Office of Personnel Management (OPM) for fee-for-service
plans operating within the Federal Employees Health Benefits Program (FEHBP). Plans are allowed to add to the
list of general exclusions. For example, the Blue Cross and Blue Shield Service Benefit Plan expands the OPM
general exclusions list to contain 30 general and specific exclusions. OPM offers a similar but slightly different
set for health maintenance organization (HMO) plans.
BOX 5-2
General Exclusions: Federal Employee Health
Benefit Program Fee-for-Service Option
• Services, drugs, or supplies you receive while you are not enrolled in this plan;
• Services, drugs, or supplies not medically necessary;
• Services, drugs, or supplies not required according to accepted standards of medical, dental, or
psychiatric practice;
• Experimental or investigational procedures, treatments, drugs, or devices;
• Services, drugs, or supplies related to abortions, except when the life of the mother would be
endangered if the fetus were carried to term, or when the pregnancy is the result of an act of rape
or incest;
• Services, drugs, or supplies related to sex transformations;
• Services, drugs, or supplies you receive from a provider or facility barred from the FEHB Program;
• Services, drugs, or supplies you receive without charge while in active military service;
• Services or supplies for which no charge would be made if the covered individual had no health
insurance coverage;
• Services or supplies furnished by immediate relatives or household members, such as spouse,
parents, children, brothers or sisters by blood, marriage or adoption;
• Services or supplies furnished or billed by a non-covered facility, except that medically necessary
prescription drugs and physical, speech, and occupational therapy rendered by a qualified profes-
sional therapist on an outpatient basis are covered subject to plan limits; and
• Charges that the enrollee or plan has no legal obligation to pay, such as excess charges for an
annuitant age 65 or older who is not covered by Medicare Parts A and/or B, doctor’s charges
exceeding the amount specified by the Department of Health and Human Services when benefits
are payable under Medicare, or state premium taxes however applied.
SOURCE: Personal communication with Dean Schleicher, Office of Personnel and Management, July 15,
2011.
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BOX 5-3
Selected Required Elements for Consideration
Section 1302 (b) (4) REQUIRED ELEMENTS FOR CONSIDERATION.—In defining the essential health
benefits under paragraph (1), the Secretary shall—
(A) ensure that such essential health benefits reflect an appropriate balance among the categories de-
scribed in such subsection, so that benefits are not unduly weighted toward any category;
(B) not make coverage decisions, determine reimbursement rates, establish incentive programs, or design
benefits in ways that discriminate against individuals because of their age, disability, or expected length
of life;
(C) take into account the health care needs of diverse segments of the population, including women, chil-
dren, persons with disabilities, and other groups;
(D) ensure that health benefits established as essential not be subject to denial to individuals against
their wishes on the basis of the individuals’ age or expected length of life or of the individuals’ present or
predicted disability, degree of medical dependency, or quality of life;
(E) provide that a qualified health plan shall not be treated as providing coverage for the essential health
benefits described in paragraph (1) unless the plan provides that—
(i) coverage for emergency department services will be provided without imposing any requirement
under the plan for prior authorization of services or any limitation on coverage where the provider of
services does not have a contractual relationship with the plan for the providing of services that is more
restrictive than the requirements or limitations that apply to emergency department services received
from providers who do have such a contractual relationship with the plan; and
(ii) if such services are provided out-of-network, the cost-sharing requirement (expressed as a co-
payment amount or coinsurance rate) is the same requirement that would apply if such services were
provided in-network;
SOURCE: § 1302(b)(4)(A)-(E).
services considered high value (e.g., not managing their chronic disease adequately), the Secretary might examine
the benefit offerings or design for evidence of inappropriate “imbalance.”
The concern raised by the diverse segments clause is that benefit packages could be established that would, in effect,
enable plans to attract the healthiest enrollees (“cherry picking”) (Monahan, 2010; Sacco, 2010). This might happen
through benefit design, for example, by having a provider network that did not include specific specialists, primary care
physicians in certain geographic locations, or selected medications. Respondents to the committee’s online question about
diverse segments of the population frequently interpreted the provision as addressing the question of disparities in access
across racial, ethnic, language, and socioeconomic lines. If a plan failed to attract a reasonable number of beneficiaries
in a given clinical or demographic group, it might be evidence of an imbalance in benefit design.
Nondiscrimination Provisions
Congressional guidance to safeguard against the potential for discrimination based on age, disability, or
expected length of life, as stipulated through Section 1302(b)(4)(B) and (D), reflects concern about past practices
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DEFINING THE EHB
by some insurers. One interpretation of this portion of the law provided in testimony to the committee was that
“what Congress is trying to get at is the notion … if there is no objective evidence, if we have an absence of clini -
cal evidence to suggest that the treatment does not work for persons with certain disabilities, then the [condition-
specific] limitation should not stand” (Rosenbaum, 2011b). The committee interprets the congressional intent of
these provisions as primarily to ensure that insurers do not make arbitrary and discriminatory decisions based on
certain characteristics of people rather than assessing the individuality of each case when making medical neces -
sity decisions and applying clinical policies.
Effect of benefits’ exclusionary language and required elements for consideration. The committee examined
the scope of exclusions considered typical across the industry (Appendix F). Among those deemed to be “industry
typical,” the committee questioned whether some would be considered to discriminate by disability. The committee
did not have the time or resources to research the legal repercussions, nor was it tasked with addressing specific
services; as a result, it does not take a position with respect to any of the items listed below or others on the
expanded list (Appendix F). The committee brings the following illustrative examples to the Secretary’s attention
as perhaps needing further evaluation to see if they should be allowable; for example, exclusions encompassed
• Any disease or injury resulting from a war, declared or not, … or any release of nuclear energy;
• Treatment of injuries sustained while committing a crime; a voluntary participant in disorderly conduct,
riot, or other breach of the peace;
• Treatment of dementia, except for treatment of psychological symptoms;
• Nutritional supplements and formulas needed for the treatment of inborn errors; and
Sexual reassignment surgery.8
•
The first two items might be considered situational exclusions, not disability-based exclusions. Should it be allow -
able for a plan to deny treatment if a person was exposed to environmental radiation?9 Should it be allowable for a
plan to deny treatment to a person who needed treatment incident to a crime; what if the individual was considered
involved in the crime due to exceeding a legal limit on blood alcohol level? The committee was advised during its
first workshop that intoxication exclusionary clauses, once prevalent when alcoholism was considered a behavioral
choice rather than a medical condition (Rosenbaum, 2011b; Rosenbaum et al., 2004), are less common today. Still
the committee found exclusionary language in one plan, for example, that a person would not be covered if injured
while intoxicated above a certain blood alcohol level and driving a car, scooter, or off-road vehicle. 10
The remaining items raise debatable points about whether people are being denied treatment based on a dis -
ability as opposed to a decision made about the design of benefits—that is, the service is not elected to be among
the priorities to be paid for out of shared resources.
Setting benefit limits. Could benefit limits also be discriminatory? Respondents to the committee’s online ques -
tion about the issue of setting limits on benefit categories could be simplistically split into two groups: those in
favor of benefit limits and those against benefit limits. Those in favor of limits noted that they are an important
component of value-based benefit design and are necessary to ensure quality and affordability. Benefit limits are
often cited as an effective means of lowering premium costs. Those who did not support limits frequently expressed
concern that nonmonetary medical management limits (e.g., step therapy, visit limits, prior authorization) would
increasingly be utilized by insurers as a “loophole” to get around the prohibition against lifetime and annual dollar
limits. The National Partnership for Women and Families stated that “non-dollar service limits can be just as
detrimental [as lifetime and annual limits] as insurers can simply substitute non-dollar limits, like annual service
limits, nullifying the effect of this important consumer protection” (Monahan, 2010). Specifically, the following
were raised as areas of most concern:
8 Sexual reassignment surgery is a frequent exclusion in plans; of note in FEHBP plans, it is considered a procedure-based exclusion rather
than a condition-based one. Personal communication with Dean Schleicher, U.S. Office of Personnel Management, July 13, 2011.
9 Subrogation clauses allow insurers to recoup medical expenses the insurer paid from third parties who are legally responsible for an injury.
10 Personal communication with Tanji Northrup, Health Division Director, Utah Insurance Department, February, 23, 2011.
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• Generic-only drug coverage, because certain drugs are not available in a generic-only formulary, leaving
patients liable for needed high-priced pharmaceuticals and perhaps affecting their adherence to drug
regimens (Fung et al., 2008)
Condition-specific restrictions11
•
• Dollar or visit limits on specific benefit categories, services, or drug classes (e.g., therapy caps) even
though the ACA prohibits annual and lifetime dollar limits
• Nonnormative limits such as very low numbers of allowed inpatient hospital days or coverage of the
second day of hospitalization but not the first
The committee notes that there is a balance between setting arbitrary limits and those that reflect best practices
and/or scientific evidence. Others have pointed out that limits, when undisclosed and not scientifically based, are
problematic: “These normative, undisclosed, and fixed limits on treatment do not allow for any deviation based
on underlying condition … are often not based on evidence; they are simply conclusory statements by actuarial
firms” (Rosenbaum, 2011a, p. 8-5). The committee affirms its desire for evidence-based limits and medical neces -
sity assessments considering the individuality of the particular case. This needs to be coupled with protections for
vulnerable patients, such that any limit should have the right of appeal.
Conclusion: With respect to the required elements for consideration, the committee concludes that congres -
sional and secretarial direction on the contents of the 10 categories of care and the scope of the typical small
employer plan provides the best a priori guidance. One supplementary a priori approach that the Secretary
could employ would be to require that contracts submitted to an exchange to become a qualified health plan
(QHP) include an attestation in its subscriber contracts that the plan will abide by the required elements
for consideration in Section 1302(b)(4)(A)-(D) or incorporate the required elements language fully in the
contracts. As all small group and individual coverage, not just QHPs, is subject to the EHB, this approach
could also be applied by state insurance commissioners to non-exchange plans.
It is impossible that HHS guidance will anticipate every circumstance that might be a possible violation of the
required elements. It is the job of the exchanges and state insurance commissioners to identify insurer practices
that will not provide meaningful coverage and consumer protection. Because states are on the frontline of review,
they are likely sources to identify practices that are either problematic or possibly innovative through monitoring
(see Chapter 7). Having a systematic way to communicate those findings across the exchanges and states in real
time could help other states.
Chapter 7 outlines the importance of planning for data collection on benefits, benefit design, limits imposed,
and monitoring implementation. At the outset, state health exchanges and state regulators will be able to com -
pare what is being typically offered in their states under the EHB requirements and identify outlier practices for
covered benefits, exclusions, and benefit design limits and networks. Over time, evaluation of these elements,
appeals, and utilization patterns can help identify if any areas need further evaluation to determine if they are out
of balance, do not serve diverse population segments, discriminate, or reflect desirable innovative practices. The
purpose of well-developed internal and external appeals processes as required by the ACA is to allow consistency
in benefit interpretation across insurers to emerge from the review of specific cases yet recognize individual
circumstances when warranted. The right to appeal provides only a limited check on contract benefit limits and
exclusions, because any external review will generally be bound by coverage limits imposed by the insurance
policy. Although, in some appeals cases, medical necessity may “trump” a visit limit, medical necessity may not
apply to some strict benefit design limitations in commercial insurers and some Medicare provisions.
11An interim final rule related to limits was issued on June 28, 2010, and explicitly stated that “the rules of this section do not prevent a
group health plan, or a health insurance issuer offering group health insurance coverage, from excluding all benefits for a condition” (U.S.
Department of the Treasury et al., 2010, p. 37223). Additional guidance on limits can be found on the Center for Consumer Information and
Insurance Oversight (CCIIO) website: http://cciio.cms.gov/resources/regulations/index.html#alw.
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DEFINING THE EHB
Emergency Room Coverage
The fifth required element has very specific language related to accessing emergency room services (Box 5-3[E]),
and a prohibition against a plan being qualified unless it follows the outlined practices.
Conclusion: The secretarial guidance could require that the legislative language of the fifth required element
be incorporated directly into contract provisions in order to participate as a qualified health plan. Similarly,
state insurance commissioners could require this for plans outside the exchange that incorporate the EHB.
Medical Necessity
Medical necessity is a condition of benefit coverage usually found in insurance contracts, allowing health
insurers to review the appropriateness of any intervention a patient receives. In evidence of coverage contract docu -
ments, there will be services listed that the enrollee is eligible to receive and that qualify for coverage contingent
on a finding of medical necessity for the individual patient. Moreover, there will be non-listed services that are
medically necessary, based on the patient’s specific condition, and unless expressly excluded in the plan documents,
insurance coverage for the services will be determined by medical necessity review. Therefore, determination of
medical necessity is used to ensure that each individual patient receives the most appropriate care; this is particu -
larly important when every “inclusion” and “exclusion” is not listed, and as medical science changes, it allows for
flexibility before lists can be updated.
Per the committee’s Statement of Task to “assess the methods used by insurers currently to determine ‘medical
necessity,’” the committee undertook an analysis of existing definitions and stakeholders concerns, and examined
the use of evidence in the application of medical necessity and the related issue of clinical policy determination .
Opportunity for public input—particularly on the advantages or disadvantages of current definitions, the need (if
any) for secretarial guidance on medical necessity, and approaches to help formulate such guidance—was provided
through the committee’s online questionnaire. Based on these public findings, additional testimony, and committee
research into various options, the committee identified the following major issues:
• The term “necessity” can lead to misunderstandings—with patients asking how something their provider
prescribes could not be considered necessary or physicians inquiring how an insurer can question their
judgment. Such responses imply that the medical necessity process is established to deny coverage,
rather than being built on a scientific evidence base, according to the National Business Group on Health
(Wojcik, 2010). In insurance practice, the insurer makes the final assessment of medical necessity for
uncontested cases; patients and providers have the right to an independent external appeal under many
current policies and more will under the ACA.12
• Multiple definitions of medical necessity exist, and respondents were split in their views about whether
the IOM or HHS should establish a national standard definition of medical necessity. Responses from
consumers and providers tended to support a national definition, particularly emphasizing individualization
of care and not inflexible clinical policies (Baker, 2010; Gascho, 2010; Morgan, 2010; Sacco, 2010; Smith,
2010; Zollar and Kendrick, 2010), and insurers tended to be opposed saying medical necessity is not a
“tool for determining what items and services should make up a benefit package,” which they viewed as
the task assigned to the Secretary (Fox, 2010). Furthermore, they noted that Section 1563 of the ACA
allows insurers flexibility to employ appropriate medical review and determination of medical necessity
(Bocchino, 2010; Calega, 2011; Walter-Dumm, 2010).
• Safeguards in the application of medical necessity may be needed, particularly for special populations
(e.g., children; individuals with disabilities, mental illness, or rare diseases) both in the definition of what
medical necessity means and in monitoring its implementation.
12 29 CFR 2590.715-2719(c)(2)(i).
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Some commented that they preferred the term medical appropriateness, but the committee acknowledges that the
term medical necessity is widespread in the vernacular and in regulatory guidance. Medical necessity has been
historically and continually referenced in federal and state statute, and it is a familiar term in commercial medical
insurance products. The committee believes the Secretary has the opportunity through the EHB definition process
to educate the public on the meaning of medical necessity—why it is consistent with individualized assessments
of the appropriateness of care, with keeping coverage affordable, and with ensuring patients’ rights of appeal if
they view care as inappropriately denied (see additional discussion in Chapter 2 of medical management, of which
medical necessity is one element).
Key Elements in Definitions
The committee considered multiple definitions of medical necessity across Medicare, in sample Medicaid
programs, and in use by private insurers (Appendix G). In the late 1990s, a research team at Stanford developed
a more “evidence-based” definition of medical necessity that has now been incorporated in a number of contracts
of insurers and state Medicaid programs (e.g., Hawaii, Kansas, Blue Cross Blue Shield of Arkansas) (Coding
Institute, 2000).13 Key elements were that an intervention could be considered medically necessary if first recom -
mended by the treating physician and then determined by the insurer to have met conditions pertaining to each of
the following elements: medical purpose, scope, evidence, and value (as illustrated in Table 5-7 and outlined in
more detail in Appendix G). These five categories were identified as those into which most existing and proposed
criteria at the time fell from the Stanford workshop members’ analysis. Notably, it was pointed out at the time
that “it was clear that most definitions have criteria that address purpose and scope, and closely following those
criteria in frequency are criteria about authority and evidence. [At the time], few definitions addressed value or
cost effectiveness” (Singer et al., 1999, p. 57).
Similarly, a major national legal settlement between insurers (e.g., CIGNA, Health Net, Prudential, Anthem/
WellPoint, Humana) and 900,000 physicians created a standard followed by many in the insurance industry. 14
Starting with a “prudent physician” standard (the primary component of the American Medical Association [AMA]
definition of medical necessity), the settlement contains the five elements of the Stanford definition. A separate
Second Circuit Court of Appeals case directs that if “the plan administrator presents sufficient evidence that a treat -
ment is not necessary in the usual case it is up to the patient and his or her physician to show that this individual
patient is different from the usual in ways that make the treatment medically necessary for him or her” (Kaminski,
2007, p. 2). As in the Stanford definition, authority, purpose, scope, evidence, and value are part of defining what
constitutes medical necessity in the national settlement (Table 5-7).
Additionally, the National Association of Insurance Commissioners, as part of its effort to define consumer-
friendly insurance terms, conveyed to HHS a number of sample medical necessity definitions from subscriber
contracts in six states (NAIC, 2010). Most of those samples reference prudent physician judgment, clinically
appropriate care and best practice, and a scientific evidence base. Few sample definitions explicitly mention
individualizing care or addressing value, efficiency, or cost-effectiveness of care, but those elements could be
encompassed within the construct of delivering clinically appropriate care depending on how the definition is
applied in practice.
The committee observed, based on the definitions from plans from these six states as well as plans in other
states, that individual states do not require health insurers operating within a single state to have a uniform defini -
tion of medical necessity. Nor does the Federal Employee Health Benefits Program require participating plans to
have a single definition.15
13 Personal communication with Linda Bergthold, health policy consultant, November 19, 2010.
14 Kaminski reports that if a “state-enacted definition is more expansive than the settlement’s definition, the state law will control. But if the
settlement’s definition is more expansive, it will control with respect to the parties subject to the settlement” (Kaminski, 2007, p. 2).
15 Personal communication with Dean Schleicher, U.S. Office of Personnel Management, July 13, 2011.
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TABLE 5-7 Key Elements in Definitions of Medical Necessity
Stanford Definitiona National Legal Settlementb
Terms Under
Authority An intervention is medically necessary if, as Health care services that a physician, exercising
recommended by the treating physician and prudent clinical judgment, would provide to a
determined by the health plan’s medical director patient
or physician designee
Medical purpose A health intervention for the purpose of treating Health care services for the purpose of preventing,
a medical condition (i.e., to treat meaning to evaluating, diagnosing, or treating an illness,
prevent, diagnose, detect, treat, or palliate) or to injury, disease, or its symptoms
maintain or restore functional ability
Scope The most appropriate supply or level of service, Clinically appropriate, in terms of type, frequency,
considering potential benefits and harms to the extent, site, and duration and considered effective
patient for the patient’s illness, injury, or disease
Evidence Known to be effective in improving health Generally accepted standards of medical
outcomes. For new interventions, effectiveness is practice—meaning standards that are based on
determined by scientific evidence. For existing credible scientific evidence published in peer-
interventions, effectiveness is determined first reviewed medical literature, generally recognized
by scientific evidence, then by professional by the relevant medical community, or otherwise
standards, then by expert opinion consistent with standards of clinical judgment
Value Cost-effective for this condition compared Intervention should not be more costly than an
to alternative interventions, including no alternative service or sequence of services at least
intervention, with application of the cost- as likely to produce equivalent therapeutic or
effectiveness criterion in the case of the diagnostic results
individual patient being determinative
a Singer et al., 1999. [Note: See full definition in Appendix G.]
b Kaminiski, 2007.
Medical Purpose
Additionally, in light of the importance of medical necessity determinations during implementation of the
EHB package and concerns about inappropriate denials of care, the committee examined the element of “medical
purpose of the intervention,” which had been raised as particularly problematic because its phrasing in medical
necessity definitions and, more importantly, in its interpretation as applied to patient cases can result in limitations
of care. Although the committee heard anecdotal accounts of denials of care based on narrow interpretations of
the wording of definitions of medical necessity, the extent of the problem was not well documented. Illustrative
examples of medical necessity approvals confined to interventions that only “cure” a person’s condition or only
“restore” their function were presented as discriminatory against conditions for which there may be no recovery
(e.g., multiple sclerosis for which maintenance of function or prevention of worsening of infirmity is more perti -
nent) or conditions whose initial lack of attainment of developmentally appropriate functioning would effectively
preclude the concept of such restoration (e.g., an individual with developmental disabilities who has never attained
speech or movement) (Ford, 2011; Rosenbaum, 2011b).
A congressional floor statement called attention to having a broadly based interpretation for the category of
rehabilitative and habilitative services and devices, including “items and services used to restore functional capacity,
minimize limitations on physical and cognitive functions, and maintain or prevent deterioration of functioning.” 16
16 Floor statement of the Honorable Bill Pascrell, Jr., (NJ) in the U.S. House of Representatives. Congressional Record—House Extension
of Remarks (March 21, 2010). Congressman Pascrell, a co-chair of the Congressional Brain Injury Task Force, included the following in
his House floor statement: “The term rehabilitative and habilitative services includes items and services used to restore functional capacity,
minimize limitations on physical and cognitive functions, and maintain or prevent deterioration of functioning as a result of an illness, injury,
disorder or other health condition. Such services also include training of individuals with mental and physical disabilities to enhance functional
development” (Pascrell, 2010).
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Advocates for children, such as the American Academy of Pediatrics, suggested modeling medical necessity
requirements after early and periodic screening, diagnosis, and treatment (EPSDT) coverage rules, 17 stating that
a disadvantage of typical insurance approaches is that they do not take into account developmental stages or the
need for habilitative services that do not treat a disease but rather allow a child to accommodate to a condition and
reach his or her highest level of functioning (American Academy of Pediatrics, 2005; Racine, 2011). On the other
hand, concern has been raised that the Medicaid EPSDT requirement to address any diagnosed condition and its
approach to defining medical necessity were far more extensive than any typical employer insurance plan; at the
same time, others have noted that Medicaid is more likely to enroll and be responsive to the needs of children with
special health care needs (The Commonwealth Fund and The George Washington University 2005; DHS, 2011;
Jezek, 2010; Koyanagi, 2010; O’Connell and Watson, 2001).
Evaluations of medical necessity will have to comply with inclusion of the 10 categories of care as well as
prohibitions against discrimination based on age, disability, and expected length of life in the ACA and secretarial
guidance. As noted in testimony to the committee with regard to potential discrimination in the application of
medical necessity to persons with disabilities, “The central question is whether the treatment is medical in nature
and whether the individual can be expected to medically benefit from it” (Rosenbaum, 2011a, p. 8-3).
Clinical Policies
Insurers’ clinical policies help address ambiguity about coverage that is not specifically addressed in listings
of included and excluded services, and are often applied in medical necessity decision making. Chapter 2 presents
sample hierarchies of medical evidence that are used in developing coverage decisions and clinical policies; most
services do not have randomized controlled trials to support them, and clinical policies are designed to identify
the most objective, credible, and scientifically based heuristic or hierarchy of medical evidence.
Clinical policies are not available for all conditions but are usually developed in areas where additional clarity
is needed, a high volume of services might be anticipated, the services have associated high expenditures, and/or
medical benefit for patients is found only under certain limited clinical scenarios. For example, the Massachusetts
Medicaid program publishes 16 separate guidelines for determination of medical necessity that are specific to dif -
ferent kinds of services (e.g., organ transplant, bariatric surgery). In the instance of organ transplant, the guidelines
indicate the possibility for coverage in the case of a congenital maldevelopment, primary malignancy, and failure
of vital organ function, among others, but do not “ordinarily” consider transplants necessary under certain circum -
stances, such as when a patient has ongoing systematic bacterial infection or presence of an irreversible disease
(Massachusetts Department of Health, 2011). Many commercial plans similarly publish their clinical policies;
Aetna, once unique in doing so, publishes hundreds of clinical policies online (Aetna, 2011). The “vast majority”
of technologies is not selected for evaluation and is not subject to utilization management (e.g., pre-authorization,
limits on visits) (McDonough, 2011).
Medical necessity reviews are where the tough decisions on coverage are made, and having more light shed on
clinical policies and review criteria would enhance understanding of whether EHB coverage needs to be updated
and if there are areas potentially subverting the intentions of the required elements for consideration. It was beyond
the committee’s time and resources to mount a systematic examination of available clinical policies, but such an
evaluation could reveal similarities and differences in clinical policies for specific conditions, and thereby inter-
pretations of the strength of the evidence basis. This could inform where evidence supports additional specificity
on EHB inclusions, as well as could reveal whether specific limits on services are rooted in evidence and should
not be considered discriminatory based on age, disability, and expected length of life.
Secretarial Guidance on Medical Necessity
The committee believes that medical necessity evaluation is an important part of benefit design, with the
potential to enhance appropriateness of care for individuals and through that mechanism to enhance the value and
17 “Screening and diagnostic services to determine physical or mental defects in recipients under age 21; and health care, treatment, and
other measures to correct or ameliorate any defects and chronic conditions discovered” (42 CFR 440.40(b)(1)-(2)).
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DEFINING THE EHB
affordability of care. The committee considered that any definition of medical necessity is but one aspect of help -
ing to ensure access to appropriate care and that promoting transparency in medical necessity definitions, clinical
policies, and appeals monitoring would further understanding.
Conclusion: The committee’s vision for the EHB is that only medically necessary (or appropriate) services
for individuals should be covered. The committee believes that the concepts of individualizing care, ensuring
value, and having medical necessity decisions strongly rooted in evidence should be reemphasized in any
guidance on medical necessity. Inflexibility in the application of medical necessity, clinical policies, medical
management, and limits without consideration of the circumstances of an individual case is undesirable and
potentially discriminatory. The committee believes transparency in a rigorous appeals monitoring process is
the primary approach to addressing the nondiscrimination provisions in benefit design and implementation,
including medical necessity reviews.
Rather than requiring a uniform national definition of medical necessity, the committee suggests the following
areas for guidance to states and health plans:
• A requirement for transparency in its medical necessity definition in all plans containing the EHB, and
the disposition of at least external review case data; and
• The components of the Stanford and national settlement definitions address areas that should be considered
part of medical necessity definitions and criteria for application (i.e., authority, medical purpose, scope,
evidence and value). Secretarial guidance should inform the breadth of the medical purposes of interventions
possible under the EHB; interpretation of the medical purpose of interventions must be broad enough to
address the services encompassed in the 10 categories of care—including services such as habilitation,
rehabilitation, and prevention. Specifically, the criteria used for medically necessary services or services
that conform to medical necessity are medical services that are (1) clinically appropriate for the individual
patient; (2) based on the best scientific evidence, taking into account the available hierarchy of medical
evidence; and (3) likely to produce incremental health benefits relative to the next best alternative that
justify any added cost. In some cases, the next best alternative may be no treatment at all. 18
These elements for the definition of medical necessity are consistent with best practices and supported by legal
precedent (Kaminiski, 2007). The committee also encourages the development of new evidence; the Stanford
definition language “known to be effective in improving health outcomes” should not preclude opportunities for
innovation such as coverage with evidence development.
The committee view is that there can be variation in the wording of medical necessity definitions, but it is the
interpretation of the definitions that is most important. The new national requirement for an independent external
review is an important step in protecting the rights of patients; external review will begin de novo and will be
binding on the insurer. Thus, in contested cases, external reviewers will ultimately make the final medical necessity
determination. Because monitoring and learning from implementation are important, the committee further suggests
• Standardized data collection and evaluation of appeals (see Chapter 7 discussion of planning for such
data collection);
• Examination of clinical policies (see Chapter 7 discussion of data collection and research the committee
supports); and
• Transparency and disclosure of data and rationale on these decisions, while protecting individual
confidentiality.
18 For example, in Washington State’s administrative code (WAC 388-500-0005), medically necessary “is a term for describing a requested
service which is reasonably calculated to prevent, diagnose, correct, cure, alleviate or prevent worsening of conditions in the client that endanger
life, or cause suffering or pain, or result in an illness or infirmity, or threaten to cause or aggravate a handicap, or cause physical deformity
or malfunction. There is no other equally effective, more conservative or substantially less costly course of treatment available or suitable for
the client requesting the service. For the purpose of this section, ‘course of treatment’ may include mere observation or, where appropriate,
no treatment at all” (MRSC, 2011).
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100 ESSENTIAL HEALTH BENEFITS
In Chapter 9, the committee recommends the establishment of a National Benefits Advisory Council (NBAC)
to advise the Secretary on updating the EHB; as one of its functions, the NBAC should evaluate the nature of
appeals to understand if more specific guidance is required on particular services.
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