California considers legislation to penalize inappropriate denials

There has been much frustration with insurers denying claims, and KFF Health News published a piece about legislation that California is considering to curb that practice. The article opens with a child with "a grapefruit-sized tumor" being denied treatments recommended by doctors. Denials can be appealed through a process known as independent medical review (IMR). Surprisingly, the majority of appeals in one year resulted in overturned initial denials in a solid majority of the cases: "In 2023, state data show, about 72% of appeals made to the Department of Managed Health Care, which regulates the vast majority of health plans, resulted in an insurer's initial denial being reversed."

The proposed legislation would levy fines on "insurers whose denials are overturned more than half the time." That would certainly be a better system than the status quo, but it seems to impose a large penalty only at a specific threshold. Another design would be to award patients a more modest amount to compensate them for their time and potentially delayed care -- that change would help recognize the costs imposed on patients by the current system. Designing the incentives to be too patient-friendly, however, will result in higher costs, which in turn will cause premiums to rise.