New Requirements
On September 28th, 2024, California enacted SB 1120 in an effort to balance technological innovation with the need for human judgment in utilization review or utilization management (UR/UM). The new law limits how a health care service plan (HCSP) 1 or disability insurer (or their contractors) may use artificial intelligence (AI), an algorithm, or any other software tool for UR/UM functions.
Effective January 1, 2025, a HCSP must ensure the use of any AI or other software tool in prospective, retrospective, or concurrent UR/UM functions based (in whole or in part) on medical necessity satisfies several requirements, including:
Provider Control. Medical necessity determinations must be made only by physicians or health care professionals competent to evaluate the clinical issues involved in requested healthcare service. AI and other software tools must not deny, delay, or modify health care services based, in whole or in part, on medical necessity.
Individualized Decision-Making. A determination by AI or another software tool must be based on: (i) An enrollee’s medical or other clinical history; (ii) Individual clinical circumstances as presented by the requesting provider; or (iii) Other relevant clinical information contained in the enrollee’s medical or other clinical record. The determination may not be based solely on a group dataset.
Discrimination and Equity. The use may not discriminate, directly or indirectly, against enrollees in violation of state or federal law. It must be applied fairly and equitably, including in accordance with any applicable regulations and guidance issued by the Department of Health and Human Services.
Audit and Compliance Review. The AI or other software tool must be open to inspection for audit or compliance reviews by the Department of Managed Health Care (DMHC) the State Department of Health Care Services.
Disclosure. Disclosures regarding the use and oversight of AI and other software tools must be contained in written policies and procedures that ensure decisions based on medical necessity are consistent with criteria or guidelines that are supported by clinical principles and processes.
Cause No Harm. The use may not directly or indirectly cause harm to the enrollee.
A willful violation of SB 1120’s requirements is a crime. Additionally, DMHC may assess administrative penalties on a HCSP that violates any of the requirements.
Impacts on Employer-Sponsored Health Plans
Plans that use AI or other software tools in their UR/UM functions (or that contract with entities that do) should carefully evaluate their systems and processes to ensure they comply with these new requirements. In addition to evaluating the AI or software tools themselves, plans should ensure that transparent policies governing the use of those technologies are in place and that providers are the sole decision-makers when it comes to medical necessity determinations. To prepare for potential audits, plans should have transparent disclosures readily available. As SB 1120’s requirements are broad yet brief, plans should be on the lookout for future guidance from DMHC and the Department of Insurance. Note that SB 1120’s requirements are consistent with recent guidance from the Centers for Medicaid and Medicare Services that allows Medicare Advantage Organizations to use AI or algorithms to make coverage determinations only if that use complies with existing law governing how those coverage determinations are made. Plans can expect this area of law to refine as it continues to grow.
1 * A HCSP is defined as any person:
who undertakes to arrange for the provision of health care services to subscribers or enrollees, or to pay for or to reimburse any part of the cost for those services, in return for a prepaid or periodic charge paid by or on behalf of the subscribers or enrollees; or
whether located within or outside of California, who solicits or contracts with a subscriber or enrollee in California to pay for or reimburse any part of the cost of, or who undertakes to arrange or arranges for, the provision of health care services that are to be provided wholly or in part in a foreign country in return for a prepaid or periodic charge paid by or on behalf of the subscriber or enrollee.
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