California Claps Back on Insurer Use of AI to Deny Needed Medical Care Decisions

California recently enacted the “Physicians Make Decisions Act,” which California Governor Gavin Newsom signed into law along with 17 other AI bills in September 2024. The Act, effective January 1, amends the Knox-Keene Act and puts vital health insurance coverage decisions back into physicians’ hands by prohibiting a health insurer from relying solely on AI tools to deny claims on grounds that a health care service is not medically necessary. The Act also imposes guidelines and standards on the proper use of AI in health care claim processing. California’s attorney general has followed suit by issuing legal guidance to insurers, providers, and other health care entities on AI’s various uses in health care that specifically emphasizes compliance with the Act.

The use of AI has rapidly emerged in the health care industry and has been embraced by health insurers seeking to cut costs and streamline review of medical claims. But this practice can cause substantial harm to patients and providers if used without appropriate human oversight, limiting coverage for necessary medical care. We’ve previously written about two class actions, one against Cigna and another against United Healthcare, both alleging insurers are using AI to improperly deny claims that physicians have deemed medically necessary.

The goal of the Act is to stop these harmful practices. Under the Act, AI can no longer be the sole determining factor whether a claim is denied, delayed, or modified in whole or in part on medical necessity grounds. Physician oversight is required when reviewing the medical necessity of claims to ensure that these critical health care decisions are made by a licensed professional and account for a patient’s individual medical history and health care needs. Health insurers are still permitted to use AI tools, subject to these and other requirements, including making the tool available for audit by state inspectors. The law is an attempt to strike a balance between using advancements in technology to improve health care delivery and safeguarding patient access to critical care.

Although willful violation of the Act is a crime, private enforcement is not available. Yet, providers may still be able to enforce violations of the Act through unfair competition or other state-law claims, giving them another tool to remedy improper insurance coverage denials.

While California is the first state to enact such a law, concern over the use of AI in health care claim processing is growing nationwide. It is anticipated that other states and potentially federal legislation could follow as policymakers scrutinize this issue and look for ways to ensure the responsible use of AI in health care.

The AFS ERISA and Managed Care team will be monitoring developments in this area. If you have any questions, please contact Caroline Turner English, Katie Heilman, David S. Greenberg, or Hannah Z. Shlaferman.