California Law Prohibits Using AI as Basis for Claims Denial

According to a report by The Mercury News, a leading daily newspaper in California, nearly one-fourth of all health insurance claims in the state were denied last year. Some of these denials may have been influenced by Artificial Intelligence (AI). However, new legislation now prevents health insurers from relying solely on AI to determine whether a claim should be denied based on medical necessity.

The “Physicians Make Decisions Act,” signed into law by Governor Gavin Newsom in September 2024, took effect on January 1, 2025. This new legislation amends the long-standing Knox-Keene Health Care Service Plan Act, which regulates health care plans and managed care organizations in California. Under the updated law, stricter guidelines and standards have been imposed on the use of AI in health insurance claims processing. The California Attorney General has provided guidance to insurers, providers, and other health care entities to ensure compliance with the new regulations.

Many health insurers have integrated AI into their operations to enhance efficiency, utilizing it for customer service, marketing, claims processing, underwriting, fraud detection, risk assessment, reporting, and forecasting. However, Senate Bill 1120 mandates that only medical professionals—not AI algorithms—can make final determinations on whether a treatment is medically necessary. AI cannot be used to deny, delay, or alter services that a doctor has deemed essential. The law also establishes strict timelines for coverage decisions: standard claims must be resolved within five business days, while urgent care cases require a decision within 72 hours. Insurers failing to meet these deadlines or violating the law may face penalties.

The California Medical Association co-sponsored the legislation, emphasizing that AI should serve as a tool to support, rather than replace, a physician’s medical judgment. While insurance companies can continue to utilize AI, they must do so in accordance with the new rules. The goal of the law is to strike a balance between leveraging technological advancements, improving healthcare delivery, and ensuring that patients have access to the care they need.

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