What is a letter of medical necessity?

Health reimbursement arrangements (HRAs) are tax-advantaged benefits that employers offer to help employees pay for qualified out-of-pocket medical costs. While many expenses are eligible for reimbursement with just a receipt or invoice, some require extra steps to satisfy the IRS’s definition of a qualified expense. A letter of medical necessity (LMN) can help prove a healthcare service is necessary and, therefore, an HRA-qualified expense.

Whether you’re an employer offering an HRA or an employee seeking reimbursement, understanding the role of an LMN is key to proper compliance and avoiding denied claims. Let’s break down what an LMN is and how it can help you take full advantage of your HRA benefit.

In this blog post, you’ll learn:

• What a letter of medical necessity is and why it's important.
• What a letter of medical necessity includes, and why the IRS require them for certain HRA expenses.
• Which healthcare costs require a letter of medical necessity to qualify for HRA reimbursement.

What is a letter of medical necessity?

Letters of medical necessity are formal notes written by a healthcare provider explaining why a specific type of care is medically necessary. Medical necessity means a doctor recommends that a patient receive a particular treatment method. If the patient doesn’t, the patient’s health or well-being may decline significantly.

Sometimes, medically necessary care doesn’t require a prescription or formal medical care, like a hospital stay. It could be something over-the-counter, like a vitamin or supplement. But, insurers and health benefits typically don’t cover these types of items. LMNs can help bridge this gap by detailing a provider’s reasons why a treatment, equipment, drug, or service is vital to diagnose, prevent, or cure a patient’s medical condition.

Here are some reasons why an individual may need an LMN:

1. They need medical care their insurer doesn’t cover. An insurance company may require an LMN to approve coverage for a patient’s non-standard healthcare service.
2. They must receive out-of-network care. Suppose someone needs care from a specialist or a licensed health provider outside their network. In that case, an LMN may help their insurance company approve coverage for the service.
3. They’re appealing a denied claim. A health insurance carrier can deny a medical claim if the policy doesn’t cover the service. An LMN is a potent tool to have during the appeal process to prove medical necessity and justify the need for care.
4. They want to deduct a medical expense from their taxes. The IRS allows individuals to deduct certain medical care expenses from their income tax returns. If the item or service isn’t an IRS-qualified expense, they may require an LMN.
5. They have a tax-advantaged health benefit: An LMN can help prove a medical expense is eligible for purchase or reimbursement using HRA, health savings accounts (HSA), or flexible spending account (FSA) funds.

An LMN increases patients' chances of receiving the medical care they need. However, their insurer may not always agree. If a doctor submits an LMN to an insurer but doesn’t include a prescription, the insurer may still reject the claim due to other factors.

What’s the difference between a letter of medical necessity and a prescription?

An LMN is a note from a licensed healthcare provider stating that a service or item is necessary to treat a patient’s medical condition. In contrast, IRS Notice 2010-59 defines a prescription as “an order for a medicine or drug that meets the legal requirements of a prescription in the state in which the medical expense is incurred.”¹

A legally valid prescription must include the following information:

• The patient's name and address
• The name of the medication, including its strength and dosage
• The quantity of the drug prescribed and patient directions for use
• The healthcare provider’s name, address, and Drug Enforcement Agency (DEA) registration number (if applicable)
• The date the licensed health provider issued the medication

A prescription allows a patient to get specific medication or supplies. An LMN justifies why a specific treatment or item is necessary for the patient’s medical condition.

Not every service or item will require an LMN. Generally speaking, if the individual can only use the item for medical care, it won’t need an LMN. But if a person could use it for any other purpose—for example, cosmetic surgery—the insurer may require an LMN.

What should a letter of medical necessity include?

The healthcare provider who’s recommending care will write their own LMN. Depending on the service or item the patient needs, each LMN will look slightly different. But, all LMNs include standard features.

Here’s what an LMN generally includes:

1. The patient’s name, date of birth, address, and contact information.
2. The doctor’s name and relevant contact information.
3. A description of the patient's health condition. It should detail the diagnosis, severity, and length of the illness.
4. The physician’s recommendation for necessary treatment. This can be a prescription, medical service, equipment, or other healthcare item.
5. A detailed explanation of why the recommended treatment is necessary for the patient's health and well-being.
6. Any additional documents supporting the recommendation, such as lab test results, clinical notes, or further medical history.
7. The doctor’s signature and the current date.

The physician will also typically include the length of time the LMN is applicable. Patients must request and submit a new note if they need ongoing treatment. If the LMN doesn’t have a duration, it’s usually good for one year from when the doctor signed it.

When submitting an LMN to PeopleKeep, please ensure your letter includes the physician’s qualification abbreviation, like MD. This helps us verify if your provider is a licensed healthcare professional.

We don’t accept letters from:

• Therapists
• Physical therapists
• Chiropractors
• Traditional naturopaths

Why is a letter of medical necessity required for certain HRA expenses?

HRAs are a personalized way for business owners to reimburse their employees tax-free for out-of-pocket healthcare costs. But they’re not designed to pay for every type of medical expense.

An HRA can only cover qualified medical care. According to IRS Code Section 213(e), these expenses must be “primarily for the prevention or alleviation of a physical or mental defect or illness.” Expenses only beneficial to an individual’s general health are ineligible for reimbursement. That’s where an LMN comes in.

An LMN helps prove that a particular item or service is medically necessary rather than for general health or wellness. Once an employee submits their LMN and proof of purchase, the expense can be eligible for tax-free reimbursement under IRS guidelines.

What type of expenses require a letter of medical necessity?

HRAs can cover more than 200 qualified healthcare costs. However, the claim documentation needed varies depending on the expense.

Below are examples of expenses that require an LMN in addition to a receipt or invoice:

• Dietary and nutritional supplements
• Doctor-supervised weight loss programs
• Exercise equipment
• Herbal or homeopathic medicines
• Humidifiers, air filters, and similar supplies
• Dermatology medical products
• Massage therapy sessions
• Home modifications
• Special foods
• Dental care

IRS Publication 502³ and the CARES Act⁴ have the complete list of eligible healthcare costs. However, employers can design their benefits to limit this list. The HRA’s plan documents should outline the eligible expenses and detail the type of substantiation documents needed for employees to claim their reimbursements.

Conclusion

HRAs are effective tools that help employees save on their healthcare costs. But without proper substantiation, your HRA administrator can deny a claim, leaving employees without reimbursement and employers struggling to fulfill federal compliance regulations. Understanding the purpose of LMNs can make the HRA claims process run more smoothly so employees can spend more time enjoying their health benefits.

Need help managing your HRA and reviewing claim documentation? PeopleKeep by Remodel Health has what you need! Our HRA administration software can help every business owner offer a compliant HRA without fuss or confusion. Schedule a call with us today to learn more.

1. IRS Notice 2010-59

2. IRS Code Section 213

3. IRS Publication 502

4. CARES Act