New California law prohibits using AI as basis to deny health insurance claims

Last year, about a quarter of all health insurance claims were denied in California — a reality mirrored nationwide that has stoked public anger toward health care companies, and led to accusations that such decisions lack human empathy.

But this month, a new state law is taking on the latest twist in the debate, ensuring that a human’s perspective cannot literally be removed from such decisions by prohibiting coverage denials be made on the sole basis of artificial intelligence algorithms.

Signed by Gov. Gavin Newsom last September, Senate Bill 1120 — known as the “Physicians Make Decisions Act” — comes as frustration with the health insurance system has intensified. Last month’s high-profile killing of UnitedHealthcare executive Brian Thompson in New York City ignited a wave of reactions that often reflected the public’s anger.

According to 2024 data from the California Nurses Association, approximately 26% of insurance claims are denied, one of many factors that inspired the law’s primary author, state Sen. Josh Becker, a Menlo Park Democrat.

“In 2021 alone, (nationwide) data showed that health insurance companies denied more than 49 million claims,” said Becker, citing data from the Kaiser Family Foundation. “Yet customers appealed less than 0.2% of them.”

In November 2023, a lawsuit against UnitedHealthcare spotlighted concerns about the misuse of AI in health insurance decision-making, accusing the company of using artificial intelligence to deny claims.

While SB 1120 does not entirely prohibit the use of AI technology, it mandates that human judgment remains central to coverage decisions. Under the new law, AI tools cannot be used to deny, delay or alter health care services deemed medically necessary by doctors.

“An algorithm cannot fully understand a patient’s unique medical history or needs, and its misuse can lead to devastating consequences,” Becker said. “This law ensures that human oversight remains at the heart of health care decisions, safeguarding Californians’ access to the quality care they deserve.”

Becker emphasized the balance between embracing innovation and safeguarding patient care.

“Artificial intelligence has immense potential to enhance health care delivery, but it should never replace the expertise and judgment of physicians,” he said.

The California Department of Managed Health Care will oversee enforcement, auditing denial rates and ensuring transparency. The law also imposes strict deadlines for authorizations: standard cases require decisions within five business days, urgent cases within 72 hours, and retrospective reviews within 30 days.

Under SB 1120, state regulators have the discretion to fine insurance companies and determine the amounts owed for violations, such as missed deadlines or improper use of AI.

Erin Mellon, spokesperson for the California Medical Association, which co-sponsored the bill, underscored the importance of protecting the doctor-patient relationship.

“Artificial intelligence has the potential to improve patient care, but it should not harm or supplant that relationship,” Mellon said. “Recent reports highlight instances where automated tools wrongly denied patients access to medically necessary care. Physicians generally support AI in health care, provided it enhances care and respects the needs of both doctors and patients.”

Paula Wolfson, a manager at Avenidas Care Partners, a Peninsula-based nonprofit serving older adults, described the challenges her clients face when navigating insurance denials.

“It causes enormous stress,” Wolfson said. “I hear from families dealing with high-risk situations because they can’t access the health care services they need.”

Wolfson welcomed California’s proactive approach to regulating AI in health care.

“It gives me a glimmer of hope that policymakers are bringing common sense and sensibility to these decisions,” she said.

Amid rising concerns over health insurance practices, Becker noted that California’s approach is drawing national attention.

“There are 19 states now looking at similar laws,” Becker said. “We’ve even been contacted by multiple congressional offices considering federal legislation. Our priority is helping Californians, but setting a national model is just as important.”