The concept of medical necessity has its roots in payers' fear that mental health care will be overused by those with access to it. The author argues that such a fear was reinforced by practice patterns that were dominant before the advent of managed care, when large amounts of treatment were given to few patients, and receipt of such care was poorly correlated with clinical need. He reviews differences between traditional models of care and those that have emerged since the advent of managed care and prospective payment. Care is medically necessary when a diagnosable disorder exists and the patient has impaired function or is clinically unstable as a result and when treatment is demonstrably efficacious in restoring normalcy or reducing disability. The author describes how psychotherapy meets these criteria under three circumstances: when used as an adjunct to treatment strategies with demonstrated efficacy, when its efficacy alone is established for a given disorder, and as a "holding operation" when no effective treatment exists or is agreed to exist. New approaches, including brief or intermittent focused treatment, that reduce reliance on the use of treatment as a holding operation are described.