What is medical necessity?
Medical necessity refers to the justification of healthcare services or procedures as reasonable, necessary, and appropriate based on clinical standards and patient-specific conditions. It ensures that care is not only clinically sound but also aligns with payer expectations for reimbursement.
Clinical vs. payer context
Clinically, medical necessity is grounded in evidence-based guidelines. Providers assess whether a service is essential for diagnosing, treating, or preventing a condition.
From a payer perspective, it’s defined through:
- Medicare’s National and Local Coverage Determinations (NCDs/LCDs)
- Commercial plan rules
- Utilization management criteria
Understanding both lenses is crucial for aligning care delivery with payment.
How is medical necessity determined?
When evaluating whether care is medically necessary, payers typically assess:
- The relationship between diagnosis and procedure codes
- Clinical documentation, including symptoms, test results, and treatment rationale
- Compliance with specific coverage policies and prior authorization rules
These components all work to support a claim’s validity.
Clinical documentation and coding relevance
Accurate clinical documentation is the backbone of medical necessity. Physicians must clearly describe a patient’s condition and explain the rationale behind the chosen treatment plan. Coding must also align – ICD-10-CM and CPT® codes should accurately reflect the services rendered. Lastly, default templates and electronic health records (EHR) cannot replace clinical specificity. Generic, imprecise documentation often fails to meet payer requirements for medical necessity and increases the risk of denial.
Below is an example of criteria providers must meet to demonstrate a specific diabetes test is medically necessary:
Hemoglobin A1c (HbA1c) – Medical Necessity Policy (CMS)
Covered uses
- Diabetes management: HbA1c testing is covered for monitoring and managing patients with diagnosed diabetes mellitus.
- Screening for diabetes: As of January 1, 2024, CMS expanded coverage to include HbA1c testing for diabetes screening under certain conditions.
Screening frequency limits
- 2 tests per calendar year for patients previously diagnosed with prediabetes.
- 1 year test per year for patients:
- Previously tested but not diagnosed with prediabetes, or
- Never tested before
Billing codes
- HCPCS Code: 83036 (Hemoglobin; glycosylated (A1c))
- ICD-10 code for screening: Z13.1 (Encounter for screening for diabetes mellitus)
Not covered instances
- The test is performed more frequently than allowed without medical justification.
- The patient does not meet criteria for screening or management.
- The test is used for non-clinical purposes (e.g., employment screening).
Why is medical necessity important?
Medical necessity underpins key areas of healthcare operations:
- Claims approval: It supports clean claims and timely, optimal reimbursement
- Denials prevention: It helps health systems avoid denials and audits through accurate, precise documentation
- Patient care quality: It reinforces sound clinical decisions and appropriate patient care
- Compliance: It ensures adherence to federal and commercial payer rules
Without an emphasis on medical necessity, both care delivery and financial outcomes suffer.
Link to reimbursement and claims
If clinical documentation doesn’t support medical necessity, claims may be denied or delayed. This can lead to recoupments for providers, payer audits, and an increased burden on revenue cycle teams to manage appeals and rework. Ultimately, this creates inefficiencies that disrupt revenue flow and compromise patient care.
Implications for patient care
When embedded thoughtfully into workflows, medical necessity:
- Ensures patients receive timely, appropriate care
- Helps providers avoid unnecessary or duplicative services
- Aligns care plans with clinical goals and payer expectations
Legal and compliance importance
Beyond reimbursement, medical necessity helps support and safeguard regulatory compliance. Failure to meet established medical necessity standards can lead to increased scrutiny from auditors and regulators. In severe cases, it may even cause False Claims Act allegations, especially if services are billed without proper documentation. Over time, repeated violations can jeopardize payer contracts or result in the loss of accreditation. Strong documentation and payer alignment are essential to mitigate these risks.
Why health systems struggle
Common challenges include:
- Payer variability: Each payer defines medical necessity differently, complicating standardization
- Incomplete documentation: Gaps in clinical notes or coding misalignment can lead to denials
- Language disconnect: Clinical terms often don’t map cleanly to billing codes
- EHR limitations: Many systems lack real-time prompts or decision support to guide documentation
How to ensure medical necessity
Improving medical necessity compliance requires various approaches and tools. Provider education is an important first step – clinicians need comprehensive guidance on how to document with specificity and properly align codes to diagnoses. EHRs should also enable real-time prompts and alerts to flag potential issues at the point of care. Lastly, health systems should leverage decision support tools to help integrate payer rules into documentation workflows and guide compliant care.
Benefits of consistent adherence
When health systems operationalize medical necessity effectively, the benefits are wide-ranging. Some of these include:
- Fewer denials: Claims are more likely to be approved on first submission
- Faster reimbursement: Clean claims reduce rework and delays
- Lower compliance risk: Documentation supports audit readiness
- Better workflow efficiency: Fewer retroactive queries and appeals
- Stronger clinical-revenue cycle alignment: Care decisions and billing are synchronized
According to a non-profit public healthcare system in the Midwest working closely with IMO Health to address unwanted denials:
“Health systems frequently encounter high denial rates for lab services due to vague or inconsistent payer policies. The lack of transparency around coverage criteria and denial rationales places a significant burden on revenue cycle teams, leading to increased administrative workload, delayed payments, reduced revenue, and higher write-offs.”
Discover more strategies for denials management and stop revenue loss before it starts.
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