Healthcare revenue leaders are under growing pressure from claim denials that continue to deplete reimbursement, slow cash flow, and cause unnecessary write-offs and rework. In 2024, initial claim denial rates increased to nearly 12% of all submitted claims, despite some provider organizations making progress in reducing prior authorization denials.1
For organizations already operating on thin margins and navigating staffing challenges, these denials create significant headaches, including delayed reimbursement, rising accounts receivable days, and the additional burden placed on already exhausted revenue cycle and clinical teams.
Medical necessity denials, in particular, represent one of the most common and often preventable sources of revenue loss for healthcare providers across the industry. In this insight brief, we explore the role of medical necessity, the costs of medical necessity denials, and the value of proactive management.
What medical necessity means (and why it matters)
Understanding what medical necessity means and why it matters is crucial for every stakeholder in the revenue cycle. According to the Centers for Medicare & Medicaid Services (CMS), medically necessary services or supplies:
- Are proper and needed for the diagnosis or treatment of a medical condition.
- Are provided for the diagnosis, direct care, and treatment of a medical condition.
- Meet the standards of good medical practice in the local area and are not mainly for the convenience of the patient or the doctor.2
While providers may view medical necessity through the lens of patient need, payers define it through detailed medical policies and precise documentation criteria. Despite those differing perspectives, denials impact both inpatient and outpatient services, including inpatient level-of-care decisions and high-cost outpatient services, such as infusions, imaging, labs, and procedures.
Outpatient medical necessity denials most often stem from misalignment between CPT® codes and diagnosis codes based on payer-specific medical policies. Both government and commercial payers have hundreds of medical policies, each with unique requirements. Locating the correct policy – let alone keeping up with frequent updates – is close to impossible, even for the most experienced teams. As a result, denials are often identified retroactively, making them far more difficult and costly to resolve.
The true cost of medical necessity denials
The financial impact of medical necessity denials is multifaceted, extending beyond the initial loss of reimbursement. Organizations not only forgo payment for services rendered, but also incur high costs associated with rework and appeals.
Hospitals and health systems spent an estimated $25.7 billion in 2023 attempting to overturn denied claims, a 23% increase from the prior year.3 The administrative cost of working a single denial also increased from $43.84 in 2022 to $57.23 in 2023.3 However, several revenue cycle leaders note that this statistic underestimates the true cost of overhead, IT investments, non-billable provider time, and multiple handoffs.
Hospitals and health systems spent an estimated $25.7 billion in 2023 attempting to overturn denied claims, a 23% increase from the prior year.
Beyond the cost of working denials, the dollars at risk are also increasing. According to a 2025 MDaudit report, the average amount denied per claim rose by 18% year over year.4 And in a 2023 survey, more than one in five respondents (22%) said their organization loses more than half a million dollars yearly due to denied claims, and one in 10 said denials result in over $2 million in losses.5 These statistics emphasize the financial impact of avoidable denials and the need for proactive revenue cycle management.
When it comes to medical necessity denials (and all denials, really), the greatest culprit is poor data quality. According to a 2025 report, more than half of providers say that claim errors are increasing, and roughly a quarter say that 10% or more of denials result from inaccurate or incomplete data collected at patient intake.6 These gaps accelerate denials that require time-consuming manual review and appeal.
Staffing strain and the burden of maintenance
Compounding the financial impact is the operational strain placed on revenue cycle teams. Medical necessity denials typically require the expertise of certified coders, nurses, or physicians to be successfully appealed. To that end, one report notes that 90% of denied claims still require some level of human review before resubmission – yet over 40% of organizations report being understaffed in their revenue cycle functions.6 As the volume of denied claims rises, staffing shortages directly affect revenue, cash flow, and employee burnout.
At the same time, medical policies and clinical criteria are constantly evolving. Codes are frequently added or removed, new policies are created, coverage rules modified, and more, often without clear visibility for providers. In fact, more than half of providers now evaluate their claims management processes annually6, demonstrating how challenging it is to stay on top of these standards with manual, in-house approaches.
...90% of denied claims still require some level of human review before resubmission – yet over 40% of organizations report being understaffed in their revenue cycle functions.
Stopping medical necessity denials at the source
The key to improving revenue cycle reimbursement is to identify potential errors upstream, before claims are submitted, rather than reacting after the fact. According to The Advisory Board’s 2024 report, Denial Prevention in the Era of Automation, early prevention can save as much as $10 million per $1 billion in patient revenue.7
For many organizations, this means reducing reliance on manual research and policy tracking while adopting denial-reduction technology designed to support – not replace – human expertise. However, not all tech is created equal. The most successful platforms are HIPAA-compliant and provide real-time, clinician-friendly alerts that flag coding errors for review and suggest more accurate ones, rather than making automatic decisions. These alerts should also be customizable, enabling users to choose when and where they appear in their workflow, and whether they pop up as required “hard stops” or passive reminders.
Lastly, effective claims management solutions will provide hands-off maintenance, enlisting expert coders, mappers, and clinical terminologists to take on the burden of maintaining information like policy and code changes. By reducing the number of denied claims, these tools help minimize the risk of audits and appeals.
Moving forward with care
Organizations are drowning in denied claims, at a time when staffing, margins, and net revenue are already strained. For revenue cycle leaders, the pressure is palpable. However, while medical necessity denials are costly, they are not inevitable.
By prioritizing prevention and investing in smarter claims management tools grounded in clinical and payer context, revenue cycle leaders and providers can reduce the administrative burden on their teams, protect financial health, and promote operational efficiency.
To learn how IMO Health’s denials management solution could optimize your revenue cycle, visit imohealth.com/denials-management/.
To see it in action, schedule a demo at imohealth.com/schedule-a-demo/.
1Emerson, Jakob. Claims denial rates up, prior auth denials down in 2024: Report. Becker’s Payer Issues. May 23, 2025. Accessed via: https://www.beckerspayer.com/payer/claims-denial-rates-up-prior-auth-denials-down-in-2024-report/
2Medicare Coverage of Innovative Technology (MCIT) and Definition of “Reasonable and Necessary.” Federal Register. Accessed via: https://www.federalregister.gov/documents/2021/01/14/2021-00707/medicare-program-medicare-coverage-of-innovative-technology-mcit-and-definition-of-reasonable-and
3Payer Denial Tactics — How to Confront a $20 Billion Problem. American Hospital Association. Accessed via: https://www.aha.org/aha-center-health-innovation-market-scan/2024-04-02-payer-denial-tactics-how-confront-20-billion-problem
4Muoio, Dave. Payer audits, denial amounts rise again in 2025, vendor data show. Fierce Healthcare. Nov 20, 2025. Accessed via: https://www.fiercehealthcare.com/finance/payer-audits-denial-amounts-rise-again-2025-vendor-data-show
5Navigating the rising tide of denials. HFMA. Aug 7, 2024. Accessed via: https://www.hfma.org/revenue-cycle/denials-management/navigating-the-rising-tide-of-denials/
6The denial problem (and is AI the answer?) 2025 State of Claims. Experian Health. Accessed via: https://blr.postclickmarketing.com/Global/FileLib/HLM/Final_-_State_of_Claims_2025_-_Experian_Health_report.pdf
7Redesigning denials management in the OBBBA era. HFMA. Nov 10, 2025. Accessed via: https://www.hfma.org/revenue-cycle/redesigning-denials-management-in-the-obbba-era/
