Medical Necessity: Is It Really Necessary? (2024)

Come to terms with payers to protect your provider’s revenue stream.

“Medical necessity” is an important concept for medical coders and auditors to understand. Health insurance companies (payers) use criteria to determine whether items or services provided to their beneficiaries or members are medically necessary. As a rule, payers will not reimburse for medical procedures, treatments, or even prescriptions that don’t meet their criteria for medical necessity. That criteria may vary from payer to payer and even from one payer’s plan to another. Understanding a payer’s definition of medical necessity is essential to getting claims paid. Here’s what you need to know.

What Criteria Are Used to Determine Medical Necessity?

Insurance providers, hospitals, and some government auditing agencies use evidence-based criteria designed by Milliman or Interqual and/or the Centers for Medicare & Medicaid Services (CMS). (Use of either Milliman or Interqual comes down to preferences set by the user.) The criteria are used to help control costs by determining the medical necessity of the inpatient stay, service, or item. It is important to note that these criteria are not meant to replace a provider’s professional opinion. A physician can request a peer-to-peer review, which may result in an overturn of a denial.

Cigna, for example, defines medical necessity for providers as “health care services that a physician, exercising prudent clinical judgment, would provide to a patient. The service must be for the purpose of evaluating, diagnosing, or treating an illness, injury, disease, or its symptoms in accordance with the generally accepted standards of medical practice.”

Cigna goes on to state, “Clinically appropriate, in terms of type, frequency, extent, site, and duration and considered effective for the patient’s illness, injury, or disease. Is not primarily for the convenience of the patient, health care provider, or other physicians or health care providers and is not costlier than an alternative service or sequence of services at least as likely to produce equivalent therapeutic or diagnostic results as to the diagnosis or treatment of that patient’s illness, injury, or disease.”

CMS uses a variety of programs to maximize accessibility to benefits while reigning in improper billing and payments such as prior authorization and pre-claim review initiatives.

Medicare’s Criteria for Medical Necessity

CMS allows its Medicare Administrative Contractors (MACs) to determine whether services provided to their beneficiaries are reasonable and necessary, and therefore medically necessary. MACs use the following criteria to determine if an item or service is medically necessary:

  • It is safe and effective.
  • It is not experimental or investigational.
  • It is appropriate when:
    • Furnished in accordance with accepted standards of medical practice.
    • Furnished in a setting appropriate to the medical needs and condition.
    • Ordered and furnished by qualified personnel.
    • Meets the medical need of the patient.

Note: There are some exceptions to the general medical necessity requirements spelled out in CMS’ regulations.

Issuing an Advanced Beneficiary Notice of Noncoverage (ABN)

Claim denials are the responsibility of the provider and/or patient to cover. If a provider feels a service is medically necessary for a Medicare patient and, upon policy review, the payer denies medically necessity, an ABN will protect the provider from loss of revenue. The patient should be given the ABN form to complete in its entirety and sign prior to having the service rendered. Be sure to give the patient enough time to make an informed decision.

When discussing medical necessity denials or potential denials with a clinician, present the medical necessity criteria the payer used to make the determination. This will prevent the debate of why non-clinical personnel can tell a provider a service is not medically necessary.

Diagnosis Impact on Medical Necessity

A patient’s diagnosis is one criterion that drives medical necessity from a payer’s perspective. From a clinical perspective, medical necessity is determined by the provider based on evidence-based medical data. This data may be used to order further testing to diagnose a patient’s condition or provide additional procedures to treat a patient’s condition.

Any time a procedure or test is ordered, the provider must first get approval from the patient’s payer before performing the test or procedure. In giving this approval, the payer is saying the test or procedure meets their established medical necessity criteria. Prior authorization is not a guarantee of payment, however.

From an insurance perspective, medical necessity is determined by either the diagnosis code(s) and/or clinical condition(s) that are defined in the payer’s policy. The pre-approval process typically involves submitting to the payer:

  • the patient’s diagnosis; and
  • the procedure to be performed.

A provider should also include:

  • the severity of the diagnosis;
  • the risk of not performing the procedure; and
  • any diagnostic studies or interventions tried previously.

It is important for the physician, coder, biller, and insurance company to all be on the same page when it comes to medical necessity. A provider may feel specific procedures or tests are medically necessary for a patient, but the insurance company can also make that determination based on their clinical policies. Problems ensue when medical necessity is defined differently by the two parties.

Frequency Impact on Medical Necessity

Another component of medical necessity is frequency — how often can a procedure be performed over a predetermined length of time? Payers often set frequency limitations on certain services. For instance, preventive services are generally limited to one per year.

To protect the provider’s or facility’s revenue stream, due diligence must be taken to properly identify any coverage limitations ahead of the patient’s encounter. This is not always easy to do as patients may receive care from several providers. To get ahead of this potential payment barrier, contact your MAC or verify through the HIPAA Eligibility Transaction System. You may also be able to gather this information from the patient, but this is a less reliable source and requires confirmation.

What Is Prior Authorization and Why Do We Need It?

The America’s Health Insurance Plans (AHIP) explains, “Prior authorization is a process whereby a provider, on behalf of a patient, requests approval or authorization from the health plan before delivering a treatment or service in order for the treatment or service to be covered by the health plan.” From a payer’s point of view, prior authorization ensures that all delivered care is medically necessary; it also addresses and prevents overuse and misuse of treatments and services.

Other purposes of preauthorization, according to AHIP, include:

  • Ensure that providers adhere to nationally recognized care criteria (e.g., ensure opioid prescribing consistent with federal guidelines).
  • Promote appropriate use of medications and services to ensure that they do not interfere with other types of medications or potentially worsen existing conditions.
  • Make sure that medications are not co-prescribed with other drugs that could have dangerous, even potentially fatal, interactions.
  • Ensure that medications are safe, effective, and provide value for specific populations or subpopulations who may be affected differently by a medication (e.g., antipsychotic medications in children and adolescents).
  • Make sure that drugs and devices are not used for clinical indications other than those federally approved or supported by medical evidence.
  • Ensure that the administering clinician has the appropriate training to do so (e.g., limiting prescribing of chemotherapy medications to oncologists).
  • Promote dialogue with clinicians to ensure tailored, patient-focused treatment programs to promote adherence and improve outcomes.
  • Ensure that members with a newly prescribed medication receive services such as counseling, peer support, or community-based support if appropriate (e.g., medication-assisted treatment).

As you can see, preauthorization is an important safety measure. It is not meant to be a barrier to healthcare.

Meeting Medical Necessity Criteria

To reinforce medical necessity and meet payer guidelines, documentation should be complete, support the service(s) billed, and validate the need for the level of care/treatment provided. For Medicare patients, billing providers should refer to local and national coverage determinations for medical necessity criteria. Commercial insurances may also have their own policies.

Providers should document the patient’s progress, response to treatment, and any necessary change(s) in diagnosis or treatment. When patients fail to comply with treatment recommendations, this should also be included in the medical record.

Remember, each outpatient encounter should stand alone. Documentation should include the patient’s name, date of service, relevant history and exam, along with an assessment and plan. Clinical findings from diagnostic and laboratory tests should be included to provide further evidence for treatment.

Medical Necessity Example – Medicare

Novitas has a Local Coverage Determination (LCD) for wound care. Within this policy, this MAC identifies coverage indications for different wound care services, limitations for different wound care services, summary of evidence, documentation requirements, and utilization guidelines. The MAC considers all of these items together to determine if a service is reimbursable. An approved diagnosis alone will not support reimbursem*nt, so it is important that you read further than just the diagnosis list.

Medical Necessity Example – Aetna

Some commercial insurance companies follow Medicare’s policies, but many have their own. Aetna has a policy with a list of acceptable diagnoses for hyperbaric oxygen therapy (HBOT), if criteria are met. The policy identifies medically necessary versus experimental and investigational. For a patient with actinic skin damage, the treatment is considered experimental/investigational and not covered.

Depending on the patient’s condition, HBOT would be medically necessary for a patient with compromised skin grafts and flaps, where hypoxia or decreased perfusion has compromised viability acutely (not for maintenance of split-thickness skin grafts or artificial skin substitutes). Required documentation includes photograph (with ruler) of wound, type of flap, name of surgeon performing graft or flap, whether there was surgical exploration, and transcutaneous oxygen tension testing demonstrating hypoxia of flap or graft (TcPO2 less than 40 mmHg on room air).

Wounds must be reevaluated, with photographic documentation (with ruler), every 15 treatments, and/or at least every 30 days during administration of HBOT. Continued treatment with HBOT is not considered medically necessary if measurable signs of healing have not been demonstrated within any 30-day period of treatment.

What Medical Necessity Is About

The healthcare landscape requires providers to not only establish medical necessity, but also to clinically validate it. This requires the right documentation, processes, and procedures. U.S. healthcare costs are at astronomical levels, with spending hitting an all-time high of just under $4 trillion in 2019. Federal, state, and private insurance carriers are all looking for ways to cut costs while improving care quality. These measures have led to increased scrutiny of services rendered to patients and whether these services are justified. Providers should be keenly aware of medical necessity requirements as defined by the payers and work towards closing any gaps within the revenue cycle that opens them up to increased medical record reviews, denials, and overpayment requests.

The AAPC Auditing Advisory Committee is one of six committees, each made up of subject matter experts. AAPC formed these committees to advance thought leadership and engage experts in work supporting AAPC members’ pursuit of lifelong learning. Members of the Auditing Advisory Committee include:

Angela Clements, CPC, CPMA, CEMC, CGSC, COSC, CCS, physician coding auditor/educator consultant

Leonta (Lee) Williams, MBA, RHIA, CCS, CCDS, CPC, CPCO, CRC, CEMC, CHONC, AAPC director of education, Auditing Advisory Committee chair

Lindsey Motter, LPN, CPC, CPMA, senior provider reimbursem*nt administrator

Wanda F. Register, MBA, CPC, CCS-P, emergency department audit analyst


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Lee Williams

Leonta “Lee” Williams, MBA, RHIA, CPC, CPCO, CRC, CEMC, CHONC, CCS, CCDS, is the senior director of education at AAPC. She holds multiple credentials across several professional organizations and has more than 20 years of health information management experience as a coding director, auditor, educator, trainer, practice manager, and mentor. Williams is the founder and a past president of the Covington, Ga., local chapter and served as secretary on AAPC’s 2018-2021 National Advisory Board.

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