Revenue Cycle

Understand the intricacies of medical necessity

Recovery Auditor Report, January 22, 2009

by Glenn Krauss, BBA, RHIA, CCS, CCS-P, CPUR, PCS, FCS, C-CDIS
Medical necessity is complex because there is debate regarding what constitutes “necessary” as it relates to healthcare services. Consider the following Medicare definition of medical necessity under Title XVIII of the Social Security Act, section 1862 (a)(1)(a): 
Notwithstanding any other provisions of this tile, no payment may be made under Part A or Part B for any expenses incurred for items or services, which are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member.
Such terminology is foreign to physicians and has essentially no bearing on the day-to-day practices of clinical medicine. In physicians’ minds, medical decision-making inherently satisfies all medical necessity requirements for services they provide and/or diagnostic tests they order.
Medicare carrier and fiscal intermediary Local Coverage Determinations (LCD) and National Coverage Determinations (NCD) succinctly define medical necessity requirements. Covered diagnoses, documentation requirements, and limitations of coverage for specific services are also included in the many promulgated LCDs and NCDs that serve as a roadmap for a provider’s establishment of medical necessity.
Despite these guidelines, challenges continue to surface regarding how to establish medical necessity. Ultimately, a physician’s clinical judgment is the guiding principle behind the appropriateness of medical necessity when it comes to inpatient versus outpatient observation designation.
RACs are not bound to apply commercially available screening criteria, such as Interqual, when determining whether an inpatient admission is appropriate. Providers that participated in the demonstration project learned quickly that RACs followed their own guidelines and definitions of medical necessity when they issued denials for inpatient admissions due to lack of medical necessity. Consider the following excerpt from a standard denial letter sent by Health Data Insights, the RAC that oversaw the demonstration project in Florida and South Carolina:
Screening criteria such as Interqual Level of Care and Millman Care Guidelines are intended merely as screening guidelines, are not dispositive on the issue of existence of medical necessity with respect to any particular claim, and do not eliminate the need to utilize independent clinical judgment when reviewing claims. Further, these criteria reflect clinical interpretation and analyses, and cannot alone provide the sole basis for definitive decisions.
During the demonstration project, RACs characterized a large percentage of identified improper payments as medically unnecessary services that occurred in the wrong setting. However, one question still remains: How many of these identified claims were, in reality, necessary services provided in clinically appropriate settings? For how many claims did physicians simply not document their clinical judgment and complex medical decision-making? Medical record documentation must convey the clinical acuity, risk of morbidity and mortality, and level of unpredictability that necessitated an inpatient admission instead of outpatient observation. 

Editor’s note: Krauss is a senior coding and chargemaster consultant for QHR in Brentwood, TN. This information was adapted from a January 14 article in


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