What Is Medical Necessity?
Medical necessity refers to the requirement that a service be reasonable and necessary for the diagnosis or treatment of a patient's condition in order to be covered by Medicare or other payers. Coding plays a central role in demonstrating medical necessity because diagnosis codes reported on a claim must support the services billed.
National and Local Coverage Determinations
CMS publishes National Coverage Determinations (NCDs) and Medicare Administrative Contractors publish Local Coverage Determinations (LCDs) that specify which diagnosis codes support coverage for particular procedures or services. Claims submitted with diagnosis codes not listed as covered under an applicable NCD or LCD are likely to be denied for lack of medical necessity.
How Coding Supports Medical Necessity
- Selecting the most specific diagnosis code available that reflects the patient's actual clinical condition
- Sequencing diagnoses appropriately so the primary reason for the service is clearly identified
- Avoiding "diagnosis shopping," the practice of selecting a covered diagnosis that is not clinically accurate simply to secure payment
- Ensuring documentation in the record supports every diagnosis reported on the claim
Advance Beneficiary Notice (ABN)
When a provider believes a service may not meet medical necessity criteria under an NCD or LCD, an Advance Beneficiary Notice of Noncoverage should be issued to the Medicare beneficiary before the service is rendered, informing them they may be financially responsible if the claim is denied.
Auditing for Medical Necessity Compliance
- Cross-reference billed procedure codes against applicable LCDs for the patient's payer jurisdiction
- Verify that documented signs, symptoms, or diagnoses support the covered indication
- Confirm ABN issuance and documentation when a non-covered diagnosis is anticipated
- Track medical necessity denial trends by procedure and provider
Why This Matters
Medical necessity denials are among the most common outpatient denial categories and often result from coding-documentation mismatches rather than actual inappropriate care. Strong coding-CDI collaboration reduces this denial category significantly.
Exam Tip
Be able to identify a scenario in which a diagnosis code does not support medical necessity for a billed procedure under a stated coverage policy.