Don't Leave Money on the Table: Medical Necessity Matters
Deborah Grider, CPC, CPC-I, CPC-P, COC, CPMA, CEMC, CCS-P, CDIP, Executive Consultant
Karen Zupko and Associates, Inc.
Medical necessity is a foundational principle in healthcare delivery and reimbursement, “Medical necessity is a legal doctrine, related to activities which may be justified as reasonable, necessary, and/or appropriate, based on evidence-based clinical standards of care.”
Medical necessity and payment are determined by what the payor will reimburse. For example, many payors, including Medicare and Medicaid, have coverage policies that determine which procedure and diagnosis codes are covered for diagnostic or surgical procedures. If the diagnosis code is not listed in the policy, the payor may determine that the procedure is not medically necessary for that condition.
According to section 1862(a) (1)(A) of the Social Security Act, Medicare will not cover services that “are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member.”
For Evaluation and Management Services
CMS states: “Medical necessity of a service is the overarching criterion for payment in addition to the individual requirements of a CPT code. It would not be medically necessary or appropriate to bill for a higher level of evaluation and management service when a lower level is warranted. The volume of documentation should not be the primary factor in determining the specific level of service billed. Documentation should support the level of service reported."
When billing E/M (Evaluation and Management) services, the practitioner should pause and critically evaluate; based on the presenting problem(s), conditions managed, and/or comorbidities, what level should they bill? The diagnosis codes reported on the claim, the complexity of these conditions, and the management of the condition play a part in the level of service billed. Of course, the selected level of service should be appropriately documented.
Many payors are now using automated technology in downcoding of E/M services from levels 4 and 5 to level 3 based on the diagnosis code, often using AI to make this determination. The payor does not see the documentation. Accurate diagnosis coding is critical to support medical necessity for these higher levels of service.
Diagnosis Coding Is Important in Demonstrating Medical Necessity
Surgeons or specialists who treat a patient many times don’t code the comorbidities that affect patient management, such as diabetes, COPD, Hypertension, etc. This is a significant oversight. If a condition influences clinical decision making, risk assessment, or treatment planning, it must be clearly documented and appropriately coded to support medical necessity, even if the specialist is not actively managing that condition. If there is no bilateral designation but the problem exists on both the right and left sides, code both sides. For example, if the patient has secondary arthritis of both shoulders and laterality is not present in the code category, two codes are necessary.
M19.211 Secondary osteoarthritis, right shoulder
M19.212 Secondary osteoarthritis, left shoulder
Both would be reported.
Another situation seen far too often when performing audits is a lack of specificity and laterality in coding the encounter. Keep in mind that an unspecified diagnosis code can trigger an audit when more specific codes could have been used. For example, the physician codes unspecified foot pain (M79.673). A payor will most likely deny the claim because laterality is not coded. In actuality, when reviewing the documentation, the physician stated the patient has a non-displaced Fracture of the left 5th metatarsal shaft when the patient banged their foot against the coffee table at home. To support medical necessity and paint an accurate picture of the patient’s condition, this is how it should be coded:
S92.354A- Nondisplaced fracture of the fifth metatarsal bone, right foot, initial encounter for closed fracture
W22.03XA- Walked into furniture, initial encounter
Y92.009- Place of occurrence: home
Practitioners often code R52 (generalized pain) when more specific documentation exists. If the documentation states pain in the left wrist, it should be coded as M25.532 (pain in left wrist). When reporting pain diagnoses, the specific anatomic site and laterality must be identified.
It is also essential to link the diagnosis to the procedure code (CPT, HCPCS). The procedure and diagnosis must make sense together. For example, you can’t expect a payor to reimburse a provider when an echo was billed on the claim with a diagnosis of rhinitis. When bariatric surgery is performed on a patient with a diagnosis submitted on the claim as obesity, and the medical policy indicates the diagnosis supported is morbid obesity, the claim most likely would be denied. In both examples, it is clear that medical necessity is not supported.
Before submitting the claim, verify that each procedure is properly supported by the appropriate diagnosis code .Claims must be coded according to the patient’s actual medical condition(s), not based on payer coverage policies. Any selected diagnosis code should be based on the patient’s medical condition(s), even if the payor policy does not cover the service. If the service is not covered based on the diagnosis code, the patient should be informed that they will need to pay for the service. For Medicare, the ABN is an important document that must be signed for a procedure or service that might not be covered for that particular condition, and that allows the patient to decide whether to proceed with the service. If the ABN is not signed, the patient will not be responsible for payment of the service. Reporting a diagnosis that the patient does not have solely to obtain reimbursement for a service can result in an incorrect claim.
Ten Tips to Ensure Compliance with Medical Necessity
Review payer medical coverage policies for all procedures and services you perform at least annually. Many payers offer listservs or update alerts to which you can subscribe.
Ensure that documentation supports the specificity of each billed service and that all relevant diagnoses, including comorbidities affecting patient care are reported.
Link each procedure code to the appropriate diagnosis code that supports medical necessity. The relationship between the two must be clinically logical.
Make certain when the coding guidelines instruct “Use an additional code,” that you review the instructional notes in ICD-10-CM.
Query the practitioner when unspecified diagnoses are selected and obtain clarification.
Review medical payor coverage policies routinely to ensure that you are informed of diagnoses not covered under the policy.
When reporting an Evaluation and Management (E/M) service, ensure the level selected is supported by medical necessity.
Always review your denials to see if the denial is based on the diagnosis code. It could be that the denial is based on medical necessity or an invalid diagnosis code.
Make certain your diagnosis code contains the required characters and is coded to the highest level of specificity.
Perform periodic audits to validate that medical necessity is supported for each encounter. Educate the providers when problem areas are identified.
Every claim submitted to the payor must be coded accurately, medical necessity must be supported, and documentation must be clear, concise, and complete. The diagnosis codes reported in the progress note, operative report, or diagnostic study must accurately reflect the patient’s condition. Additionally, all comorbidities that impact patient care should be clearly documented and coded.
Sources:
Current Procedural Terminology (CPT, 2026); American Medical Association, CMS Pub. 100-4; chapter 12 section 30.6.1
Wikipedia