Medical necessity refers to health services and supplies that are needed to diagnose or treat a patient's illness, injury, or related symptoms. It sits underneath nearly every coverage decision a payer makes, and failing to demonstrate it is one of the most common reasons claims get denied (1).
Following accepted medical standards is one component of medical necessity, but it doesn't guarantee payment on its own. Coverage also depends on the patient's benefits, the payer's coverage criteria, and the documentation behind the claim. Services that are cosmetic or a matter of convenience typically fail the test entirely and lead to billing medical necessity denials. And because each payer applies a slightly different medical necessity definition, hospital revenue cycle management (RCM) teams have to understand the rules payer by payer.
Start with an important distinction: clinicians decide what care is clinically appropriate for their patients. Payers decide whether that care meets the plan's medical necessity and coverage criteria for payment (2). Those are two different judgments, and the gap between them is where denials live.
There's also no single operational definition of medical necessity that every payer uses. Medicare applies the “reasonable and necessary” standard set by federal law, while commercial plans write their own criteria, which may also be shaped by state law (2). Understanding each payer's rules and processes is the foundation of efficient billing.
Under the Social Security Act, Medicare generally pays only for items and services that are “reasonable and necessary” to diagnose or treat an illness or injury (3). Whether a specific service meets that standard can be determined in three ways:
Healthcare providers should get familiar with the NCDs, the applicable LCDs in their region, and the related billing and coding articles that accompany them. The coverage policy tells you what Medicare considers reasonable and necessary; the billing and coding articles tell you how to report it.
Commercial payers set their own internal policies to determine what qualifies as medically necessary. Their clinical staff may reference evidence-based guidelines and internal research to develop these standards, which are then written into health plan policies. Some plans, particularly self-funded employer plans, use third-party administrators or utilization management vendors to apply them (2).
Common criteria include whether a service is consistent with peer-reviewed medical practice, whether it's experimental or cosmetic, and whether an equally effective, less costly alternative exists (2). When a case is unclear, the payer may route it to internal medical directors for review (2).
Here's the model to keep in mind: the patient record is what shows a service was reasonable and necessary, and the codes on the claim are how that clinical story reaches the payer. Both have to hold up.
In medical coding, procedure codes alone won't support the claim. The claim also needs diagnosis codes that communicate why those services were performed. Coders assign ICD-10-CM (International Classification of Diseases, 10th Revision, Clinical Modification) codes to the diagnoses and CPT (Current Procedural Terminology) or HCPCS (Healthcare Common Procedure Coding System) Level II codes to the procedures and services; on professional claims, diagnosis pointers then connect each service to the diagnoses that support it (3).
One caution: a diagnosis code supports coverage under payer policy, but it doesn't prove medical necessity by itself. If the underlying record doesn't substantiate the service, the right diagnosis code won't save the claim.
CMS previously required standalone forms for certain durable medical equipment (DME) claims: Certificates of Medical Necessity (CMNs) and DME Information Forms. It discontinued both for dates of service on or after January 1, 2023, because the information was duplicative of what already lives in the claim and the medical record (4). The record itself now carries the full weight, for Medicare and commercial payers alike.
That means the patient record should include the reason for the visit (such as the chief complaint), the provider's assessment and diagnosis, and the care plan, with enough clinical detail to support the reasonableness and necessity of the tests, procedures, or referrals ordered under the applicable payer's policy. Be specific. In my experience, the costliest medical necessity denials trace back to thin documentation, not bad coding.
Medical necessity denials have more than one source. Some stem from coding errors. Others originate in the documentation, the payer's clinical criteria, frequency limits, or site-of-service rules, even when the coding is technically correct. A few habits reduce the risk from every angle:
Implementing an autonomous medical coding engine is one strategy to reduce coding-related denials long-term. Healthcare leaders considering this option should compare autonomous coding solutions on several factors, including coding accuracy, to get the best return on their investment.
So where does automation fit? Start with an honest boundary: no coding technology can turn a clinically unsupported service into a medically necessary one. What automation can do is make sure the claim accurately reflects what the documentation supports, on every encounter. That's where many preventable denials start.
Coding teams working through backlogs, payer edits, and volume spikes make mistakes; it's human. Autonomous medical coding solutions reduce that variability by assigning documentation-supported codes at the appropriate level of specificity, consistently across every encounter. Nym's autonomous medical coding engine analyzes patient records and assigns codes in seconds. And while many autonomous coding solutions lack transparency, Nym's engine provides actionable audit trails with supporting documentation and guideline references for every code assignment. That evidence is ready the moment a payer questions a claim. Unlike solutions that apply universal coding logic, Nym's engine also applies standard guidelines (CMS, AMA, and payer-specific rules) alongside each customer's internal coding guidelines, with updates applied as guidelines change.
The results show up in the denial numbers: one large health system reduced its radiology professional fee (ProFee) coding-related denial rate by 97% with Nym's engine, and Geisinger achieved a denial rate below 0.1%.
Request a demo to learn how Nym's engine can support your medical coding team in improving revenue capture and preventing avoidable coding-related denials.