Medical Necessity

Overview

One of the most challenging areas for healthcare professionals is medical necessity due to the complexity of interpreting what Medicare considers “reasonable and necessary.” Federal and state payers, as well as managed care organizations, may define medical necessity differently and require varying levels of diagnosis or treatment under their reimbursement rules. Ensuring compliance with Medicare’s medical necessity requirements is crucial for avoiding financial losses and fraud or abuse allegations.

Learning Objectives

By the end of this lesson, participants will be able to:

Define medical necessity and understand how Medicare determines coverage.
Differentiate between covered and non-covered services.
Explain the purpose and use of the Advance Beneficiary Notice (ABN).
Understand National Coverage Determinations (NCDs) and Local Coverage Determinations (LCDs).
Implement strategies for verifying and documenting medical necessity to ensure compliance and reimbursement.

1. Understanding Medical Necessity

Definition of Medical Necessity

Medicare defines medical necessity as services that are reasonable and necessary for diagnosing or treating an illness, injury, or improving the functioning of a malformed body member. Medicare requires providers to report patient diagnosis information to determine medical necessity.

The Social Security Act, Section 1862(a)(1)(A) forms the regulatory foundation for Medicare medical necessity determinations by stating that Medicare will not pay for services that are not “reasonable” and “necessary” for the diagnosis and treatment of an illness or injury.

2. Covered vs. Non-Covered Services

Non-Covered Services

A non-covered service is never reimbursed by a third-party payer, regardless of diagnosis or circumstances. Medicare documents these services in Section 1862 of the Social Security Act. Other third-party payers establish their own lists of non-covered services.

Covered Services

Covered services can be preventive or diagnostic in nature and may be reimbursed based on medical necessity criteria set forth in either NCDs or LCDs. Medicare contractors use these coverage guidelines to determine whether a test or service is eligible for reimbursement.

3. The Advance Beneficiary Notice (ABN)

Purpose and Function

An Advance Beneficiary Notice (ABN) is a written notification that informs Medicare beneficiaries that the program may not pay for a service. The ABN allows patients to decide whether they still want the service, understanding that they may have to pay out of pocket.

Obtaining an ABN

If Medicare is expected to deny payment for a service due to NCD or LCD limitations, the provider must issue an ABN.
Some screening tests (e.g., mammograms, pap smears, prostate cancer screenings) have frequency limits, requiring ABNs when these limits are exceeded.
The ABN must be signed by the beneficiary before the service is provided. If the patient refuses to sign but still demands the service, the provider may document the refusal with signatures from two staff members.

Limitations and Regulations

Providers must comply with Emergency Medical Treatment and Labor Act (EMTALA) requirements before issuing an ABN in emergency situations.
Failure to obtain ABNs when necessary can lead to fraud and abuse charges and financial losses.

4. National and Local Coverage Determinations

National Coverage Determinations (NCDs)

An NCD defines Medicare’s coverage policies for specific services, procedures, or technologies on a national level. These determinations are binding on all Medicare contractors and are published in the Medicare National Coverage Determinations Manual.

Local Coverage Determinations (LCDs)

An LCD is a decision by a fiscal intermediary or carrier to cover a particular service on a regional level, based on Section 1862(a)(1)(A) of the Social Security Act. LCDs provide additional guidance when NCDs do not explicitly cover a service.

5. Implementing Medical Necessity Screening

Steps for Verifying Medical Necessity

Check whether the test or service has an NCD or LCD.
If no coverage limitation exists, proceed with the test.
If an NCD or LCD applies, review the physician’s documentation to determine if medical necessity criteria are met.
If necessary, obtain an ABN before proceeding with the service.

Technology and Automation

Utilize electronic medical record (EMR) systems with built-in NCD and LCD checks.
Implement automated alerts for services requiring ABNs.
Train staff to ensure accurate documentation and compliance with Medicare rules.

6. Importance of Medical Necessity Documentation

Compliance and Legal Risks

Failure to document medical necessity properly can result in fraud and abuse charges, financial losses, and violations of Medicare cost-reporting rules. Providers must:

Ensure documentation supports the necessity of ordered services.
Avoid routinely writing off Medicare denials without issuing ABNs.
Submit claims even if payment denial is anticipated, in compliance with Medicare rules.

Strategies for Effective Documentation

Educate physicians and staff on medical necessity criteria.
Conduct regular audits to identify compliance risks.
Implement standardized protocols for verifying and documenting medical necessity.

7. Best Practices for Compliance and Reimbursement

Developing an Effective Process

Considerations for implementing a strong medical necessity compliance program include:

Medical necessity verification – Will this be performed manually or through automated tools?
Staff roles and responsibilities – Who will be responsible for verifying orders and obtaining ABNs?
Order completeness checks – What actions will be taken for incomplete physician orders?
Post-service audits – Who will conduct medical necessity reviews and at what frequency?
Physician engagement – How will physicians be educated and involved in compliance efforts?
Ongoing education – How will training on medical necessity compliance be provided?