How to Reduce Medical Necessity Denials and Improve Reimbursement in Healthcare

By: Ashley Hunter, MBA, CHFP, CRCR and Stevie Zarle

Medical necessity denials remain a significant challenge for healthcare organizations, often resulting in delayed reimbursement, increased administrative burden, and potential revenue loss. Unlike other categories, these denials can be particularly difficult to resolve as they frequently involve complex payer policies, coding nuances, and, at times, extensive documentation requirements.

To effectively address and prevent these denial types, it is critical to:

1. Understand the denial reason codes most associated with such denials
2. Recognize the differences in how Medicare and commercial payers handle such cases
3. Implement targeted front-end strategies to minimize risk

This article explores the root causes behind medical necessity denials, outlines payer-specific nuances, and highlights proactive measures organizations can take to reduce their financial impact.

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Associated Denial Reason Codes & Their Root Causes

The first step in understanding medical necessity denials is identifying the reason codes received and the associated procedures. The two primary denial reason codes associated with medical necessity denials are below. 

CO49 - Routine exam/screening procedure or diagnostic procedure performed in conjunction with a routine service/exam.
CO49 denials are typically the most straightforward type of medical necessity denial. They usually indicate a mismatch between the diagnosis and the procedure, most often when a diagnostic service is billed with a screening diagnosis code. For example, billing CPT 74262 (diagnostic colonoscopy) with ICD-10 code Z12.11 (encounter for screening for malignant neoplasm of colon) would likely result in a CO49 denial. In many cases, these denials are due to coding errors and can be resolved by correcting the diagnosis and submitting a corrected claim.

CO50 – Non-covered services because this is not deemed a ‘medical necessity’ by the payer.
Unlike CO49 denials, CO50 denials often require more in-depth investigation to determine the root cause of non-payment. This denial reason indicates that the diagnosis code assigned to a service does not meet the payer’s medical necessity criteria. The challenge with CO50 denials is that payer policies don’t always clearly outline which diagnosis codes are considered acceptable for each procedure. Additionally, even when a diagnosis appears to align with policy guidelines, payers may still require extensive supporting documentation to justify medical necessity.

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Differences in Commercial vs. Medicare Payers

In addition to denial reason codes, the denying payer can offer further insight into the root cause of medical necessity denials. Approaches to preventing and resolving these denials differ depending on whether the payer is commercial or Medicare. This is because Medicare not only operates transparently but also provides detailed service coverage guidelines, including specific diagnosis and procedure codes that meet medical necessity for many services. 

Medicare Medical Necessity Denials
When Medicare issues a denial for medical necessity, the first step is to locate the applicable Local Coverage Determination (LCD) or National Coverage Determination (NCD) for the billed service. Additionally, if the Medicare Administrative Contractor (MAC) for the organization’s region has published a billing or coding article for the procedure, that guidance should also be reviewed. The diagnosis code used on the claim should be cross-referenced with the policy criteria—more often than not, the denied claim includes a diagnosis code that is not listed as medically necessary in the coverage policy.

Once it is confirmed that the denial is due to a non-covered diagnosis, the next step is to determine whether the issue stems from a coding error or if the service was performed with a diagnosis that was non-covered from the outset. Start by reviewing the provider’s order to verify the diagnosis or reason for the service. If the diagnosis on the order differs from what was submitted on the claim, this may indicate a coding error that can be corrected and resubmitted. However, if the diagnosis on the order matches the claim, it suggests that a non-medically necessary service was ordered, which ideally should have been flagged and addressed prior to the service being rendered.

Commercial Payer Medical Necessity Denials
Medical necessity denials from commercial payers are often more complex to resolve due to difficult-to-locate, lengthy policies and frequent requirements for supporting medical records. However, there is one critical first step that can help streamline the review process and potentially reduce unnecessary manual effort.

When reviewing a medical necessity denial from a commercial payer, the first step should be to confirm whether prior authorization was obtained for the service. This differs from Medicare, which often does not require authorization for the same procedures. Commercial payers, on the other hand, will not typically approve authorization unless the reason for the service meets their medical necessity criteria.
If authorization was obtained and the claim was still denied, the next step is to confirm that the diagnosis code on the claim matches that listed on the approved authorization. A mismatch may lead to denial despite having prior authorization.
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If no authorization was obtained, it indicates that the service was never reviewed by the payer for medical necessity. In this case, it becomes critical to locate the payer’s applicable medical policy to determine whether the diagnosis or reason for service meets their medical necessity criteria. As with Medicare denials, this comparison will help guide the next steps—whether the claim can be appealed or if the service must be written off due to non-coverage.

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Preventing Medical Necessity Denials

Because medical necessity denials are often challenging to overturn and can result in revenue loss—especially when non-covered services are performed—it is critical for organizations to focus on denial prevention through front-end processes. The most effective strategies include thorough authorization procedures and proactive medical necessity reviews.
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Authorization:
For services requiring prior authorization, this step should be completed in advance to ensure approval for the ordered procedure and diagnosis. Payers generally will not approve authorizations if the diagnosis does not meet their medical necessity criteria. In some cases, if coverage is possible but contingent on additional documentation, the payer may pend the request and ask for supporting medical records.

Medical Necessity Review:
For Medicare patients—where authorization is not typically required—a manual review of the diagnosis against the applicable LCD or NCD is essential. If the diagnosis does not meet Medicare’s medical necessity criteria, the ordering provider should be contacted to determine next steps.

In situations where the patient chooses to proceed with a non-covered service, proper financial consent should be obtained. For Medicare patients, this involves securing an Advance Beneficiary Notice (ABN). For commercial or non-Medicare patients, a financial waiver should be used to acknowledge the patient’s responsibility for payment if their insurance denies the claim.

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The Proactive Approach

​Medical necessity denials are rarely straightforward and often require careful investigation, policy review, and collaboration between clinical and billing teams to resolve. By understanding the key denial reason codes, like CO49 and CO50, recognizing the differences in Medicare and commercial payer medical necessity assessments, and taking proactive steps, such as front-end medical necessity reviews and proper authorization workflows, organizations can significantly reduce the occurrence of these denials. Ultimately, a strong focus on prevention—paired with the ability to identify and correct root causes—can protect revenue, streamline operations, and improve the overall patient and provider experience.

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Take Control of Medical Necessity Denials with RCCS

Struggling with complex medical necessity denials? We’re here to help. Our team of revenue cycle experts specializes in identifying root causes, navigating payer-specific policies, and implementing proactive strategies that reduce denials and protect your bottom line.
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Partner with us to streamline your denial management process, improve reimbursement outcomes, and empower your teams with the tools they need to succeed.