What Is Medical Necessity in Medical Coding & Billing?

Medical necessity is a cornerstone of accurate medical coding and billing. It determines whether a service, procedure, or supply is reasonable, necessary, and appropriate based on a patient’s medical condition. In simple terms, if the treatment is not medically necessary, insurance payers may deny the claim — regardless of how accurately it is coded.

Definition of Medical Necessity

Medical necessity is the justification for a service or procedure as being essential for diagnosing, treating, or preventing illness, injury, or disease. Most payers, including Medicare and commercial insurers, define medical necessity using criteria such as:

• Alignment with accepted standards of medical practice

• Provision for the diagnosis or direct care of an illness, injury, or disease

• Not primarily for the convenience of the patient or provider

• Provided at the most appropriate level of care

Why Medical Necessity Matters

1. Insurance Coverage: Payers only reimburse services deemed medically necessary.

2. Claim Approval: Even perfectly coded claims can be denied if medical necessity isn’t demonstrated.

3. Compliance: Incorrectly billing for non-covered services can lead to audits, recoupments, or even fraud investigations.

How Medical Necessity is Determined

• Documentation Review: The patient’s medical record must clearly support the diagnosis and the service performed.

• Diagnosis-to-Procedure Link: ICD-10-CM codes must justify the CPT® or HCPCS Level II codes billed.

• Coverage Policies: Medicare Local Coverage Determinations (LCDs) and National Coverage Determinations (NCDs), as well as commercial payer guidelines, define what diagnoses justify specific services.

Medical Necessity in Coding & Billing

• ICD-10-CM: Codes should reflect the patient’s true clinical condition.

• CPT®/HCPCS Codes: The service or supply should be consistent with the documented diagnosis.

• Modifiers: Sometimes used to explain special circumstances affecting necessity.

• Supporting Documentation: Includes physician notes, test results, and treatment plans.

Common Causes of Medical Necessity Denials

• Non-covered diagnosis for the service billed

• Inadequate documentation to support the service

• Upcoding (coding for a higher-level service than provided)

• Lack of linkage between diagnosis and procedure

Guidelines for Demonstrating Medical Necessity

1. Accurate Documentation: Providers must document symptoms, history, exam findings, diagnostic test results, and treatment rationale.

2. Link ICD-10-CM to CPT® Codes: Use coding software or encoders to ensure the diagnosis supports the procedure.

3. Follow Payer Policies: Always check LCDs, NCDs, and commercial payer coverage rules.

4. Be Specific: Avoid unspecified or vague diagnosis codes when a more specific one is available.

5. Timely Updates: Keep up with annual ICD-10 and CPT® updates that may affect coverage.

Tips for Coders

• Always review clinical documentation thoroughly before assigning codes.

• Use encoder tools to verify diagnosis-to-procedure coverage.

• Educate providers on documentation requirements for medical necessity.

• Keep a list of frequently used services and their required diagnosis codes for quick reference.

• Appeal denials with detailed medical record excerpts and policy references when necessary.

Bottom Line:
Medical necessity is more than just a billing requirement — it’s a compliance safeguard and an essential part of ethical coding. When diagnosis codes accurately support the services performed, it ensures appropriate reimbursement, reduces denials, and supports patient care.

AAPC https://www.aapc.com/blog/46500-medical-necessity-why-it-matters-ways-to-demonstrate-it/

Medical Coding MDM https://codingclarified.com/medical-coding-mdm/

Evaluation and Management (E/M) Coding https://codingclarified.com/e-m-2025/