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Medicare Medical Necessity Denials and How Your Lab Can Prevent Them

by | Apr 3, 2021 | Blog, Compliance Perspectives-lca, Lab Compliance Advisor

Ensuring that the lab services you bill for meet Medicare medical necessity requirements is one of the oldest challenges faced by lab compliance managers. And it doesn’t get any easier over time. The complication stems from the simple fact that, in most cases, labs perform but don’t order the services they bill for; those services […]

Ensuring that the lab services you bill for meet Medicare medical necessity requirements is one of the oldest challenges faced by lab compliance managers. And it doesn’t get any easier over time. The complication stems from the simple fact that, in most cases, labs perform but don’t order the services they bill for; those services are ordered by an unrelated physician. This creates an inherent tension between the sides to the extent that labs rely on ordering physicians to furnish the documentation needed to show that the services are medically necessary.

The nature of medical necessity disputes has changed since the early years of Medicare because clinical labs must now submit a diagnosis code on Medicare payment claims, and ordering physicians must provide labs diagnosis or other medical information required for the lab to receive payment. In addition, national coverage determinations (NCDs) and local coverage determinations (LCDs) from Medicare administrative contractors (MACs) can sometimes help labs determine, in advance, whether Medicare will consider a test to be medically necessary. Here’s a broad look at the various medical necessity rules, the practical problems they create and some potential ways to resolve them.

Medicare Medical Necessity Requirements

The fundamental rule is that Medicare covers only tests that are “reasonable and necessary” to diagnose or treat an illness or injury. A test can be found not “reasonable and necessary” for many reasons, including because:

  • It’s not medically necessary given the patient’s diagnosis or condition;
  • It’s not safe and effective;
  • It’s experimental or investigational;
  • It wasn’t “ordered” in accordance with Medicare rules, i.e., where the ordering physician wasn’t the “treating” physician, or didn’t use the test results to diagnose or treat the patient’s specific medical problem.

In many cases, when the lab receives the requisition and before it performs the test, the only information it has about the test is the information listed in the completed test requisition. However, this information doesn’t provide anything potentially indicating that the ordered test isn’t reasonable and necessary. In fact, based on the diagnosis information that the physician provides, it may appear that the ordered test does meet the medical necessity requirements listed in an NCD or LCD. However, it may turn out that the ordering physician’s medical records do not support coverage of the test. Maybe the test “order” wasn’t reflected in the patient’s medical record; maybe the medical record entry wasn’t properly authenticated; or perhaps the content of the medical record didn’t support the diagnosis code included on the requisition.
In addition, more than one MAC has found medical records inadequate when they didn’t explain the reason that certain tests were ordered, i.e., provide a “nexus” between the patient’s signs and symptoms and the tests that were ordered. Result: The lab may only learn of the reasonable and necessary problem(s) later during a subsequent post-payment audit.

Medicare Financial Protection Provisions

The other key law shaping medical necessity is the parts of the Medicare statute (Section 42 1395pp(a)) that limit liability for services furnished by a provider that are determined not to be reasonable and necessary. The Rule: Medicare will pay the provider for these services, as long as neither the individual for whom the services were furnished nor the provider knew, or could reasonably have been expected to know, that Medicare wouldn’t reimburse the services.

The Medicare statute also says that overpayments shouldn’t be recovered from a provider if it was “without fault,” i.e., exercised reasonable care in billing and accepting Medicare payment (42 U.S.C. § 1395gg(b)), as long as the provider has made full disclosure of all material facts and, based on the information available to the provider, it had a reasonable basis for assuming that the payment that it received was correct. MACs and other Medicare auditing organizations are specifically required to make a limitation of liability and “without fault” determination when a claim is denied because an item or service isn’t reasonable and necessary.

How the Rules Play Out in Real Life

Based on these limitations of liability and “without fault” rules, labs seem to have a strong case for not being required to forego payment or repay amounts previously received for services that were determined not to be reasonable and necessary when the only basis for denying the claims was the content of the physician’s medical records. In fact, such arguments were apparently accepted on a frequent basis during Medicare’s earlier years. Unfortunately, they don’t work nearly as well nowadays. There seems to be at least three reasons for that:

First, in several cases, there may have been significant question whether the provider furnishing the services was independent of the ordering physician, such that it actually had no reason to believe that the services ordered by the physician weren’t medically necessary.

Second, the Medicare Appeals Council and courts reviewing its decisions have permitted the statutory obligation of the entity seeking Medicare payments to provide documentation

supporting its claims to trump any argument based on the supplier’s lack of knowledge

of the reasons for which the test was ordered, how the results were used, or its lack of

access to related medical record documentation.

Third, even though regulations require only that the lab maintain documentation received from the ordering physician and documentation demonstrating that its Medicare claim accurately reflected that information, a lab’s failure to provide additional documentation supporting medical necessity has resulted in denial of claims for payment (See, for example, Meridian Laboratory Corp. v. AdvanceMed Corp. (PSC), Departmental Appeals Board, Decision of Medicare Appeals Council, 2011 WL 6960470].

CMS Understands the Lab’s Problem

In one recent decision involving tests furnished by an independent diagnostic testing facility (IDTF), the council stated that the “entity submitting the claim for its services will not receive Medicare coverage . . . unless the services are documented as reasonable, necessary, and otherwise in compliance with Medicare requirements.” The council recognized that “providers of laboratory . . . services are dependent upon the ordering physicians to provide part of the documentation required to obtain Medicare coverage for their services.”

However, it went on to hold that the IDTF was financially responsible for the services that it furnished when it was couldn’t provide documentation to support their medical necessity. According to the council, “Medicare’s documentation requirements are not intended to make . . . laboratories . . . the reviewers of the medical necessity, but rather require those entities, if they are going to bill Medicare, to support their claim for payment with documentation showing that the service is a service covered by Medicare” [Virtual Imaging Services v. First Coast Service Options, Departmental Appeals Board Decision of Medicare Appeals Council, M-14-1254].

In addition, findings that a provider knew or had reason to know that a claim would be denied have been supported by only the thinnest of reeds. In an appellate decision frequently cited by HHS, the court relied on regulations stating that a provider is deemed to know the content of manual issuances, bulletins, and other written guidelines provided by CMS or the MAC. According to the court, since these guidelines indicated that the supplier was responsible for supporting medical necessity with documents that were generally in the possession of the ordering physician, it had sufficient notice that Medicare might require such documentation and would deny the claim if it wasn’t provided. So, although it didn’t explicitly say that the provider knew or could have been expected to know “that payment would not be made,” the court upheld the council’s decision not to afford the supplier protection under the statute’s limitation of liability provisions [Maximum Comfort, Inc. v. Secretary, 512 F. 3d 1081, 1088-89 (9th Cir. 2007)].

4 Ways to Protect Your Lab from Medical Necessity Claims Denials

While the medical necessity issue may look like a “blame the victim” situations, there are at least four actions you can take to protect your lab against denials of Medicare claims based solely on the content of the physician’s medical record or the lab’s lack of access to those records.

  1. Educate Physicians

First, the lab can educate physicians about its need for a copy of the physician’s medical records to support the medical necessity of clinical lab tests that the physician orders.

  1. Impose Contractual Obligations

If there’s a contractual relationship, the lab should consider including a provision requiring the physician or medical group to provide medical record documentation upon the lab’s request. In fact, Medicare regulations permit the lab to request such documents from the physician (42 C.F.R. § 410.32(d)(2), (3)). At least one MAC has indicated that a physician’s failure to cooperate with a supplier violates a legal requirement. The regulations also provide for CMS to request such documents from the ordering physician and deny the claim if it doesn’t receive them.

  1. Ask Physicians to Personally Sign Requisitions

Labs should also encourage referring physicians to personally sign test requisitions. Although CMS has stated that this isn’t required by Medicare regulations, getting a signed requisition can eliminate risk of assertions that:

  • The test wasn’t “ordered”;
  • The lab didn’t provide documentation of the test order; and/or
  • The order wasn’t authenticated as required by Medicare regulations.
  1. Secure ABNs

A lab should also confirm that it’s obtaining Advance Beneficiary Notices of Noncoverage (ABNs) whenever appropriate and that it’s encouraging physicians to do so on its behalf when the individual for whom testing is to be performed doesn’t personally present at a lab patient service center.


Medicare medical necessity requirements will continue to raise troublesome issues for labs. However, there are things labs can and should do to limit their financial exposure. They can also continue to make the case for protection from liability for services later found not be reasonable and necessary under the limitation of liability provisions of the Medicare statute.

The Proposed Official Medicare Coverage Definition of “Reasonable and Necessary”

CMS is currently reviewing several regulatory changes that the Trump administration initiated in its final days. Among these “midnight regulations” is the Jan. 14 final rule establishing a definition for CMS to use to determine whether a service or item is “reasonable and necessary” for purposes of Medicare coverage. Under the final rule, a service or item would be deemed reasonable and necessary if it’s considered:

  • Safe and effective;
  • Not experimental and investigational;
  • Appropriate for Medicare patients to the extent it’s: A. Furnished in accordance with accepted medical standards for diagnosis and treatment; B. Furnished in an appropriate setting; C. Ordered and provided by qualified personnel; D. Meets, but doesn’t exceed, the patient’s medical need; E. Is at least as beneficial as an existing and available medically appropriate alternative; or. F. Meets criteria to be created by CMS later measuring utilization and coverage of the service or item by commercial insurers.

The new rule was supposed to take effect on March 15.



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