What is Medically Necessary in Terms of Physician Medi-Cal Billing?
Medically Necessary is a billing term that physicians must understand if they are to bill for Medi-Cal covered services. Treatment that is important to a patient and medically justified may not be medically necessary for billing purposes. Conditions that warrant medical treatment may not be medically necessary for billing purposes. To know if a condition that is treated can be billed a doctor must consult the Legal Definition which is found in (W&I Code § 14059.5.
For individuals 21 years of age or older, a service is "medically necessary" when it is reasonable and necessary to:
- Protect life;
- Prevent significant illness or significant disability; or
- Alleviate severe pain.
For Individuals Under 21 (EPSDT Standard) The standard is significantly broader for children and young adults under the Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) mandate. For this group, "medically necessary" includes services necessary to:
- Correct or ameliorate defects and physical and mental illnesses and conditions discovered by the screening services.
This term becomes key when you have billed for years believing that you are following the "medically necessary" rules and suddenly Medi-Cal or a third party administrator choose to audit you and seek reimbursement based upon a differing view as to what was justified not only medically but for reimbursement purposes. To defend your billing you may be forced into an administrative hearing where you have very little rights. See our blog on the collection efforts that can be directed against you once you lose a this hearing.
Key Distinction: For adults, the service must often address a current severe threat or pain. For children, the service is covered if it simply improves a condition or prevents it from getting worse. 2. The Four Pillars of Necessity Beyond the statutory definition, DHCS and CMS (federal Medicaid) generally look for four criteria to validate a claim:
- Clinical Effectiveness: The service must be generally accepted by the professional medical community as effective for the condition being treated.
- Not for Convenience: The service cannot be provided solely for the convenience of the patient, the family, or the physician.
- Least Restrictive/Cost-Effective: If two treatments are equally effective, Medi-Cal will only pay for the one that is the least costly or least restrictive.
- Proper Setting: The service must be provided in the most appropriate setting (e.g., outpatient vs. inpatient) required by the patient's medical condition.
- How This Impacts Billing and Audits When a doctor is suspended or audited, "medical necessity" is often the battlefield. DHCS auditors frequently challenge billing based on the following:
- Insufficient Documentation: If the patient's chart doesn't explicitly describe the "severe pain" or the "threat to life/limb," the auditor will deem the service not medically necessary, even if the doctor performed it in good faith.
- Off-Label Use: Using a drug or procedure for a purpose not approved by the FDA or compendia often triggers a "not medically necessary" denial.
- Frequency of Service: If a doctor provides daily therapy when clinical guidelines suggest weekly is sufficient, the "excess" visits are flagged as unnecessary.
| Feature | Adult Standards (Ages 21+) | Pediatric Standards (Under 21) |
| Primary Statutory Goal | Address an immediate, significant threat. | Correct or "ameliorate" (improve) a condition. |
| Criteria for Coverage | Must be reasonable and necessary to protect life, prevent significant illness/disability, or alleviate severe pain. | Must be necessary to correct or improve physical/mental illnesses or conditions found during screening. |
| Preventative Care | Limited; generally must relate to a current diagnosis or high-risk category. | Broadly covered; includes services that prevent a condition from worsening or help a child reach developmental milestones. |
| Maintenance Care | Often denied if the patient has "plateaued" and is no longer showing significant improvement. | Covered; maintenance services are necessary if they prevent the "regression" of a child's condition. |
| Burden of Proof | Must document the severity and the risk of "significant" harm if untreated. | Must document the potential for improvement or the necessity of maintaining current function. |
| Clinical Standard | Must be the least restrictive and most cost-effective setting/treatment. | Must meet the federal EPSDT mandate, which often overrides state-level cost-containment restrictions. |
Private Insurance (Knox-Keene Act) for private health care service plans, California Health and Safety Code § 1367.01 governs how plans must handle "medical necessity" decisions. While it doesn't provide a single "dictionary" definition like WIC § 14059.5, it mandates that:Decisions must be made by a licensed physician (or competent health professional).Criteria must be supported by clinical principles and processes (often referencing the "generally accepted standards of care" found in HSC § 1374.721). The two statutes are not meant to be read together but if you are a lawyer arguing "medical necessity" for Medi-Cal billing or arguing with an insurance company as to what is or is not covered under a plan it is worth reviewing the two statutes to see if similarities or differences can buttress your argument.
Is "Medically Necessary" a Local Issue?
We have a case in San Diego, California where the amount of skin care per patient was compared to a national average. This makes little sense because skin cancer rates are higher in southern areas. And yet, the insurance carrier computers do not distinguish patient cancer rates vs local treatment. Instead they compare doctors vs doctor which is a less precise measure. Likewise, doctors who treat privileged communities vs doctors who treat underserved communities will have different treatment rates for the same conditions. Again, standard computer comparisons which are used by insurance companies to identify "outlier" doctors are not highly sophisticated. AI software needs input from investigators and without proper input they can identify patterns but they cannot distinguish between the best level of medical care vs standard care in terms of what is proper vs what is fraud. So under this standard "medically necessary" is very subjective. The reimbursement standards to which "medically necessary" applies are filtered and interpreted based upon computer assessments. The same patient and the same billing sent by one doctor is "medically necessary" and a doctor identified as an outlier will be identified as improper.
In terms of ethnicity there is also a disparity that can create undeserved focus on doctors who provide appropriate treatment to certain underserved groups. Read the Journal Article The expanding melanoma burden in California hispanics which is published in the Journal of the American Cancer Society. The use of AI is supposed to adjust for this but we are not confident that the systems are racially or socially sensitive.
There are many companies competing to provide insurance companies with AI powered review of billing files. See: Provider Scoring: Detect medical provider fraud, waste, and abuse | Verisk or AI Tools That Detect Healthcare Provider Fraud | Insurance Thought Leadership. The AI should draw from the State Cancer Profiles > Incidence Rates Table but it is not clear how a lawyer representing a doctor can establish whether the AI or non-AI assessment software considered that data (or to what extent it considered it).
Hire a Qualified Lawyer
Physicians may be audited, sued by Medi-Cal or third party administrators and even charged criminally under Penal Code section 550 and federal fraud statutes - if they consistently bill for important medical treatment that is simply not medically necessary for billing purposes. The subtle legal arguments can sometimes be the difference between success or failure. I you suspect that you are vulnerable to an audit or worse, contact the medical law firm of Daniel Horowitz at (925) 283-1863.
