Utilization Review and Medical Necessity
This domain tests level-of-care decisions: was the service necessary, and was it delivered in the right setting? Items focus on the Medicare inpatient/outpatient distinction, observation status, notice requirements, and how screening criteria are applied to a real record.
Defining medical necessity
A service is generally necessary when it is reasonable and necessary for the diagnosis or treatment of illness or injury, meets accepted standards of care, is not experimental, is furnished in the appropriate setting, and is supported by the documentation. Medicare authority sits in Social Security Act §1862(a)(1)(A), operationalized through NCDs and LCDs. Commercial payers layer their own medical policies on top.
Setting and status rules
- Two-midnight rule: an inpatient admission is generally appropriate when the physician expects the stay to span two midnights, documented at the time of the order. Stays not expected to span two midnights are generally outpatient, with limited Part B inpatient payment available when the order and certification exist.
- Observation is an outpatient status, not a separate benefit; it is time-based and payer-specific, and a Medicare Outpatient Observation Notice is required when applicable.
- SNF coverage requires a qualifying inpatient hospital stay of three consecutive calendar days - observation days do not count.
- Notices: the ABN (form CMS-R-131) for services that may be denied as not medically necessary, delivered before the service with the reason and an estimate.
Applying criteria
Use licensed criteria to structure the review, then verify each element against the record. Departures from criteria are permitted when the documentation justifies them, and the rationale must be written down.
Worked example
A patient with a COPD exacerbation is admitted at 11 p.m. and discharged at 2 p.m. the next day - one midnight. The reviewer should not simply deny for length. The question is whether the record at the time of admission documented severity (oxygen requirement, inability to maintain saturation, failed outpatient therapy, significant comorbidity) supporting an expectation of two midnights. If not, the stay is more likely an outpatient encounter and the hospital bears the payment risk absent a valid certification.
Traps that cost marks
- Counting midnights by calendar days rather than actual time.
- Treating observation as equivalent to inpatient for the SNF qualifying stay.
- Using the discharge outcome to judge the admission decision.
- Assuming a commercial payer's criteria mirrors Medicare's.