Coding and medical necessity

Payer and health plan basics

• Payers are the entities that pay for healthcare services, including private insurers, government programs, and self-funded employers.
• Health plans are the benefit packages a payer offers, defining covered services, networks, and cost-sharing.
• Insurance is the broader risk-pooling mechanism that funds the benefits that are part of a health plan.
• Benefit design sets coverage, cost-sharing, and limitations, directly affecting both patient responsibility and laboratory reimbursement.
• Managed care models are health insurance arrangements designed to control healthcare costs while coordinating and improving patient care. They do this by creating provider networks, negotiating payment rates, and establishing rules for accessing certain services. Common managed care models include health maintenance organizations (HMOs), preferred provider organizations (PPOs), and exclusive provider organizations (EPOs).
• Ancillary contracts govern services, such as laboratory testing outside the hospital payment arrangement.
• Hospital contracts may reimburse laboratory services separately or package them with other care, such as under the Outpatient Prospective Payment System.
• Carve-outs are separate arrangements for benefits such as laboratory testing, radiology, or pharmacy. A laboratory may appear in-network for general medical services but be out-of-network for the carved-out laboratory benefit, resulting in different rates, higher patient costs, or denials.
• Policy limitations may include annual caps, frequency limits, medical-necessity review, exclusions for experimental testing, and prior authorization for high-cost services.

Common government health programs

• Medicare is a federal health insurance program that covers adults age 65 and older, certain people with disabilities, and those with end-stage renal disease.
• The Clinical Laboratory Fee Schedule (CLFS) is the Medicare payment system used to reimburse most outpatient clinical laboratory tests.
• Medicaid is a public health insurance program jointly funded by the federal government and state governments that provides healthcare coverage to eligible low-income individuals and families.
• TRICARE is a healthcare program for eligible U.S. military service members, retirees, and their families.

Patient cost-sharing terms

• Out-of-pocket costs are deductibles, copays, coinsurance, and charges for noncovered or out-of-network services.
• Deductible is the amount a patient pays before plan coverage begins.
• Copay is a fixed amount due for a service.
• Coinsurance is a percentage, often 20%, of the allowed amount a patient pays after their deductible is met.

For covered tests under Medicare’s CLFS, patients generally have no Part B deductible or coinsurance when medical-necessity requirements are met. Commercial plans vary. In-network testing usually limits patient responsibility, while out-of-network testing can produce larger balances. The plan’s Summary of Benefits and Coverage, plus any ancillary or hospital contracts, helps predict payment.

Federal policy and compliance

• Clinical Laboratory Improvement Amendments (CLIA) certification is required for laboratories performing human testing and is essential for Medicare billing within the laboratory’s authorized testing scope.
• National Correct Coding Initiative (NCCI) edits help prevent improper unbundling and duplicate billing. It is important that laboratories follow the edits.
• The Protecting Access to Medicare Act of 2014 (PAMA) is a federal law that changed how Medicare determines payment rates for clinical laboratory tests, moving the CLFS toward market-based rates based on reported private-payer data. CMS periodically updates policies and rates, and outreach leaders should monitor current guidance and assess how any changes affect test menus, contracts, and revenue forecasts.

Learn more

• Centers for Medicare & Medicaid Services is the authority on CLFS rates, coverage policies, PAMA reporting, and the Clinical Labs Information Center.
• The American Clinical Laboratory Association provides advocacy updates, policy analysis, and industry perspectives.
• American Medical Association CPT materials and the CMS Medicare Claims Processing Manual, Chapter 16, both provide detailed coding and billing guidance.