The Utilization Management Process and the Origins of Medical Necessity


Utilization management and utilization review, along with the concept of medical necessity, are vital factors that influence how healthcare providers operate. Utilization review was introduced in the 1960s to reduce overutilization of resources and identify waste.

According to the American Hospital Association, “heading into the COVID-19 pandemic, the financial health of many hospitals and health systems were challenged, with many operating in the red.” The AHA, along with numerous others, have rightly labeled this pandemic the greatest financial threat in history for hospitals and health systems, as they continue to fight the pandemic while non-COVID patient visits remain below normal levels. The financial pressure has created a serious obstacle for many hospitals to keep the doors open.

Today, utilization review is one method used to demonstrate the quality of care and protect revenue integrity. We’ll also examine how medical necessity plays a key role in utilization management and revenue cycle reimbursement, ensuring more appropriate cash flow.

Medical Necessity Definition

Medical necessity is a defining standard in the modern healthcare industry. Health plans, including government programs like Medicaid and Medicare and private health insurance companies, commonly set standards for medically necessary treatment.

The primary intent of medical necessity is relatively simple. Medicare defines what is medically necessary as “healthcare services or supplies needed to diagnose or treat an illness, injury, condition, disease, or its symptoms and that meet accepted standards of medicine.”

Determining medical necessity aims to reduce costs to payers and providers while increasing the quality of treatment for patients. Thus begins the challenge for payers and providers at each side of the equation, and whose interactions bookmark the patient’s experience – the focus should be on ensuring quality of care, appropriate payment based upon the patient’s medical necessity and clinical presentation. Understanding health plans shouldn’t pay for treatment that wasn’t appropriate, hospitals also want to be paid appropriately for the care they provided. In essence, it’s in both parties’ best interests to gain alignment or transparency into the patient’s true clinical picture to get the status and medical necessity right up front.

Medical Necessity and Utilization Management

A concept image showing a physician reviewing a holographic display of patient data.

Utilization management (UM) plays a key role in aligning the standards of payers with the care provided to patients. And medical necessity marks a crucial inflection point for alignment between payers and providers, defining those standards and providing a guide for utilization review teams.

However, UM and review processes can leave providers feeling like they’re completing substantial amounts of unnecessary administrative work. Many criteria-based UM technology solutions in use today require clinicians to do a deep dive into the EMR, when rich clinical datasets already exist within a patient’s medical record and tell a compelling story regarding their clinical picture. Criteria-based solutions do not have the ability to show clinical data in a transparent or comprehensive view, nor do they provide real-time updates as a patient’s condition changes. As a result, clinicians may feel they are reduced to simply checking off boxes when determining medical necessity and completing work related to utilization management. To illustrate this point, I used to say that my team was more familiar with the criteria and the checkboxes than their patients at the end of the day. That is not how clinicians should use their clinical knowledge and skills. Furthermore, criteria-based solutions do little to facilitate improved communication and decision-making within hospital systems or between providers and payers.

Incorporating AI and advanced technologies is a better path forward, because they not only reduce the time it takes to complete to review, but also increase the accuracy of the decision and allow the clinician time to know their patient.

Hospitals and health systems that use CORTEX®, XSOLIS’ solution for utilization management, realize a wide range of benefits. They more accurately determine patient status, reduce overall administrative burden, and increase nurses’ efficiency. That leaves more time to spend on time-sensitive and complex cases – not to mention CORTEX delivers on improved payer communication and relationships as well. Leaning into technology solutions that can drive better information-sharing and partnerships is what will be required to transform the inefficiencies that have long plagued administrative and clinical areas of healthcare such as UM.

Discover how XSOLIS can support everything from more involved clinicians to significant operational savings – up to two hours back in a nurse reviewer’s day or 7X ROI.

Schedule a CORTEX demo today.


Kelly Layton BSN, RN, ACM, is Senior Director, Clinical Engagement at XSOLIS and has over 30 years’ experience in healthcare, serving in corporate compliance and care coordination technology roles, and as a former director of case management at Penn Medicine Princeton Medical Center, Saint Barnabas Medical Center, Saint Peter’s University Hospital, and Union Hospital.