Denied by Design: Why No Provider Escapes Prepayment Review Unscathed

In the Medicare fee-for-service world, “prepayment review” (also sometimes called “prepayment medical review” or “pre-claim review,” depending on the context) means that a claim is selected before payment is made and is subject to a review to determine whether it should be paid, rather than become the topic of the usual post-payment audit.

Some finer details include the following:

• Under Centers for Medicare & Medicaid Services (CMS) regulatory language at 42 C.F.R. § 405.902, “prepayment medical review (or prepayment review) means a review that occurs before an initial determination for payment is made on the selected claim to determine whether payment should be made.”

• As a Medicare Learning Network (MLN) definition states: “Prepayment Review: Review of claims prior to payment. Prepayment reviews result in an initial determination.”

• A Medicare contractor explains that “prepayment review occurs when … the claim is suspended … before the claim is paid.”

In simpler terms: a provider submits a claim, and rather than being paid immediately or processed normally, the claim is flagged for special review, then the contractor assesses the claim (for medical necessity, documentation, coding, edits, etc.), and only after the review (if approved) is payment made (or else the claim is denied or adjusted).

In Medicare, the authority sits in the rules for medical review: the CMS contractors may select claims for prepayment review, request records, and keep you there while they scrutinize submissions claim by claim (see 42 C.F.R. §§ 405.902 definitions and 405.903). The CMS Program Integrity Manual directs Medicare Administrative Contractors (MACs) to use targeted edits, and permits provider-specific prepayment review when there’s a likelihood of sustained improper payments. In practice, that means frequent additional documentation requests (ADRs), short fuses, and cash-flow choke points.

Medicaid has a parallel (and sometimes harsher) toolset. Federal regulations require states to suspend payments when there’s a “credible allegation of fraud,” unless “good cause” exists not to. Many states do that through prepayment holds and record-by-record review that can last months. CMS’s toolkit tells states to document good-cause exceptions but otherwise suspend pending law-enforcement review.

Why is getting beyond prepayment review so difficult?

First, the “exit criteria” are often unrealistic. North Carolina’s statute is unusually explicit: a provider stays on prepayment review until it posts three consecutive months at a ≥ 70-percent “clean-claims” rate, with each month’s volume at least 50 percent of historical average. A “clean claim” here means a submission that sails through without any defect: no missing attachment, signature glitch, coding quirk, or documentation ambiguity. Miss by a hair, and the month doesn’t count, the clock resets. For many specialties, especially those with subjective medical-necessity calls, that’s a Sisyphean bar.

Second, the medical-necessity standard can be something of a moving target. Courts have recognized that clinicians can reasonably disagree. In the Eleventh Circuit’s AseraCare decision, a mere difference of clinical opinion – without more – couldn’t prove falsity under the False Claims Act (FCA). By contrast, the Ninth Circuit’s Winter decision held that a medical-necessity certification can be false if made knowingly or recklessly.

Auditors read Winter to justify second-guessing judgment calls; providers point to AseraCare to show that honest disagreement is not falsity. You can see how, inside a prepayment framework demanding near-perfection, this split makes “clean” claims often elusive.

Third, administrative frictions stack the deck. CMS guidance gives contractors 45 days per ADR and wide latitude to keep requesting records; every nitpicky denial (even one unrelated to true coverage) dings your “clean claim” score. Meanwhile, there’s no national time limit to end Medicare prepayment review. That asymmetry – open-ended contractor discretion versus rigid provider benchmarks – makes exit standards functionally unattainable for many practices.

The federal courts have repeatedly acknowledged how crippling these payment holds, and related recoupments can be. In Family Rehabilitation v. Azar, the Fifth Circuit allowed a provider’s due-process challenge to proceed because ongoing Medicare holds before an administrative law judge (ALJ) hearing posed an existential threat. Although the case involved recoupment, the court’s analysis of cash-flow harm maps neatly onto prepayment choke points: if you can’t make payroll, you can’t deliver care, let alone generate “clean” months. The Fourth Circuit’s Accident, Injury & Rehabilitation line of cases underscores the same theme amid the ALJ backlog and continuing holds.

In Bader v. Wernert, an Indiana federal court granted a preliminary injunction in part to protect access to genetic services after the state cut off Medicaid payments tied to program-integrity actions. The case illustrates how payment stoppages, whether styled as suspension or prepayment review, can swiftly endanger both providers and beneficiaries. As an aside, I was lead counsel for Bader v. Wernert; we were successful in obtaining a preliminary injunction to protect access to genetic services, even though the state suspended Medicaid reimbursements. Judge Theresa Springfield took a long time to issue a decision – partly, in part, I think, because this was a first-impression case, to my knowledge. Once Medicaid reimbursements stop, no facility can hire a lawyer. I can tell you that I litigated for a penny. There was time I had to write off, which hurts lawyers’ end-of-year goals (more than two weeks), but the win was so worth it. We trailblazed getting an injunction when Medicaid reimbursements were suspended.

The upshot is that the legal architecture empowers contractors to demand near-error-free claiming while reserving broad discretion to second-guess medical judgment and documentation. Add volume thresholds (like North Carolina’s), rolling ADRs, and inconsistent instructions, and the “clean-claim streak” required to exit the process can become a mirage. Defense strategy should be twofold: 1) attack placement and maintenance procedurally (notice, timelines, contractor authority, definition of “clean claim,” etc.); and 2) build a record that separates subjective judgment (AseraCare) from true falsity (Winter), while preserving due-process arguments about irreparable harm if payment holds persist.

That’s the way out – because as many providers discover, there is no practical way “to be perfect” for three straight months when the goalposts keep moving.