Claims Processing: What is Claims Adjudication?

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When you provide healthcare services to a patient, you submit a claim to the patient’s insurance company for reimbursement. The insurance company then goes through a process called claims adjudication to decide whether or not to cover the entire claim. This process can be a bit complicated, but we’ll break it down into four general steps.

1. Initial Review

The first step in the claims adjudication process is the initial review. When the insurance company receives a claim, they check it for basic details like the patient’s name, diagnosis code, location of treatment, and service code for the treatment. If any of this information is missing or incorrect, the insurer will reject the claim. If everything is in order, the claim moves on to the next step of the adjudication process.

2. Automatic Review

The second step in the adjudication process is the automatic review. The insurer performs a more detailed scan of the claim through their computer system. They check to see if the healthcare service requires prior authorization and if it was a medically appropriate and cost-effective treatment for the patient’s condition. Most claims are straightforward enough to adjudicate primarily at this stage.

There are a few common issues that come up during automatic review. If the healthcare service requires prior authorization, the claim will need to include the prior authorization number, and the diagnosis and procedure codes in the claim need to match with the codes submitted for pre-authorization. Also, insurance companies usually have a 90-day or 120-day deadline for submitting claims, so the automatic review system will deny claims that have missed this deadline.

3. Manual Review

Around 80% of claims are simple enough to be decided either entirely by the automatic review or with only a quick scan by a human medical reviewer. The remaining 20% of claims are those that are especially complex and expensive. These are passed on to a medical claims examiner for a detailed manual review. Manual reviewers can also be doctors or nurses depending on the case or the specific insurer.

During the manual review, the medical claims examiner will go through the claim in detail. They may request additional documentation, like medical records, to make sure that the services are appropriate for the patient’s situation. This is especially common when a healthcare practice performs a new or unlisted procedure that doesn’t have an established billing code. Since there’s no algorithm to determine when the new service is the appropriate form of care, a healthcare provider needs to look at the case in more detail.

4. Decision

Once the automated system, a human reviewer, or both have reviewed the claim, the insurance company will make a decision about payment. Ideally, the insurer will agree to pay the claim in full. Sometimes the insurer will pay a reduced rate. This happens when the payer determines that the amount billed was too high for the patient’s diagnosis, so the company approves a lower-level, less expensive procedure code for payment instead of denying the claim entirely.

The insurance company may also deny the claim. This can happen for a number of reasons, ranging from lapses in the patient’s coverage to your practice’s being out of network. In the claims adjudication process, denial is different from rejection. Claims are usually rejected in the initial processing stage because of errors or typos. When this happens, billing staff can simply correct the mistake and resubmit the claim. On the other hand, claims are denied at the end of the process, and appealing a denied claim can be more complicated.


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A denied claim means your practice’s payment will be either delayed or lost entirely. Appealing the decision can help the practice get paid for the services it’s already provided, but this can be complicated and time-consuming. If a claim is denied because of a clerical error, problem with prior authorization or question about whether the patient was covered at the time of service, appealing the decision should be fairly straightforward. You’ll usually be able to submit corrected or additional information to resolve the problem.

Appeals become much more involved when the insurance company says that a procedure was not medically necessary. When this happens, the healthcare provider will usually need to participate in the appeals process as well. There are three levels of the appeals process.

First Level

In an initial appeal, the healthcare practice contacts the payer to argue that the service met the payer’s rules and should be approved. A doctor from your practice can speak to a medical reviewer to conduct a peer-to-peer insurance review. This is usually a phone conversation where the provider has the opportunity to explain the details of the patient’s case, any relevant research data, and other reasons the treatment was medically necessary.

Second Level

If the first-level appeal is denied, you’ll need to make the case that the procedure fell within the payer’s guidelines. At a second-level review, a medical director at the insurance company who hasn’t seen the claim before will review it.

External Review

The final appeal opportunity is an external review, during which a doctor or another provider who doesn’t work for the insurance company reviews the claim. External reviews are only available for denials that are based on medical necessity or questions about whether a service is experimental or not.

Appealing the adjudication of a claim can require a significant time investment from both providers and billing staff. Sometimes the patient drives the process. Otherwise, your practice will need to decide whether appealing a claim is a good use of its time. This can be a nuanced, case-by-case decision. Appealing a recurring service or one that’s especially expensive to provide could be worth the time that staff devotes to the appeal, while it may be more efficient to move on from smaller denials.

Avoiding Denied Claims

To avoid denied claims and the costs and frustrations they can cause, pay attention to areas where mistakes tend to happen before you submit a claim. The simplest mistakes are the most common. Relatively small errors like a misspelled patient name or incorrect diagnosis code can cause a claim to be denied. If a practice accidentally submits two claims for the same service, one or both will be denied as a duplicate. When a payer doesn’t cover a particular service, no number of appeals will change the outcome.

Using a medical billing clearinghouse, such as Apex EDI’s clearinghouse, can simplify the claims adjudication process. It stores claims information in one central system, catches errors before submission, and lets billers submit claims to multiple insurers through the same program. The system scrubs your claims for errors before you submit them, which means you’ll benefit from the efficiency that a 95% claim approval rate brings to your practice. Our providers get their payments 12 days faster on average while avoiding all the frustration and morale challenges that come with denied claims. Schedule a demo with Apex EDI to see how you can simplify the claims adjudication process today. 

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