Why Health Insurers Use AI Algorithms to Deny Claims (And How to Challenge It)

Your hospital submits a reimbursement claim for post-operative rehabilitation, an inpatient hospital observation stay, or a vital specialty biologic infusion. The denial arrives quickly, sometimes so quickly that it is hard to believe anyone read the chart. In some cases, an automated tool may have screened the request against statistical patterns before, or instead of, a detailed human review.

Many commercial insurers and Medicare Advantage plans now use software, including predictive tools, to help process claims and prior authorization requests. Insurers say these tools improve speed and consistency. Critics, including plaintiffs in pending lawsuits and some members of Congress, allege that certain tools have been used to limit care based on statistical averages rather than the individual patient’s needs. Insurers named in those cases have disputed the allegations.

A denial that seems to come from software can feel like a black box. However, federal claims rules for employer plans require a full and fair review of appeals, and CMS rules for Medicare Advantage require that medical necessity decisions be based on the individual patient’s circumstances. Understanding how these tools are used, and knowing which questions to ask on appeal, can help you get a human clinical review of your case.

1. Under the Hood: How Automated Claim Denial Systems Operate

In traditional claims processing, an experienced nurse reviewer or board-certified medical director manually reviews clinical records against established medical necessity criteria. Today, high-volume automated adjudication pipelines intercept claims at the clearinghouse stage:

• Predictive Recovery Scoring: Some predictive tools use large datasets of historical patient profiles (age, primary diagnosis, functional independence measures) and calculate a mathematical prediction of how many days of skilled nursing care or physical therapy a patient “should” require. Lawsuits have alleged that some plans relied too heavily on such predictions when ending coverage; the companies involved deny this.
• Batch Auto-Adjudication: Payer systems cross-reference submitted International Classification of Diseases (ICD-10) diagnosis codes with Current Procedural Terminology (CPT) treatment codes. If a clinical submission fails to match the strict algorithmic baseline profile, the system may flag or reject it. Investigative news reports have alleged that, at some insurers, physicians signed off on batches of flagged denials very quickly; the insurers have disputed those characterizations.
• Low Appeal Rates: Published analyses of marketplace plan data suggest that only a small share of denied claims are ever appealed. That means an incorrect denial often stands simply because nobody challenged it.

2. What Federal Rules Say About Algorithmic Denials

Insurers are allowed to use technology to help process claims. Federal and state regulators have said, however, that these tools should not replace individualized clinical judgment. The table below is a general summary; the rules that apply depend on your type of plan:

Under CMS Final Rule CMS-4201-F (codified under 42 C.F.R. § 422.101), Medicare Advantage organizations must make medical necessity determinations based on the individual patient’s circumstances and must follow Medicare coverage rules. CMS has explained that an algorithm or software tool can be used to assist, but it should not be the sole basis for denying care that Medicare would cover. Check CMS.gov for current guidance.

3. A 4-Step Plan to Challenge a Suspected AI Denial

You usually cannot tell for certain whether software played a role in a denial, and you do not need to prove it. The goal is to get a careful human review of your individual case:

Step 1: Request Your Claim File and the Criteria Used

Under the federal claims regulation for employer plans (29 C.F.R. § 2560.503-1), and similar rules for many other plans, you can request, free of charge, copies of the documents, records and other information relevant to your claim, including the guideline or criteria relied on. In your written request, you can also ask for:

1. Any review notes or logs showing when and by whom the claim was reviewed (plans may not be required to provide every internal log, but it is reasonable to ask);
2. The name or, at minimum, the qualifications and specialty of the clinician who made the decision;
3. The clinical criteria applied, and whether any software or predictive tool was used in evaluating the claim.

If the file contains little or no evidence that anyone considered your individual records, say so in your appeal and ask for a full and fair review by a qualified clinician. Our guide on how to request your complete claim file has more detail.

Step 2: Ask How the Decision Was Made

Ask the insurer to identify the clinical evidence and criteria behind the decision. You might ask: “Did your automated tool evaluate my specific laboratory values, radiological imaging, functional progression, and vital signs, or did it rely on an aggregated cohort average?” Insurers may treat the inner workings of their software as proprietary, but they should be able to explain the clinical rationale for the decision as it applies to you.

Step 3: Secure an Individualized Specialist Letter of Medical Necessity

Your treating physician or surgeon can provide a detailed clinical letter that contrasts the patient’s individual clinical chart with the insurer’s generic algorithmic assumption:

• Document specific clinical indicators (e.g., erratic blood glucose levels, post-surgical wound complications, fall risk scores) that invalidate generic predictive recovery timelines;
• Highlight the severe clinical risks of prematurely discharging or halting treatment;
• Include an explicit attestation: “The patient’s clinical complexity cannot be captured by algorithmic statistical averages; this ongoing treatment is medically necessary under accepted standards of care.”

Step 4: Escalate to External Review and State Regulators

If the internal review panel upholds the algorithmic denial, you may be able to request an external review by an Independent Review Organization (IRO). For many plans this right comes from 45 C.F.R. § 147.136 or state law; Medicare Advantage has its own multi-level appeal process. In an external independent review, clinicians who do not work for the insurer look at your records and the plan’s criteria.

You can also file a complaint with your state Department of Insurance (for state-regulated plans), contact the Department of Labor’s Employee Benefits Security Administration (for employer plans), or call 1-800-MEDICARE (for Medicare Advantage). Several states have passed or are considering laws on the use of AI in coverage decisions, so your state regulator can tell you what applies where you live.

4. A Worked Example (Hypothetical)

This example is hypothetical and is only meant to show how the steps fit together.

An 81-year-old patient is recovering in a skilled nursing facility after a hip fracture. On day 14, the plan sends a notice saying coverage will end in two days because the patient “no longer requires skilled care.” The family is surprised, because the patient still cannot climb stairs or transfer safely without help.

• Day 14: The family reads the notice, finds the fast-appeal instructions and files the expedited appeal the same day.
• Day 14: They ask the facility’s therapist and physician for current notes showing what the patient can and cannot do, and what skilled services are still being provided.
• Day 15: The physician writes a short letter describing the patient’s specific deficits and fall risk, and why continued skilled therapy is needed.
• Afterward: The family requests the claim file and the criteria used, so they have it if a further appeal is needed.

In this hypothetical, the appeal reviewer sees documentation about this particular patient rather than a general expectation for hip fracture recovery. That does not guarantee the decision is reversed, but it puts the right information in front of the reviewer.

5. Questions to Ask Your Insurer

• What specific clinical criteria or guideline was applied to my claim, and can I have a copy?
• Which criterion did my request not meet?
• Was any software, algorithm or predictive tool used in the decision?
• Did a clinician review my individual medical records, and what is that person’s specialty?
• What is the deadline for an appeal, and do I qualify for an expedited one?
• If the appeal is denied, how do I request an external or independent review?

Keep a note of the date, the representative’s name and any reference number for each call.

6. Common Mistakes to Avoid

• Assuming a fast denial cannot be challenged. The speed of a denial says nothing about whether it is correct.
• Building the appeal around the software. You rarely need to prove an algorithm was involved. An appeal that shows how your records meet the plan’s criteria is usually stronger than one that focuses on the technology.
• Missing the deadline. Appeal windows are limited, and notices about ending care in a facility can have very short ones. See our guide to appeal deadlines.
• Sending a generic letter. Ask your doctor for specifics about your condition, not a form statement. Our guide to “not medically necessary” denials explains what a strong letter includes.
• Stopping after the first appeal. External review exists for cases where the plan does not change its mind.

7. Quick Checklist

• Read the denial notice and write down the stated reason and the appeal deadline.
• Request the claim file and the criteria used.
• Ask your doctor for a detailed, patient-specific letter and supporting records.
• File the appeal in writing, on time, and keep copies.
• Ask for an expedited appeal if a delay could seriously harm your health.
• Request external review if the internal appeal is denied.
• Contact your state insurance department, the Department of Labor or Medicare, depending on your plan type, if you need help.

Frequently Asked Questions

Is it legal for insurers to use AI in claim decisions?

Generally, insurers may use software to assist with processing. Federal rules for Medicare Advantage and laws in some states limit how these tools can be used to deny care, and this area of law is changing. Your state insurance department can tell you what applies to your plan.

How can I tell whether an algorithm denied my claim?

Often you cannot tell from the letter. You can ask the plan directly and request the criteria and records it relied on. Either way, your appeal rights are the same.

Does it matter what kind of plan I have?

Yes. Employer plans, individual marketplace plans, Medicare Advantage and Medicaid each have their own appeal rules and regulators. Your denial notice should explain the process for your plan.

Can my doctor help?

Yes. A letter of medical necessity and, where the plan offers it, a peer-to-peer review between your doctor and the plan’s physician can be very helpful.

Do I need a lawyer?

Most appeals are handled without one. For large claims or repeated denials, a patient advocate, a state consumer assistance program or an attorney may be worth contacting.

The Bottom Line

Software can speed up claims processing, but coverage decisions about medical necessity are supposed to reflect the individual patient. If a denial seems to ignore your circumstances, request your claim file, ask how the decision was made, submit a detailed letter from your doctor, and use your appeal and external review rights.

This article is educational information, not legal, medical or financial advice.