How claims adjudication works, from claim submission to appeal

Claims adjudication is the process an insurance company uses to review a claim and decide how much of it to pay. After you submit a claim for a client’s care, the payer checks it for accuracy, confirms the service was covered and medically appropriate, and then either approves it in full, approves it at a reduced rate, or denies it.
Knowing how each stage works helps you submit cleaner claims, understand what a pending status means before it stalls your cash flow, and decide when a denial is worth appealing. Here is how claim adjudication moves from submission to payment, and what to do when it does not go as planned.

What is claims adjudication?

Claims adjudication is how a payer reviews a submitted claim and determines its share of the cost. The payer confirms the basic details are correct, verifies that the service was covered and medically appropriate for the client’s condition, and then issues a decision: pay in full, pay a reduced amount, or deny.

For your practice, adjudication is the gap between providing care and getting paid for it. The smoother a claim moves through this process, the faster the reimbursement lands.

If you want to go deeper on the claims adjudication process, download our eBook, Understanding the Claims Adjudication Process.

Submitting the right claim form: the UB-04 and the CMS-1500

Before adjudication can begin, you have to submit the claim on the correct form. Two standard forms cover most behavioral health and therapy billing.

The CMS-1500 is the standard form for individual clinicians and group practices billing for outpatient services. If you run a private practice or a group practice, this is almost always the form you submit.

The UB-04 form , also known as the CMS-1450, is the standard form for institutional billing. Facilities such as inpatient psychiatric units, residential treatment centers, and many partial hospitalization or intensive outpatient programs submit claims on the UB-04 form, which captures facility-level details the CMS-1500 does not.

Submitting the wrong form, or leaving a required field blank on the right one, is one of the quickest ways to get a claim kicked back before it reaches review. Confirm which form each payer expects for the services you bill.

The claims adjudication process, step by step

Most claims move through the same four stages. Here is what happens at each one.

Step 1: Initial review

The first step is a basic check. When the insurance company receives a claim, it looks at core details like the client’s name, diagnosis code, location of treatment, and service code. If any of this information is missing or incorrect, the insurer rejects the claim. If everything is in order, the claim moves on.

Step 2: Automatic review

Next, the insurer runs a more detailed scan of the claim through its computer system. It checks whether the service required prior authorization and whether the treatment was medically appropriate and cost-effective for the client’s condition. Most claims are straightforward enough to be settled mainly at this stage.

A few common issues surface during automatic review. If the service required prior authorization, the claim needs to include the authorization number, and the diagnosis and procedure codes have to match the codes submitted for pre-authorization. Payers also enforce filing deadlines, often 90 or 120 days, so the system will deny claims that arrive late.

Step 3: Manual review

Most claims are simple enough to be decided by the automatic review or with a quick scan from a human reviewer. The more complex and expensive claims get passed to a medical claims examiner for a detailed manual review. Depending on the case and the insurer, that examiner may be a doctor or a nurse.

During manual review, the examiner goes through the claim in detail. They may request additional documentation, such as medical records, to confirm the services fit the client’s situation. This is especially common when a practice performs a new or unlisted procedure that does not have an established billing code. Without an algorithm to judge whether the service was appropriate, a human reviewer has to look at the case more closely.

Step 4: The payment decision

Once the automated system, a human reviewer, or both have finished, the insurer makes a decision.

In the best case, the insurer pays the claim in full. Sometimes it pays a reduced rate, which happens when the payer decides the amount billed was too high for the client’s diagnosis and approves a lower-level, less expensive procedure code instead of denying the claim outright.

The insurer may also deny the claim for reasons that range from a lapse in the client’s coverage to your practice being out of network. In adjudication, a denial is different from a rejection. Claims are usually rejected early in processing because of errors or typos, and billing staff can correct the mistake and resubmit. Denials come at the end of the process, and reversing one is more involved.

What pending claim adjudication means

When you check a payer portal or clearinghouse and see a claim marked “pending adjudication,” it means the payer has received your claim and it is moving through the review steps above. The claim has not been approved or denied. It is in the queue.

So what does pending claim adjudication mean in practical terms? The payer is verifying eligibility, checking codes, and confirming the service was covered. Most claims clear this stage within the payer’s standard processing window, though timelines vary by payer and claim type, and many states set their own prompt-payment rules.

A claim can sit in pending status longer when it gets routed to manual review, when prior authorization is in question, or when the payer is waiting on additional documentation. If a claim stays pending well past the payer’s usual turnaround, follow up. Confirm the payer received everything it needs and that nothing is waiting on your end.

Appealing a denied claim

A denied claim means your payment is either delayed or lost. Appealing can help you recover payment for care you have already delivered, but it takes time, and how hard the appeal is depends on why the claim was denied.

If the denial came from a clerical error, a prior authorization problem, or a question about whether the client was covered at the time of service, the appeal is usually straightforward. You can typically submit corrected or additional information to resolve it.

Appeals get more involved when the payer says a procedure was not medically necessary. In that case, the treating clinician usually has to take part. There are three levels to the process.

First-level appeal

In an initial appeal, your practice contacts the payer to argue that the service met its rules and should be approved. The treating clinician can speak with a medical reviewer in a peer-to-peer review, usually a phone call where the clinician explains the details of the client’s case, any relevant research, and the other reasons the treatment was medically necessary.

Second-level appeal

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

External review

The final opportunity is an external review, in which a doctor or other independent clinician who does not work for the insurer reviews the claim. External reviews are available only for denials based on medical necessity or on whether a service is experimental. If you want a more in-depth guide to appeal denials, check out Working a denied insurance claim: An escalation guide for therapists in private practice.

Deciding whether an appeal is worth it

Appealing the adjudication of a claim can take significant time from both clinicians and billing staff. Sometimes the client drives the process. Otherwise, your practice has to weigh whether the appeal is a good use of its time, and that is often a case-by-case call. A recurring service or one that is expensive to deliver can justify the effort, while it may make more sense to move on from smaller denials.

Avoiding denied claims

The best way to handle denials is to prevent them. Before you submit, pay attention to the spots where mistakes tend to happen, because the simplest errors are also the most common. A misspelled client name or an incorrect diagnosis code can be enough to trigger a denial. If a practice accidentally submits two claims for the same service, one or both will be denied as a duplicate. And when a payer simply does not cover a service, no appeal will change the outcome.

A medical billing clearinghouse can take pressure off this part of the process. It stores your claims in one central system, scrubs them for common errors before submission, and lets you send claims to multiple payers through the same program. Catching a missing code or a mismatched client detail before the claim goes out keeps it out of the rejection and denial pile, which means fewer pending claims to chase and faster reimbursement.

The right practice management and billing software can build those checks into your everyday workflow, so claims go out cleaner the first time and spend less time in adjudication.

Frequently asked questions

What does pending claim adjudication mean?

A pending status means the payer has received your claim and is still reviewing it. The claim has not been approved or denied yet. If it stays pending well beyond the payer’s usual processing window, it is worth following up to confirm nothing is missing.

What is the difference between a rejected claim and a denied claim?

A rejected claim was stopped early because of an error or typo, and you can correct it and resubmit. A denied claim went through the full adjudication process and was not approved, so reversing it usually requires a formal appeal.

Should my practice use the CMS-1500 or the UB-04 form?

Most outpatient clinicians and group practices submit the CMS-1500. Facilities such as inpatient psychiatric units, residential treatment centers, and many partial hospitalization or intensive outpatient programs use the UB-04 form. Confirm which form each payer expects for the services you bill. This HEP data is also the foundation for remote therapeutic monitoring (RTM). RTM monitoring and billing capabilities within Fusion are coming very soon and will build on the same client‑reported and adherence data already captured through Wibbi.

How long does claim adjudication take?

It depends on the payer and the complexity of the claim. Clean electronic claims tend to clear faster than ones that need manual review or additional documentation, and many states have prompt-payment laws that set their own timelines.