Executive Summary 

• Following a market-wide pledge between insurers and the Department of Health and Human Services to improve prior authorization – the practice of providers seeking insurance company approval before providing a medical service – many insurers announced new initiatives to increase patient care access and improve prior authorization. 
• Prior authorization is one of several systems under the umbrella of utilization management, a broader practice used to contain health care costs and optimize delivery. 
• This primer explains utilization management and its various systems, highlights the role utilization management has in health care policy and cost containment, and discusses the often-conflicting interests of utilization management implementation. 

Introduction 

Following a market-wide pledge between insurers and the Department of Health and Human Services to improve prior authorization – the practice of providers seeking insurance company approval before providing a medical service – many payers have announced new initiatives to increase patient care access and improve prior authorization. While prior authorization is a widely recognized term in health care and was the primary topic of the announcement, it is only one of several systems under the umbrella utilization management, a broader set of practices used to contain care costs and optimize delivery. This primer explains utilization management and its various systems, highlights the role utilization management has in health care policy and cost containment, and discusses the often-conflicting interests in utilization management implementation. 

What Is Utilization Management?  

Utilization management (UM) is a broad label for various insurance company policies designed to optimize health care value, including consumer and provider costs. For the purposes of this primer, UM should be understood as, “a set of techniques used by or on behalf of purchasers of health care benefits to manage health care costs by influencing patient care decision-making through case-by-case assessments of the appropriateness of care.” Generally, this assessment of the appropriateness of a patient’s care is determined at one of three stages in a patient’s clinical experience – before (prior authorization), during (concurrent review), or after (retrospective review) – and informs whether a patient will proactively or retroactively receive coverage or approval of a given service. There are other additional UM systems that serve to contain drug costs. These include step therapy (also known as fail-first or step protocol), quantity limits, and mandatory generic substitution. Since roughly 25 to 30 percent of total health care spending may be categorized as wasteful – meaning the total dollar spend did not result in a proportionate improvement of patient outcomes – health insurers utilize these varying cost containment systems to limit unnecessary spending, attempt to improve patient health, and more closely correlate patient treatment with appropriate and covered clinical interventions.    

Prior Authorization  

Prior authorization (PA) is a process that requires providers to seek approval from insurers before administering certain procedures, tests, or medications. This determination is generally based on medical necessity but can also include other factors such as a patient’s benefit limits, the availability of more affordable yet equally effective treatment options, and other administrative considerations. While insurers ultimately determine if a given care measure aligns with a patient’s health coverage, the responsibility of ensuring compliance with a patient’s PA coverage falls to providers, rather than patients or the insurer. For example, consider an individual in their late 40s with early-stage osteoarthritis in their knee. While it is widely accepted that full knee replacement can resolve osteoarthritis, a patient suffering early-stage knee pain could likely experience similar therapeutic resolution from a bimonthly physical therapy (PT) session. When applying PA to this situation (surgery versus PT), insurers are likely to encourage a patient to pursue PT before pursuing knee surgery. A full knee surgical intervention costs almost eight times more than a comparable level of PT – $30,000 and $4,000, respectively – and is more medically intense and could lead to complicating factors. PA may encourage both the provider and patient to consider PT as an alternative treatment option that would likely result in similar short-term outcomes.  

Concurrent Review 

Concurrent review is an ongoing authorization process that tracks a patient while they actively receive care (while admitted to a facility). While PA serves as a control designed to ensure that the requested service is medically necessary and has appropriate insurance coverage before the service is provided, concurrent review is utilized to provide real time assessment of the care being delivered. This includes the necessity of the given care, as well as quality levels of that care. As a result, this form of review can help patients receive more efficient and effective health care delivery and reduce the misuse of inpatient services during the administration of inpatient care. For example, consider a patient with ongoing cancer care across an average course of treatment (roughly three to six months). Generally, before a patient begins any treatment courses, they first undergo an approval process to receive an initial coverage determination. While usually not difficult to obtain, an insurer may also conduct concurrent review after treatment begins to optimize the value of that patient’s treatment regimen. While this can increase the administrative burden on insurers and providers during treatment, insurers utilize this review to actively manage treatment course payments. This can be beneficial: The median annual cost (across all tumor types) for a course of anticancer drugs cost roughly $196,000 in 2023. This style of review is particularly effective for cancer treatment and other long-term treatment regiments that may require prolonged care, as it enables insurers to more actively monitor patient care, reducing the time between provider care requests and insurer coverage approvals. 

Retrospective Review 

Retrospective review is analysis performed after clinical care delivery and the submission of a service bill. Rather than determining the appropriateness of the administration of a service, retrospective review is a back-end billing control that allows a given entity to retroactively confirm that the level, quality, and efficacy of care provided coincides with the needs and insurance coverage of a given patient. More simply, retrospective review is effectively an insurance-side payment audit. Because retrospective review functions after care is rendered, it enables payers to assess the codes used to document the quality, level, and application of care provided in a patient’s bill and ensure that the codes utilized to charge insurers for provider reimbursements correctly reflect the services provided – as determined by standard in Current Procedural Terminology (CPT) and the International Classification of Diseases (ICD)-10. While retrospective review can assist in correcting a variety of reimbursement issues, at its core, retrospective review is used by insurers to improve insurer side financial accuracy, reduce fraudulency, and better ensure regulatory compliance.  

If done correctly, this form of review should have little impact on a patient’s immediate care experience. In practice, however, this is seldom the case. Based on recent analysis, just under 15 percent of all claims submitted to payers are initially denied, even though many of these denied claims had previously received PA preapproval. Of these claim denials, nearly 55 percent were ultimately overturned – meaning insurers ultimately provided coverage – but only after several rounds of costly appeals. Data also suggest that the higher the cost of a treatment, the more likely insurers are to deny a claim – with the average claim denial costing $14,000. 

Other Drug Cost Containment Practices 

UM covers several other pathways in addition to the above methods – including step therapy, quantity limits, and mandatory generics requirements – designed to help contain drug costs while facilitating access to pharmaceuticals for patients that have appropriate prescriptions.  

Step therapy manages prescriptions through a progressive process. If a patient is prescribed an expensive or atypical medication, step therapy may be instituted; patients first try a less expensive therapeutic alternative. If a provider discovers efficacy or tolerability issues, prescriptions are changed until cost, treatment, and quality are aligned. While it is challenging to assign an average savings value to step therapy, one study on the effectiveness of step therapy for angiotensin receptor blockers (ARBs) – drugs used to treat high blood pressure, heart failure and chronic kidney disease – provides some insight into the comparative savings possible on a step therapy vs non step therapy plan. Researchers identified that step therapy practices resulted in ARB costs that were 13 percent lower for patients in the intervention group compared to the non-step therapy control. This accounted for approximately $368,000 in savings across 1 million participants, in one year. 

Quantity limits set predetermined controls on the quantity of a medication that can be dispensed to an individual, based on their medical needs and the Food and Drug Administration approved indication for the prescribed drug. This practice may manifest in a variety of different ways, but most commonly is seen when doctors prescribe patients a smaller number of pills per prescription bottle with a higher number of prescription refills. While studies that directly assess the cost savings in quantity limit groups versus control groups are narrow, data published by Wellfleet – a student-focused insurance program that caters to colleges and universities – suggest that quantity limits are more than two times as effective at generating plan savings as step therapy. The reported data across plan years 2021 and 2022 showed step therapy saved an average of roughly $6.90 per member, while quantity limits saved roughly $15.05 per member. This variance in savings rates between both mechanisms is expected because quantity limits yield plan savings on every prescription, while step therapy only yields savings when an affordable generic drug or lower-cost brand drug replaces a patient’s usage of a more-costly brand name alternative. 

Finally, many insurers also have a mandatory generics requirement. This means that if a patient does not receive a provider-issued acknowledgement directly explaining the medical necessity of a brand-name or high-cost generic drug over a more affordable and therapeutically equivalent generic drug, insurers will amend the issued prescription and automatically substitute the brand-name or high cost generic drug with a more affordable generic alternative. Similar to step therapy, this UM pathway is intended to control unnecessary costs while providing the patient with the necessary, prescribed treatment. Recent research assessing the theoretical savings possible from substituting therapeutically equivalent low-cost generics for higher cost alternatives corroborate this practice. As identified in the study, across the top 1,000 generics utilized in Colorado’s all payer claims database, replacing high-cost generics with lower cost alternatives of the same clinical value would yield savings of roughly 90 percent. Specifically, this study found that utilizing a low-cost mandatory generics requirement could have yielded roughly $6.6 million in savings in 2019 (from $7.5 million to $873,711 respectively). 

Cost Containment Reform Is Utilization Management Reform 

Utilization management is a central part of the U.S. health care system. It is one of the key decision-making models that drives the price of health care. When policymakers or patients discuss a desire to lower or otherwise change the cost of care, they are often discussing reforms to UM. Currently a near majority of U.S. adults – as reflected among population survey data – find it difficult to afford health care. Specifically, almost four in 10 worried about affording their monthly health insurance premium, six in 10 said they were worried about affording the cost of health care services, and one in five said they did not fill a prescription because of its cost. All these examples are related to UM. Lawmakers, patients, insurers, and other parties all interact with UM in at least one way, though cost containment is not realized in the same way for each party. As a result, this can lead to parties having varied – and sometimes conflicting – perspectives on UM. For example, to a patient, effective cost containment may involve lower monthly premium payments without a corresponding increase in out-of-pocket expenses. To a provider, effective cost containment might involve the outright remove of PA practices because of the additional administrative burden it imposes. To insurers, ideal cost containment could mean reductions or the outright removal of additional patient care costs. As a result, UM is used to balance this midpoint between competing interests (more than the listed above), optimizing the value of care against its cost for all affected parties.  

There are several ways that lawmakers attempt to do this, but one of the most recent and notable of ways is the Centers for Medicare and Medicaid Services’ attempt to increase the use of UM in Medicare, specifically the Wasteful and Inappropriate Service Reduction (WISeR) Model. WISeR aims to utilize artificial intelligence and machine learning to expedite and improve UM – specifically through PA – for a preselected set of services that are particularly “vulnerable to fraud, waste, and abuse.” While currently only focused on a small number of treatments, this model has the possibility of improving and expediting the way that UM determines a patient’s eligibility for certain services and, if more broadly utilized, could have an impact on total health care spending.  

Although WISeR may only represent a single approach to cost containment reform within UM, because of the central role that UM plays in health care cost containment, there is a multitude of other additional approaches that could be and are utilized to improve each party’s experience with UM.  

Utilization Management Considerations 

As discussed above, while UM practices are intended to broadly reduce spending, this may sometimes be in direct conflict with patient facing UM goals. Take for example patients’ experiences with UM practices designed to contain insurer-side coverage costs. As demonstrated in a KFF patient experience survey on health insurance, patients reporting health care access problems across all insurance types were three times more likely to report being unable to receive care because of a PA issue (defined as an instance in which health insurance denied or delayed PA for a treatment before the patient received it) compared to those not identifying PA issues. The KFF survey also demonstrated that this same group who reported health care access problems was three times more likely to report significant delays in receiving care as a direct result of PA, two times more likely to say their health declined as a result of PA, and roughly a third said they “had to pay more out of pocket for care.” While this is only survey data, these findings show that more than a third of the total survey population experienced a notable issue with accessing provider ordered treatment options through PA systems, that 28 percent paid more out of pocket for care than they expected to because of PA systems, and that 15 percent experienced a decline in health because PA delayed or outright prevented the patient from accessing provider ordered care. 

PA is not the only part of UM that affects patient outcomes. As demonstrated in a recent study, quantity limits had a direct impact on the probability of a Part D enrollee requiring an emergency room or hospital readmission, following a provider’s administration of antibiotics for the treatment of pneumonia. The same study also identified, however, no relationship between quantity limits and adverse events in patients with urinary tract infections when providers administered antibiotics. This study did not seek to assess the effectiveness of a given antibiotic; rather, it was specifically controlled and designed to assess the effect of quantity limits on various illnesses and treatment regimens. Thus, while this study only focused on patients with initial cases of pneumonia or urinary tract infection, these findings demonstrate the negative impacts that quantity limits can have on patient outcomes.   

These are two of many considerations that affect patients and other parties within UM. Any changes to UM would likely have far reaching effects on broad swaths of care delivery due to the central role that UM plays within health care.