On July 27, the U.S. House of Representatives’ Ways & Means Committee advanced bipartisan legislation to constrain health plans’ use of prior authorization in the Medicare Advantage program. The proposed new standards and enrollee protections follow a recent federal investigation, which found that some Medicare Advantage plans used prior authorization to deny beneficiaries access to medically necessary care. Meanwhile, a July KFF report found that insurers in the health insurance Marketplaces declined to pay roughly one in five claims for in-network services in 2020. Insurers denied many of these claims because they deemed the services not “medically necessary,” or because the enrollee failed to obtain prior authorization or a referral. These types of denials reflect utilization management tactics designed to lower a plan’s spending on health care items and services, and surveys of physicians suggest they are on the rise. While insurers argue that utilization management is critical to constraining unnecessary and wasteful utilization and curbing health care cost growth, it can also lead to delayed or foregone care, paperwork hastles for physicians, and big bills for patients.

What is Utilization Management?

“Utilization management” refers to a range of tools that insurers use in order to prevent plan members from overusing care, encourage them to seek care that is most appropriate, and manage costs. Some examples of utilization management tools include:

• Prior Authorization: Insurers sometimes require providers to gain approval or authorization from the patient’s plan before administering or prescribing certain treatments to a patient. The health plan will approve the item or service if they agree that the proposed treatment is medically necessary.
  • Step Therapy: Certain prescription drugs are subject to a special type of prior authorization in which the insurer only covers a higher-cost medication if the patient tries a lower-cost medication first, and that lower-cost medication is determined by a licensed health care provider to be ineffective.
• Claims Review (also called Utilization Review): Insurers review claims and medical records to identify errors, fraud, or abuse. When insurers determine that care they were billed for is medically unnecessary or not covered by the plan, they may deny payment.
  • Concurrent Review: Claims review that occurs while a patient is still admitted to a facility.
  • Retrospective Review: Claims review that occurs after a treatment has already been given or completed.

Utilization management began in the 1950s as third-party payment for health care was expanding after World War II. Some utilization management was instituted by providers as a way to ensure quality and assess physician performance. Beginning in the 1960s, Blue Cross plans conducted claims review for medical necessity and length of stay. After the establishment of Medicare and Medicaid, the federal government also began instituting utilization management tools to control costs via independent peer review. In the 1980s, employers’ interest in containing costs grew as more organizations became self-insured. For example, in 1984 Pennsylvania municipal employees launched a new state plan that aimed to contain costs through medical necessity review for certain elective procedures, among other initiatives.

The American Medical Association and patient advocates argue that aggressive use of utilization management can result in negative impacts on clinical outcomes and too often, adverse medical events. The concerns have led at least 12 states to enact laws attempting to rein in inappropriate utilization management. In 2018 a coalition of provider and payer organizations adopted “consensus” principles to improve the prior authorization process, but providers complain that insurers have been slow to institute reforms. At the same time, insurers point to data showing that 25 percent of health care services in the U.S. are wasteful. The evidence is considerable that when providers are paid on a fee-for-service basis, they have a strong incentive to perform more and sometimes medically unnecessary services. Insurers argue that a reasonable third-party check on the overuse of services and over-prescribing of expensive drugs is critical to help rein in health care cost growth.

Legal and Regulatory Framework for Utilization Management

There are limited federal standards for utilization management. For private health insurers, federal rules prohibit the use of prior authorization for emergency care, but otherwise they face few federal constraints. However, there have been efforts to increase the transparency around insurers’ utilization management practices. The health insurer price transparency rule includes a provision requiring plans to notify plan members if services are subject to utilization management tools like concurrent review or prior authorization. The Affordable Care Act (ACA) also requires employer-sponsored and non-group health plans to report data to the U.S. Department of Health & Human Services (HHS) on claims payment policies and practices, including the number of denied claims. However, to date, federal regulators require only non-group insurers to provide this data. The bill recently advanced by the U.S. House Ways & Means Committee, H.R. 8487, would establish new standards for Medicare Advantage plans, including new requirements to report prior authorization and appeals data to HHS, standardize prior authorization transactions, offer greater transparency over prior authorization policies to enrollees and providers, and create waivers of prior authorization for certain providers based on past performance.

Several of H.R. 8487’s provisions appear to be inspired by state laws that set standards for the health insurers they regulate. In California, for example, insurers are required to use consistent medical necessity criteria developed by a nonprofit association with relevant expertise, instead of using their own criteria. Lawmakers in Michigan recently required insurers’ prior authorization processes to be standardized. Texas has enacted a “gold card” law that enables providers with a documented history of approval to bypass the prior authorization process.

Looking Forward

The growing cost of health care in the U.S. is eating into workers’ paychecks and has led to a crisis of medical debt. Utilization management is one tool that insurers can use to help keep premiums in check, but it comes with significant tradeoffs for patients. Lower premiums are only so helpful for patients when they get big bills for health care services that their insurer refuses to pay.

There are a variety of ways to regulate utilization management to ensure it does not become excessive or inappropriate. Requiring insurers to use standardized prior authorization processes, as several states have done and Congress is considering, can help reduce providers’ administrative burden. Greater transparency, such as requiring insurers to report to HHS on their use of prior authorization, and fully implementing the ACA’s reporting requirements by extending them to group health plans, can help expose when and how insurers’ utilization management tactics become a barrier to medically necessary care.

Utilization management will likely remain an essential pillar of insurers’ cost containment efforts. Patients who have services rejected or claims denied for medically necessary care will need assistance. Recent transparency data from Marketplace insurers suggest that consumers may not be aware of their right to appeal denied claims, or that the process is administratively burdensome. Only 0.1 percent of Marketplace enrollees appealed claim denials in 2020. The Build Back Better Act provided $100 million in federal support for state consumer assistance programs. These programs educate consumers about their insurance rights, resolve consumer complaints and, when necessary, help people navigate the appeals process. Such an investment, in addition to reasonable utilization management reforms, could help ensure enrollees gain access to the services they need.