Examining the Cost of Manual Prior Authorizations

As the cost of healthcare in the United States continues to soar, now standing at a staggering $4.3 trillion annually, innovative administrative tools have emerged to contain costs and streamline processes. Prior authorizations have become a principal mechanism for health insurance payers to contain costs and deter care that is deemed not medically necessary. Initially conceived to align clinical and financial incentives during the managed care movement of the 1990s, prior authorizations aimed to prevent unnecessary care proactively rather than retrospectively denying payment for services rendered.

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However, what began as a well-intentioned strategy has evolved into a cumbersome and convoluted administrative process, posing significant challenges for healthcare providers and patients alike. The intersection of clinical judgment and financial incentives inherent in prior authorizations has become increasingly problematic amid the skyrocketing healthcare costs and continuous advancements in medical innovation.

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With this article series, my goal (and the goal of the broader Valer team) is to provide context for the complexities, challenges, and potential solutions surrounding prior authorizations.

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The Cost of Prior Authorizations

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The financial burden of prior authorizations has garnered increasing attention, both for its direct impact on healthcare expenditures and its repercussions on patient access to timely care. McKinsey & Company estimated the total annual cost of managing prior authorizations across healthcare in the U.S. to be a staggering $35 billion. Furthermore, findings from the 2022 CAQH Index report, an industry consortium dedicated to enhancing administrative transactions, revealed that the average cost per authorization is approximately $11, with an average time expenditure of 20 minutes per authorization.

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With over 70% of current prior authorizations reliant on manual processes, the potential benefits of automation are significant. Automating prior authorizations could save an estimated 11 minutes per authorization, resulting in an approximate cost reduction of $9.60 per authorization for both providers and payers. As defined by CAQH, the cost per authorization encompasses labor costs associated with conducting transactions, excluding the time and cost incurred for gathering information and follow-up.

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In addition to the substantial financial costs, prior authorizations impose a considerable burden on patient care. The American Medical Association (AMA) Prior Authorization Physician Survey highlighted that 93% of physicians perceive the burden of prior authorizations as either "high" or "extremely high." Alarmingly, 82% of physicians reported instances where prior authorizations led to the abandonment of care, while 34% cited serious adverse outcomes experienced by patients due to prior authorization hurdles.

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Recent studies, such as those published in JAMA Oncology, further underscore the detrimental impact of prior authorizations on patient outcomes. In this context, 69% of cancer patients reported delays in their cancer care, often exceeding two weeks, while 22% experienced denials of recommended care due to prior authorization requirements.

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The growing frustration with the administrative burden imposed by prior authorizations has sparked calls for regulatory reform at both the state and federal levels, with pending legislation seeking to address these challenges.

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In the upcoming articles throughout this series, I'll delve deeper into the intricacies of prior authorizations, exploring innovative approaches and technical solutions to streamline this essential but often burdensome aspect of modern healthcare administration. Stay tuned for Article 2: Exploring the Key Components of the Prior Authorization Process.

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