Prior Authorization: What Does it Really Cost?

Published December 1, 2001

Prior authorization, like many pharmacy management processes, can be used to improve the quality of medical care delivered to patients. This is true when it is used to verify quality issues for continued treatment, such as assuring that laboratory tests have been performed to monitor for potential adverse reactions, or that appropriate dose adjustments have been made for elderly or pediatric populations.

However, requiring prior authorization on every new, expensive pharmaceutical coming to market may cost a health plan more in labor and potential liability than if it had just covered the drug from the beginning.

Rife with Problems

While prior authorization helps to curb inappropriate drug use, the process presents problems of its own for all concerned.

For the health plan, prior authorization is labor-intensive and expensive. Many plans quote costs of $10 to $25 per authorization request, with more than 80 percent of the requests approved.

Physicians see prior authorization as a threat to their diagnostic and treatment authority. Patients consider it interference with their right to receive the best medical care available. Pharmaceutical companies believe prior authorization keeps their products from patients who might benefit from them.

Costs vs. Savings

Much effort and energy has been expended by these players arguing the finer points of prior authorization: which products to include, what criteria to use, when to approve, when to deny. Lately, those discussions are also taking place within state and federal legislative bodies and regulatory agencies. As a result, health plans may have thrust upon them significant changes in the rules that govern prior authorization management.

A review of pending and approved legislation suggests states may force health plans to allow patients to obtain second opinions to overturn prior authorization denials. Time limits may be set for prior authorization reviews and decisions, so health care is not unreasonably delayed.

Legislation may require that prior authorization denials be sent in writing to the patient and physician; that denials be issued by a physician rather than a pharmacist or technician; and that appealed denials be reviewed by a physician other than the original reviewer.

All of these processes will add time and expense to the prior authorization process—even though the majority of prior authorization requests are eventually approved. It thus becomes questionable if the savings actually offset the expenses incurred.

Liability Issue

Many newer pharmaceutical agents, such as cyclooxygenase-2 inhibitors and non-sedating antihistamines, cost more but may be safer than older agents that plans want patients to use first. Newer agents, such as those used in the treatment of rheumatoid arthritis, may also be more efficacious in minimizing disease progression or complications.

How often are the products with prior authorization status reviewed by the health plan’s medical/legal department, or by outside legal counsel, to assess health plan liability in denying a potentially “better” treatment that costs more? What happens when a patient experiences a serious medical complication that may have been avoided if he or she hadn’t been required to use the more-established drug?

Health Plans Seek Solutions

The three-tier formulary used by health plans today was designed in part to minimize the administrative costs and patient confusion associated with prior authorization. The three-tier formulary essentially exchanges the punitive prior authorization process for much higher co-payments or cost-sharing for some drugs. Nevertheless, many plans are now adding prior authorization criteria to even their top-tier agents—in addition to charging the higher co-payment.

Browsing the pharmacy Web sites of major health plans or typing the keyword “prior authorization” into a Web browser identifies a seemingly endless list of drugs requiring such authorization and the various protocols needed to obtain approval. Clearly, the prior authorization requirement is not only alive and well, but prospering.

So where do we go from here?

Reform Ideas

It makes little sense to further complicate the pharmacy benefit with additional tiers and prior authorization criteria. Doing so could result in the opposite of reform: plans with more products requiring prior authorization than not. At the same time, payers cannot afford the cost of unlimited and unmanaged medical care.

Rather than focusing on fighting with physicians over which drug to prescribe, efforts might be better spent identifying the highest-risk patients; improving compliance to therapy and reaching treatment goals; looking for quality care issues, such as patients with potential drug interactions, adverse drug events, and polypharmacy; and focusing energies on inappropriate treatment areas, such as antibiotic use in viral infections.

It would be interesting for a managed care plan to study the cost of managing prior authorization, including all medical and legal costs for both the plan and patients involved, and the cost of the same system without the authorization process.

Any takers?

Dr. Debi Reissman is president of Rxperts Inc., a managed care consulting firm in Irvine, California. You can visit the Rxperts Web site at This article is derived from one that first appeared in Drug Benefit Trends, 12(10):22,24, 2000. Cliggott Publishing Co., a division of SCP/Cliggott Communications, Inc.