Prior authorization (PA) is a process health plans use to determine if they will cover a prescribed medical service, procedure, or medication before it is delivered. This requirement acts as a gatekeeper, forcing providers to seek approval from the insurer to confirm the proposed treatment is medically appropriate and cost-effective. Insurers intend this practice to curb rising healthcare expenditures and ensure efficient resource use. The central debate is whether the financial savings realized by health plans are ultimately offset by the substantial hidden costs and administrative burdens it creates across the healthcare system.
How Prior Authorization is Designed to Reduce Spending
Insurers justify prior authorization as a necessary tool for utilization management, evaluating the medical necessity and appropriateness of care. The primary financial goal is to reduce the provision of services that are avoidable, unnecessary, or not aligned with evidence-based clinical guidelines. By requiring a review, health plans aim to limit the use of high-cost services, such as advanced imaging tests, specialty medications, or complex surgical procedures.
A core cost-saving mechanism is steering patients toward less expensive, but equally effective, alternative treatments. If a physician prescribes a brand-name drug, the PA process allows the insurer to push for a generic equivalent or a biosimilar, which provides the same therapeutic benefit at a lower cost. This step-therapy approach mandates that a patient must fail on a lower-cost option before the insurer covers a more expensive one.
Prior authorization also functions as a check against fraud, waste, and abuse. It ensures that prescribed medications are used for their FDA-approved indications or for uses supported by recognized medical compendia. The process can also help prevent dangerous situations, such as drug interactions, by reviewing a patient’s entire treatment plan.
By intervening before care is delivered, insurers can direct patients to more cost-efficient locations for services. For example, a PA requirement for an outpatient procedure may guide the provider to use a standalone surgery center rather than a more expensive hospital-affiliated facility. Insurers estimate that PA programs can yield savings ranging from 5% to 7% on targeted services by reducing overutilization and promoting adherence to cost-effective guidelines.
The Secondary Costs of Administrative Burden
While insurers focus on savings, the prior authorization process generates substantial operational costs that fall primarily on healthcare providers. The administrative burden is immense, requiring significant staff time to complete forms, track requests, communicate with insurers, and handle appeals. Physician practices spend an average of 14 hours per week on PA-related tasks, diverting staff resources away from direct patient care.
The sheer volume of manual work required is a major expense, as many PA requests still rely on time-consuming processes like faxing and phone calls. The annual cost for PA approval on primary care practices can range from $2,161 to $3,430 per full-time physician, with some practices hiring staff exclusively for this purpose. Across the healthcare system, administrative costs related to prior authorization are estimated to be billions of dollars annually.
Beyond the direct overhead, the process creates indirect costs through delayed treatment. Physicians report that PA often leads to delays in care, which can result in a patient’s condition progressing. When a disease worsens due to delayed access, the patient may ultimately require a more intensive, and thus more expensive, intervention later on. This phenomenon means that initial cost savings for the insurer may be negated by higher overall spending on acute or advanced care.
Financial Consequences for Patients
The consequences of prior authorization extend directly to the patient’s personal finances, often resulting in financial toxicity. When a PA request is denied, patients must choose between appealing the decision, switching to a less-effective therapy, or paying for the prescribed treatment out-of-pocket. A PA delay or denial often leads to patients paying for the prescribed medication themselves, incurring unexpected expenses.
The process can expose patients to higher costs by forcing them into ineffective initial treatments, a practice known as step-therapy. If the insurer requires the patient to try and fail on a cheaper drug first, this can result in multiple additional office visits, unnecessary co-pays, and the cost of the ineffective medication. Delays caused by the authorization process can also lead to patients needing urgent or emergency care, which is significantly more costly than the original planned service.
A significant number of patients, when faced with a delay or denial, simply abandon the recommended course of treatment. While this may represent a cost “saving” for the insurer, it introduces the financial risk of a patient’s health deteriorating, leading to higher long-term costs. For patients with serious conditions, such as cancer, PA-related delays have been linked to increased out-of-pocket costs and being forced into second-choice therapies, affecting both finances and health outcomes.
Measuring the Net Financial Outcome
Synthesizing the intended savings and the generated costs reveals why a definitive answer regarding net financial benefit remains elusive. Insurers focus on savings achieved by avoiding the cost of a specific high-value service, but they rarely release comprehensive data accounting for full administrative costs or downstream expenses of treatment delays. This lack of transparency makes a system-wide cost-benefit analysis difficult.
Studies modeling the total economic impact suggest that the costs associated with prior authorization may exceed the benefits. One analysis estimated that the total costs imposed by PA, including administrative labor and patient-related expenses, increased total healthcare spending by an estimated $1.9 billion annually, even after accounting for reduced drug spending. The greatest financial burden of the PA process is often placed on the patient and the provider, with the insurer being the least impacted sector.
The definition of “savings” also complicates measurement, as a cost reduction for the insurer does not automatically translate to a saving for the entire healthcare system. A study on a specific treatment found that the PA process was not cost-saving and increased total societal costs, even though the insurer might have saved money on the initial prescription. The consensus is that while PA policies are a necessary feature of utilization management, their current implementation imposes time and cost burdens that often diminish, or eliminate, any net financial benefit.