Authorization in medical billing is the formal permission a healthcare provider must secure from a patient’s health insurance company before delivering certain medical services or treatments. This process ensures the insurance company agrees to potentially cover the cost of the proposed service under the patient’s plan. Without this pre-approval for specific procedures, medications, or durable equipment, the insurer will likely deny the subsequent claim. This leaves either the patient or the provider financially responsible. The requirement for this administrative step is designed to manage healthcare spending and confirm that the care being delivered meets certain criteria.
Defining Prior Authorization and Its Role
This requirement for advance permission is most commonly known as Prior Authorization (PA), but it is also referred to as pre-certification, pre-approval, or pre-determination. The purpose of this mandate is to act as a cost-control measure for the insurance company. It allows them to verify that expensive or complex treatments are appropriate, functioning as utilization management to ensure services are neither overused nor misused.
The central concept reviewed during authorization is medical necessity. This means the treatment must be justified by clinical documentation and align with generally accepted medical standards for the patient’s condition. Reviewers assess whether a less expensive but equally effective treatment option is available before approving a high-cost service. This practice helps to ensure the prescribed care is appropriate for the patient and is a covered benefit under the specific health plan.
PA is typically required for services that carry a high cost, are considered elective, or are prone to overuse. Common examples of procedures and items that trigger a PA request include:
- Non-emergency surgeries
- Expensive diagnostic imaging (MRI or CT scans)
- Specialty medications
- Long-term physical therapy
- Durable medical equipment (wheelchairs or oxygen tanks)
The Step-by-Step Authorization Process
The responsibility for initiating the authorization request rests entirely with the healthcare provider’s office, not the patient. The provider must first check the patient’s insurance plan rules to confirm whether the specific procedure or medication requires prior authorization. If required, the provider compiles a formal request containing detailed clinical information to justify the service.
The submission package must include the patient’s diagnosis code (ICD-10 code) and the procedure code (CPT code), along with clinical notes and supporting documentation. This documentation demonstrates that the treatment is medically necessary for the patient’s specific condition. Submissions can be sent to the payer through various channels, including electronic portals, secure fax, or sometimes by phone.
Once the payer receives the request, their utilization management team reviews the clinical documentation against the plan’s coverage policies and medical necessity guidelines. The time for a decision varies; standard requests often take several business days, while urgent requests receive a faster turnaround. The review outcome is either an approval, which generates a specific authorization number that must be recorded, or a denial of the proposed service.
Financial Impact of Missing Authorization
If a required prior authorization is not obtained or is denied, the insurance company will reject the claim when submitted for payment. The consequence of a claim denial is the shifting of financial responsibility to the patient, who may be held liable for the entire cost of the treatment. This unexpected financial burden can lead to patient stress and dissatisfaction.
If the provider failed to follow protocol and did not obtain mandatory authorization, they may sometimes be forced to write off the cost, absorbing the expense as a loss. However, providers often attempt to bill the patient first. The cost of denied and reworked claims consumes administrative resources and slows the provider’s cash flow.
The denial is not always final, as both the patient and the provider have the right to pursue an appeals process. Appeals involve submitting additional documentation or an internal review request to the insurer. This can be followed by an external review if the internal appeal is unsuccessful. Retroactive authorization, which is approval granted after the service, is rarely given and is reserved for true emergency situations where obtaining pre-approval was impossible. Without prior approval, the financial risk for the service increases significantly for the patient.
Authorization Versus Related Billing Terms
Prior authorization is frequently confused with other administrative steps, but it serves a distinct function from eligibility verification and referral. Eligibility verification confirms the patient has an active insurance policy on the date of service and that the policy covers the type of service being sought. This check verifies the patient is covered under their plan, but it does not confirm the specific service is approved.
Authorization confirms that the specific procedure or medication has been reviewed by the payer and is deemed medically necessary and appropriate for coverage. A referral is an official order or recommendation from a primary care physician (PCP) for a patient to see a specialist. Referrals are typically required by managed care plans to ensure the patient sees a specialist within their network. Both a referral and a prior authorization can be required simultaneously, but they are separate administrative requirements that must be satisfied to ensure full coverage.