Can Prior Authorization Cut Health-Care Costs?

Health insurance companies increasingly require medical providers to obtain approval before delivering the costliest forms of treatment to patients. This has helped curb wasteful expenditure but also impeded access to care. “Prior authorization” has become a flashpoint on Capitol Hill.

Advances in technology can make prior authorization faster, more accurate, and less burdensome for clinicians. But prior authorization decisions are likely to become increasingly controversial, especially as technological progress generates an ever-growing set of expensive new treatment options that only modestly improve medical outcomes.

Rising health-insurance costs are mostly the result of greater consumption of health care. From 2010 to 2025, average employer-sponsored health-insurance premiums rose from about $5,000 to over $9,000—an increase 26 percent above the general level of inflation. Over the same time, prices of health-care services fell 5 percent relative to prices in the economy as a whole. American prices for equivalent medical services are about 26 percent higher than the average for developed countries, but our health-care consumption is 120 percent greater.

This disparity owes much to public policy. Most countries limit health-care expenditures by rationing funding for medical providers. But no such limits apply in the United States, where the law requires insurers to pay for all “medically necessary” services. Insurers must, therefore, review the appropriateness of reimbursement claims submitted by medical providers to keep costs under control. To prevent patients from being stuck with the bill for unapproved services, this review process typically occurs before non-emergency care is delivered—the process known as “prior authorization.”

Prior authorization does reduce costs. It eliminates payment for services not medically necessary, or for which fraudulent reimbursement claims are filed. It also reduces the cost of prescriptions, referrals, and diagnostic tests.

But insurers often employ prior authorization in a broader and more controversial way: to cut low-value and ineffective care, by curbing payment for services that don’t follow their clinical-practice guidelines. This is intended to ensure more appropriate treatment, eliminate unnecessary services, and deter procedures with low prospects of success and high risks of complications. For instance, prior authorization reduced the dosage of opioid prescriptions; patients subject to prior authorization had lower rates of opioid abuse and overdose.

Prior-authorization assessments are typically reserved for the costliest pre-scheduled medical services—those in which a single unnecessary payment could be extremely expensive. For example, the median new cancer diagnosis costs $200,000 for a course of treatment; in 2022, 95 percent of prescriptions for branded cancer drugs were subject to prior authorization. By contrast, prior authorization applies to very little of the spending associated with general practice, infectious diseases, or emergency medicine.

Prior authorization allows physicians to focus on caring for patients rather than tracking constantly changing prices for many treatment alternatives. Nonetheless, physicians generally dislike being second-guessed by insurers. The American Medical Association protests that prior authorization “complicates decision-making,” and that “fighting rejections is time-consuming.” An AMA survey found that physicians and their staff spend 13 hours per week completing prior-authorization requests. In 2023, 27 percent of medical providers reported that it took more than five days for them to receive approval for treatment.

Such delays can impede timely access to treatment. The introduction of new prior-authorization requirements caused an average delay of ten days for patients refilling oral anti-cancer prescriptions. As cancerous tumors grow over time, this makes them harder to treat and increases the risk of mortality. Furthermore, a recent federal investigation found that insurers often inappropriately denied prior authorization due to human error during the processing of claims.

Prior authorization certainly requires oversight, to ensure that insurers don’t use it to refuse to pay for necessary medical care. Take Medicaid, under which patients typically do not contribute to the cost of treatment, and plans must cover all drugs subject to discounts. Here, prior authorization is the main constraint on improper reimbursement claims. But only a third of states surveyed by federal investigators entitle Medicaid beneficiaries to independent medical reviews or assess rates of denials of care by insurers. As a result, prior authorization in Medicaid has sometimes served to leave patients untreated rather than switching them to more cost-effective therapies.

By contrast, prior authorization in Medicare Advantage appears to work well. Regulatory guardrails apply nationwide, and the rate of denial of requests for prior authorization is only 6 percent—compared with 13 percent in Medicaid. Prior authorization is largely responsible for making Medicare Advantage enrollees’ health-care costs 9 percent to 30 percent less than those under the traditional Medicare program—without worsening medical outcomes. The Trump administration has therefore been eager to expand prior authorization to the publicly managed Medicare program, in which half of beneficiaries remain enrolled.

There’s precedent for this working. During the Obama years, Medicare established prior-authorization requirements for certain goods (such as power-mobility devices, non-emergency transportation, and home health services), which were most susceptible to inappropriate use. This substantially reduced spending on covered items but applied to only 0.4 percent of the program’s expenditure on physician services.

Regardless of its scope, it is clearly desirable to make prior authorization work faster and with greater accuracy.

Time-consuming and error-prone approval processes owe much to outdated technology. Obtaining payment can require up to 14 steps. These processes are not standardized because each health-insurance plan may have its own set of covered benefits, networks, provider-payment processes, and documentary standards. Insurers’ varying coverage rules can also be hard to anticipate, which makes getting authorization labor-intensive. Communication via phone calls takes physicians away from patients, while faxes may remain unanswered for days.

It’s in the interest of all the main stakeholders to address this problem. Associations of insurers, hospitals, physicians, and pharmacists issued a consensus statement calling for the development of industry-wide standards for electronic prior authorization. An evaluation found that electronic prior authorization reduced the average processing time from 19 hours to six.

A recent regulatory reform requires federally funded health insurers to adopt electronic prior-authorization systems, provide justifications for determinations, render verdicts within seven days, and systematically report data on approval decisions. By making use of new automated software, the insurance industry hopes to grant over 80 percent of electronic approvals in real time by 2027.

But while technology might speed up the process, it’s unlikely to quell the controversy. “Medical necessity” is not a clear-cut matter but an inherently debatable standard for health-care procedures, which exist on a spectrum of cost-effectiveness. The more policymakers seek to slow the upward march of health insurance costs, the more prior-authorization barriers are likely to frustrate medical providers and patients.

Photo by KENA BETANCUR/AFP via Getty Images