Summary: Dr. Eric Bricker’s “Controversies in Denials and Prior Authorizations”
The following article is a summary of Dr. Eric Bricker’s video titled “Controversies in Denials and Prior Authorizations.” We are publishing it in accordance with Section 107 of the U.S. Copyright Act. He deserves full credit for this insightful information on Denials and Authorizations and how non-payment by carriers results in overall increased healthcare costs because of the revenue cycle management system. He illustrates how the “costs” to just get paid from third party payment – Fee for Service – is intentionally bad by design. Here is a link to the original content: https://www.youtube.com/watch?v=B6t099qa9iM
Introduction: As previously mentioned in our article: https://heartwoodadvisors.net/medical-underpayments-history-of-insurance-industry-to-lead-us-here/ on Medical Underpayments, insurers underpay billions of dollars to healthcare providers annually. The article provides additional evidence that the insurance industry has a financial incentive to deny healthcare to the insured supporting our claim and knowledge that they also underpay healthcare providers. Our medical underpayments solution ensures hospitals and doctors are at least getting 100% of the fees they deserve while helping them negotiate better contracts. We have many problems with our healthcare system. Legislation and insurance companies are part of that problem. It all contributes to the rising cost of healthcare in the United States.
Denials and Prior Authorization
Billing and collections in healthcare is incredibly expensive. It is referred to officially as revenue cycle management. Revenue cycle management sounds much more sophisticated. Billing and collections is hugely expensive for doctors and hospitals and other healthcare providers like physical therapists. One study from the Journal of the American Medical Association for an academic medical center in North Carolina, found that this academic medical center spent $99,000 per primary care physician just billing and collecting from insurance companies. In other words, $1 out of every $7 in revenue that they collected was spent on the actual billing and collection process itself. And that’s just for primary care. For other specialties such as emergency medicine. It can be as high as 25% of revenue is actually spent collecting the revenue. This is not due to “inefficiency and waste” on the part of the doctors and hospitals. This is part of the design of the US healthcare system and fee for service – third party payment. The incredibly expensive process of billing and collections in fee for service. Third party payment is completely by design. It is 100% intentional. Propublica had an article recently about Cigna denials. In other words, non-payment from health insurance companies where they have medical directors at various insurance companies across the United States, at Cigna just one single medical director alone denied 60,000 claims in one month. This expose of Cigna by ProPublica found that Cigna denied 300,000 claims over a two month period of time, which when you do the math on it, means that Cigna and their medical directors spent 1.2 seconds per denial. That’s called non-human review. Obviously it was a computer that was doing this, not a person. So where are these denials coming from? These denials are computerized implementations of medical policy. Medical policy is the fancy insurance term for you have insurance, but in these various clinical circumstances, we will not pay for care. It is not “medically necessary.” One example: We had one of our members who had a denial for an ophthalmologist visit where the ophthalmologist used a laser in the office for a particular diagnosis. The insurance company denied payment because they said you can’t use the laser to treat that particular diagnosis of the retina. You can use the laser for other diagnoses of the retina, but not for that particular one. And the ophthalmologist was like, that’s ridiculous. This is the normal standard of care! You can literally have over 80 pages of print about the variety of clinical situations where your insurance company will not pay. That medical policy varies by insurance companies. There are some clinical situations where Blue Cross will pay and for the exact same clinical situation, Aetna will not – and then vice versa – there might be certain clinical situations where Aetna will pay but Blue Cross will not.
The only state in America that says that medical policy has to be established by the physicians and the medical professionals themselves and cannot be established by the insurance company is actually California.
So in California, health insurance companies cannot come up with “their own” medical policy. It has to be established by professional societies of physicians and clinicians themselves. In every other state health insurance companies can just make it up. Of course the health insurance companies claim it’s clinically rigorous, but the point is, it was created by doctors that work for them. They then take software to then run through the ICD 10 and CPT codes and identify those clinical situations that per their non-coverage medical policy, and then they just deny coverage and they don’t pay – “non-payment.”
What is a CPT® code? The Current Procedural Terminology (CPT®) codes offer doctors and health care professionals a uniform language for coding medical services and procedures to streamline reporting, increase accuracy and efficiency. (Source: The American Medical Association) International Classification of Diseases, 10th Revision (ICD-10) is a diagnostic and procedure coding system endorsed by the World Health Organization (WHO). It replaces the International Classification of Diseases, 9th Revision (ICD-9) that was developed in the 1970s. (Source: The American Medical Association)
Prior Authorizations
Another form of “non-payment” by third party payers (i e insurance companies) is in the form of prior authorizations. So in denials, like in the case of that ophthalmology example I used, there was no prior authorization report. It just wasn’t covered, period. Prior authorizations are when, for certain services they will be covered. A knee or a hip replacement or for a cardiac stress test, it’ll be covered per the medical policy, but you have to ask permission in advance, and the patient has to meet certain clinical criteria in order for the knee replacement stress test in order to be covered. So UnitedHealthcare recently had an announcement that said that they were going to decrease the number of prior authorizations that they do from 13 million a year to 10 million a year. Prior authorizations – forget about whether you agree or disagree with the clinical criteria for the prior authorizations. They are incredibly burdensome from a time and resources standpoint by the doctors and the nurses that actually have to go through the prior authorization process. 13 million prior authorizations for only one insurer United Health Care, so let’s just say it takes one hour to do a private, (sometimes the health insurance, literally will put the physician practice on hold for hours) Assuming it only takes one hour (a huge underestimate) it takes 13 million hours a year to obtain prior authorizations. There are 2000 working hours in a year. If you divide 13 million by 2000, that is 6,500 FTEs that are required. So their full-time job is just getting prior authorizations from United, and that’s just one health insurance company! You’ve got Blue Cross, Aetna, Cigna, Molina… So United’s has stated they are going to decrease prior authorizations by 23%. That’s 13 million to 10 million a year. They realize the burden this is for doctor’s offices. Realize that this non-payments through prior authorizations is financially constricting the cash flow of the doctors and hospitals.
That’s Ok but, that’s a 23% decrease in the number of prior authorizations. That does not mean it is a 23% decrease in the amount of money that requires prior authorization. That is not 23% of the total claims spend that goes through the prior authorization.
Why? Because of what is referred to as the Pareto principle.
Everybody who works in healthcare finance should have a detailed understanding of the Pareto principle. In my opinion, it is healthcare finance malpractice. If you do not understand the Pareto principle. It’s the 80/20 rule, meaning that you have a chart here where you have the, let’s just say on the X axis, this is the number of prior authorizations, and they are broken down into five tranches of 20% each. So 20% of the prior authorizations, another 20% of the prior authorizations. Another, another, another. There’s five tranches. So this adds up to a hundred percent of the prior authorizations. Now, here you have the amount of money per prior authorizations because some prior authorizations are for procedures that only cost $250 and other procedures, other prior authorizations are for procedures that cost $250,000.
The point in the 80/20 rule is that 80% of the claims spend, or the reimbursement that requires prior authorization is in only 20% of the actual prior authorizations. And that is referred to as the Pareto principle.
It stratifies even more within that 20%. The top 4% of prior authorizations are actually responsible for 50% of the money that flows through prior authorizations. Now, notice the next 20% is only 12% of the dollars. The next 20% is only 5% of the dollars. The next 20% is only 2% of the dollars, and then the bottom 20% is only 1% of the dollars. That means that potentially if United decreased their prior authorization count by 20%, they would have only decreased the amount of money impacted by that decrease in prior authorizations by barely more than 1%. So now, is United going to choose this? 20%? Is 80% of the money that flows through prior authorization going to be impacted by their change? Probably not. It’s probably gonna be closer to the end of the money.
Plan Members Costs:
This same Pareto principle applies to plan members and costs.
- The top 20% of plan members drive 80% of the cost for the plan.
- The top 4% of plan members drive 50% of the costs for the plan.
- Notice the bottom 20% of plan members only drive 1% of the spend.
In other words, the bottom 40% only drive 3% of the spend. The bottom 60% of a planned population only drives 8% of the total spend. So when you talk about “engaging the population,” it’s important, it’s super important to know that it’s what part of the population are you engaging? Because if you’re engaging the bottom 60% of your plan members, then you’ll have almost zero impact on the plan’s cost, because that bottom 60% don’t generate any claims. So it’s not just the quantity of engagement that is important, it is the quality of the engagement. In other words, who are you engaging? It is very important that you understand the Pareto principle! So what are these prior authorizations that have very high dollar amounts associated with them? Some are orthopedic surgery and neurosurgeries ie. joint replacements like hip and knee replacements, and then spine surgeries for the lumbar spine and the cervical spine, also scoliosis surgeries. These are surgeries that cost upwards of $50,000 to over $200,000, close to a quarter million dollars for a complex scoliosis surgery. It’s for transplant, by far, the most common transplant is kidney transplants, kidney transplants below heart, liver, and pancreas transplants and lung transplants out of the water. So just know when you talk about transplants, the vast majority of those transplants are kidney transplants, which also cost over a quarter million dollars. Next is oncology. So for breast cancer and colon cancer and prostate cancer and lung cancer, those are the big cancers for a health plan, okay? For the surgery, for the chemo, and for the radiation, all of these require prior authorization. Remember, oncology is one of the top three diagnostic categories, so orthopedics, oncology, and then cardiac. So for pacemakers, i c d, which is an implantable cardiac defibrillator, it’s given to people who have congestive heart failure with dilated cardiomyopathy. And then it’s also for stress tests and then for echocardiograms all require prior authorizations. There are many other medical procedures which require prior authorizations but they’re for much lower dollar amounts. The very high dollar amount areas of prior authorization are in these clinical areas. This is where the money is.
Why are denials and prior authorizations so important to a health insurance company?
If doctors and hospitals hate prior authorizations so much, and it costs them upwards of 16 to 25% of their revenue to actually do the prior authorized to actually fight the denials and the prior authorizations to actually get paid, then why in the world during negotiations don’t the doctors and hospitals negotiate out the denial and prior authorization process? They negotiate surgeries? Just don’t do prior authorizations. That could be part of the negotiation process. But obviously denials and prior authorizations are kept in the contracts because they are so important to the hospital’s, The doctors logic is that if you’re gonna put denials and prior authorizations in the contract, then you’re gonna have to pay me much more per coronary artery bypass graft. You’re gonna have to pay me much more per spine surgery. The doctors could say, instead of me paying me a quarter of a million dollars for a scoliosis surgery, then only pay me $150,000. But you gotta get rid of the prior authorization.
But the insurance company doesn’t want to do this because the denials and the prior authorizations are a very important thermostat to tightly control the medical loss ratio. Remember, the Affordable Care Act said that insurance companies must spend 80 to 85% of all of their premium on claims themselves, and they can then retain 15 to 20%, that 80 to 85% is the medical loss ratio.
You better believe the health insurance company keeps very close tabs on the claims that are being paid out, and they want that medical loss ratio to be as close to the 80 to 85% as humanly possible. Especially for publicly traded health insurance companies. They report their medical loss ratio and the Wall Street analysts look at that number with supreme importance. And if that medical loss ratio number is too high, the stock price is gonna get hammered. In order to have super tight control, because if you are a CFO at a health insurance company, then you need to make the numbers work.
If you need to adjust up or adjust down denials and authorizations in order to make those numbers work, you will. Here are the medical loss ratios for United, going back to Q3 2021, 80 3% Q4 2021, 83 0.7%. Look at that. Only 0.7% different q1 2022. The next quarter, 82% next quarter, 81.5%, 80, next quarter, 81.6%. Next quarter, 82.8%. Next quarter, 82.2%. They are remarkably consistent because they use denials and prior authorizations to fine tune the claim payments that are going out the door! And there is absolutely variability in medical care and claims coming in the fourth quarter (always higher) because that’s what people have met their deductibles therefore more claims are submitted.
You would expect more claims to be paid out in either the fourth quarter or in the first quarter of the subsequent year. You don’t see a change in the medical loss ratio quarter by quarter, because while there are changes in the size, and you know, when people are getting all their surgeries in the fourth quarter, the health insurance companies are intentionally adjusting their payment to smooth out the medical loss ratio through denials and prior authorizations.
What happened in Q3 and Q4 of 2021, COVID was still raging…
Remember that Covid didn’t start going away until the first quarter of 2022 during covid, paradoxically, the number of elective surgeries, drug replacements, knee replacements, the amount of cancer surgeries, the amount have cancer treatments, they all went down because the hospitals didn’t have the staff and the capacity, or they, for infection control purposes, they could not perform these types of procedures. You would expect the medical loss ratio in Q3 and Q4 of 21 and in q one of 22 to be lower. But then as Covid lightened up, and then as the knee replacements and the hip replacements and the spine surgeries and the cancer surgeries as they came back, you would expect the medical loss ratio to go up because more doctors and hospitals were filing more claims to make up for the lack of care that was provided during covid.
Notice what happened to the medical loss ratio? It didn’t go up.
It didn’t go up. 82%, 81%, 81%, 82 2%. It stayed remarkably flat. Why? Because the insurance carriers have the thermostat of denials and prior authorizations to tightly control. Regardless of how many claims are coming in, they can tightly go out through denials and prior authorizations.
Patient Implications
This has significant implications for patients. When any patient goes to the doctor or the hospital, they sign a form that says that the patient is ultimately financially responsible for care. The doctor or the hospital will bill the insurance company, but if the insurance doesn’t pay, then the ultimate financial responsibility lies with the patient! Medical policy and denials essentially equals non-insurance coverage.
It shouldn’t be called medical policy. Medical policy is a completely deceptive term that should not be allowed to be used. This is non-coverage. There should be bright red letters, a non-coverage document that outlines the 80 pages of non-coverage, to call it Medical policy is intentionally deceptive!
Next up, prior authorization, again, people’s delayed or no insurance. So people don’t have insurance. They kind of have insurance. Insurance is the transference of risk. When you have medical insurance, you kind of have a transference of risk. But you have 80 pages of non-transfer of risk. In my opinion, there needs to be dramatic consumer protections to stop the deceptive practice of medical policy and prior authorizations. Listen, if you want to deny coverage and have non-coverage, that’s fine. Have non-coverage for 80 pages of stuff, but it needs to be excruciatingly clear to your plan members who are buying these policies, that this is 80 pages of stuff that your insurance will not cover, and that is never explained to people ever, and that needs to be explained front and center.
What’s the take home point for this? Non-Payment by carriers results in overall increased healthcare costs because of the revenue cycle management – Cost to just get paid from third party payment – Fee for Service – is intentionally bad by design.
Dr. Bricker (although he stated “It’s not going to change”) gave examples of Hospitals which have direct contracts with some companies like Walmart and implored employees in general to keep their HR departments aware of medical denials or prior authorizations because they are responsible for employee benefits.
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