Understanding the Consequences of High Prior Authorization Denial Rates and Strategies for Mitigation

Prior authorization denials have steadily increased in recent years, becoming a concern for healthcare providers. Data from the American Medical Association (AMA) shows denials on inpatient accounts rose from 1.5% of gross revenue in January 2021 to 2.5% in August 2022. Though these percentages might seem small, the financial impact is significant. A growing portion of gross revenue is tied up in denied claims, causing delays in reimbursement, higher administrative costs, and more complicated revenue cycle management.

Medicaid managed care presents a particularly notable challenge. A 2023 report from the Office of Inspector General (OIG) found that Medicaid Managed Care Organizations (MCOs) had a denial rate of 12.5%, more than twice that of Medicare Advantage plans. Since nearly 75% of Medicaid beneficiaries are enrolled in MCOs, the volume of denied claims has a large effect on provider cash flow.

Denials affect more than just finances. They place strain on administrative teams and delay patient care. Nearly 20% of Medicaid enrollees report issues with prior authorizations, leading to frustration and disruptions in care. Managers and IT staff recognize that these delays can reduce patient trust and satisfaction, which can impact an organization’s reputation.

Primary Causes of Prior Authorization Denials

• Incomplete or inaccurate documentation: Missing clinical data or insufficient justification for services often results in denials.
• Coding errors: Mistakes with ICD-10 or procedural codes frequently cause claim rejections. Denials related to coding have been increasing.
• Eligibility verification lapses: Failure to confirm patient insurance coverage before treatment leads to immediate denials.
• Administrative hurdles: Missed deadlines, incorrect forms, or not obtaining required authorizations.
• Medical necessity disputes: Payers may deny claims if they determine a service is not medically necessary based on their criteria, which sometimes differ from providers’ views.
• Use of out-of-network providers: Claims submitted for providers outside the payer network often face higher denial rates.

These causes often overlap, contributing to growing denial volumes that harm billing accuracy and cash flow.

Financial and Operational Consequences of High Denial Rates

Denials cause more than just immediate loss of income. Some effects include:

• Delayed reimbursements: Appeals and re-submissions take time and prolong payment waits.
• Increased administrative costs: Each denied claim requires extra work for review and follow-up. The average cost to appeal a denial is about $181.
• Lost revenue: Claims that remain denied or are not appealed represent direct losses.
• Cash flow challenges: Small or financially weak practices may face serious problems maintaining staff and operations due to persistent denials.
• Strained staff resources: Clinical and billing staff spend more time chasing denials, diverting focus from patient care.

Patients experience delayed diagnostics or treatments and unexpected bills when services are denied after care. This reduces patient satisfaction and can lead to negative experiences.

The Role of Eligibility and Benefits Verification

Verifying insurance eligibility and benefits before service plays a key role in reducing denials. Automated, real-time checks ensure prior authorizations are requested only when needed and clarify patient financial responsibilities upfront. This approach lowers denial chances and prevents surprise bills.

Tools that identify insurance coverage across different payers and update electronic health record (EHR) systems with accurate data help providers estimate patient liabilities better. Integrating demographic and coverage information also improves collections and reduces guesswork during financial screening.

Strategies to Mitigate Prior Authorization Denials

Reducing denials requires multiple approaches focused on automation, staff training, accurate documentation, and smooth workflows.

• Automation of prior authorization processes: Automation minimizes manual errors and speeds up requests. Automated queries to health plans can check if authorization is required, and auto-fill forms reduce human involvement. Embedded tools in EHRs give real-time authorization updates, lessening the need for staff to contact payers.
• Continuous training and education: Coding rules change frequently. Regular training for coding staff and clinicians on payer rules and coding standards prevents denials from errors. Coding mistakes are a major cause of medical necessity denials.
• Comprehensive documentation protocols: Clear documentation supporting medical necessity is crucial. Aligning notes with payer guidelines reduces denials related to missing or unclear information. Tools prompting clinicians during service help improve accuracy.
• Real-time eligibility verification: Integrating insurance checks into patient registration lowers denials caused by coverage issues.
• Use of denials management systems: Software to track denial causes and automate appeals helps identify problem areas and focus interventions.
• Outsourcing revenue cycle functions: Many health systems use outsourcing to access expertise and technology, improving coding quality and lowering overhead.
• Collaboration and communication with payers: Clear channels with payers for understanding medical necessity and authorization requirements reduce improper denials. Using standardized clinical guidelines supports consistent understanding.

Medical Necessity Denials and Their Impact

Denials over medical necessity make up a large portion of all claim denials. These occur when payers disagree with providers on whether a service was essential. Differences in interpretation, incomplete documentation, or coding errors often cause these issues.

The CMS Two-Midnight Rule introduced in 2013 encouraged clinical judgment rather than length of hospital stay for medical necessity. Nevertheless, inconsistencies remain, particularly with Medicare Advantage Organizations. The 2024 CMS Medicare Advantage and Part D Final Rule aims to improve consistency but changes may be slow.

Unresolved medical necessity denials reduce provider revenue and create extra work through appeals. Patients may suffer delayed care or face unexpected bills due to retroactive claim denials.

AI and Workflow Automation: Transforming Pre-Service and Denial Management

Artificial intelligence (AI) and automation are important tools for managing prior authorizations and lowering denial rates. AI-driven phone systems can automate communication with patients and payers, reducing administrative load and freeing staff for other work. These systems handle routine eligibility verification, collect patient data, and assist with scheduling.

AI tools integrated with electronic health records can automate prior authorization requests by scanning patient data and matching payer rules. They auto-generate forms, submit electronically, and update authorization status in real time, reducing the need for manual follow-up.

Robotic Process Automation (RPA) identifies errors like wrong codes or missing documents before claims are filed, prompting corrections. Machine learning models analyze past data to predict which claims may be denied, allowing preventive action.

Using AI and automation shortens processing times, lowers denial risk, and improves revenue cycle management. It also benefits patients by reducing delays and unexpected charges.

Expanding Technology Use in Medicaid and Managed Care Settings

Medicaid managed care has higher denial rates than other payers, making technology adoption especially useful. Since Medicaid pays a large share of healthcare expenses, states and providers employing automation and AI can lessen the burden of denials.

The 2024 CMS Managed Care final rule calls for better transparency and oversight of prior authorizations in Medicaid MCOs. Practices serving many Medicaid patients should prioritize advanced prior authorization and eligibility tools that comply with these regulations.

Summary for U.S. Medical Practices and Organizations

Medical practice leaders and IT professionals must address high prior authorization denial rates to protect revenue, reduce administrative load, and sustain patient satisfaction. Denials stem from clinical, coding, and administrative issues, but many can be prevented with focused strategies.

Key measures include automating prior authorization workflows, improving coding and documentation, verifying eligibility in real time, using denial management tools, and considering outsourcing where helpful. Incorporating AI and automation technologies can enhance these efforts.

As payer requirements evolve and regulatory scrutiny grows, organizations that implement these approaches will better handle denials and streamline revenue cycles.