Revenue cycle 101: Prior authorization + referrals

[Note: This post was originally published in January 2021 but was updated in October 2023]

Prior authorization. Pre-authorization. Precertification. Prior approval. Prior review. All of these names, though slightly different, refer to the same thing: prior authorization.

What is prior authorization?

Prior authorization is the process by which healthcare providers must request confirmation that an insurance provider will cover a prescribed medication, service, or treatment for a patient. When services require prior authorization, patients cannot move forward with prescribed care until this request is approved.

Prior authorization (PA) came about as a way for insurance providers to:

• Control costs
• Reduce wasted resources
• Eliminate clerical errors

Ideally, prior auths also help ensure a patient will receive appropriate and necessary care. However, many providers believe the process is far from perfect.

What are referrals?

Referrals, although often used interchangeably with prior authorization, are something different. Instead of requesting coverage for a medication, service, or treatment, a referral requests confirmation of coverage for a specialist visit. All referrals must be approved by the payer before the patient can be seen by the specialist. 

How much do prior auths cost?

According to the 2019 CAQH Index, prior auths cost providers $528 million in administrative costs — and that doesn’t include referrals. On average, providers spent almost $11 per transaction to conduct a prior authorization manually compared to nearly $4 using a web portal. Based on those numbers alone, it’s clear that significant time and money is tied up in prior auths and referrals, so it’s important to understand how the process works.

The prior authorization + referral process

One thing to note about prior authorizations is that there are no nationwide standards dictating how requests should be made and responses delivered. So, keep in mind that workflows will vary from state to state and insurance company to insurance company. The process could also be more or less complex than what’s outlined below, depending on whether it’s for a prescription, procedure, or something else entirely.

With that in mind, let’s walk through a simplified version of the steps involved in completing a prior authorization request

When is prior authorization required?

Prior auths come into play after a healthcare provider has identified a course of action for a patient, whether that’s a prescription, test, or procedure. Usually, the steps look something like this:

1. The provider will inform the patient that an authorization is needed as soon as it’s flagged — something that might happen when the provider sends a prescription to the pharmacy, for example, or orders a test from the lab.
2. Staff must review coverage details and confirm the insurer’s rules. Because there’s a lot of variance between payers, and from plan to plan, this can be time-consuming.
3. Once review is complete, staff will contact the insurance company to confirm documentation requirements, in addition to the paperwork and patient information they’ve already collected.
4. Staff will compile the requisite documents and move forward with submission. By this point, most of the necessary items will have been collected, including details of the provider’s prescribed care plan and the rationale behind it.

In terms of how the request is actually submitted, there is still a lot of variance from provider to provider. Requests might be submitted by fax, phone, email or through a web portal, and requirements vary from one insurance company to another. Because it’s an opaque, complex process, providers often resort to ad-hoc solutions or guidelines for staff (such as post-it note reminders or hastily assembled process docs). As you might imagine, that can lead to issues with accuracy and productivity.

When is a referral needed?

Similarly, referrals also come into play after providers – usually primary care physicians (PCPs) – have decided they would like the patient to see a specialist.  

Once this course of action has been identified:

1. The PCP will need to write the referral to a specialist who is also in-network
2. The referral must be sent to the specialist, AND
3. It must be sent to the patient’s insurance provider.

Just like with authorizations, the referral must be approved by the insurance provider for the patient to receive care.  

Approved or denied — what happens next?

It can take up to 10 business days to approve or deny a prior auth or referral. If the request has been completed properly, meets the insurance provider’s criteria, and falls under coverage outlined in the patient’s plan, the request will be approved. If more information is needed, the insurance provider will communicate with the doctor’s office or hospital to sort out the details.

However, if a denial is issued, a patient could be confronted with delays or rescheduled care. In some cases, patients face an outright inability to see a specialist or get the treatment they need.

Considering the variance in coverage (person to person, plan to plan), a denial could happen for any number of reasons.

• Incorrect paperwork may have been filed.
• More documentation might have been needed.
• Coding- or billing-specific errors can also add up to a rejection.

Furthermore, an approval or referral can also expire after a set amount of time, creating delays.

The wrap up

Prior auths + delays or abandonment of care

In 2022, an AMA survey found that:

• 94% of physicians report that prior authorization delays access to necessary care
• 80% of physicians report that prior authorization sometimes, often, or always leads to treatment abandonment.

Extensive paperwork, time spent calling insurance providers, and uncertainty around wait times place a growing burden on healthcare providers’ time and resources.

Prior auths + patient leakage

Extended timelines for authorizations or referrals not only impact a patient’s ability to get timely care, but they also cause patient leakage. Instead of waiting long periods of time to see a specialist or get a medication, many patients will seek more timely care elsewhere. According to a 2022 ABOUT Healthcare report, providers could see a 17% revenue boost from preventing patient leakage. 

While this struggle has been a growing concern for providers for some time, new solutions that leverage innovative tech can now offer a simple way to streamline the processes of authorization and referral. Waystar’s own Authorization suite — including Referral Status — uses RPA and API technology to automate manual tasks, expedite the path to patient care, and support billing teams with tools that let them get paid faster, fuller, and more effectively.

Want to learn more? Check out how Waystar’s Authorization Suite helps providers streamline the entire process and reduce denials and write-offs.