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Prior authorization of pharmaceuticals: health policy in search of evaluation. (2001 Best Clinical Paper Award Recipient).

Currently in the US there is a strong emphasis being placed on health policy that ensures access to high quality medical care but with due consideration of costs. Unfortunately, economic analysis, which includes enumeration of costs and benefits of care, is poorly applied and underutilized in these policy decisions (Reinhardt, 1997). A recent example is the proposal placed before Congress recommending the use of pharmaceutical benefit managers (PBMs) as agents, and their techniques as the means, of achieving pharmaceutical cost containment in Medicare.

Prior authorization (PA), specifically identified in the Medicare drag benefit proposal, is one of the several techniques employed by PBMs to influence drug dispensing and prescribing (Grabowski & Mullins, 1997). PA is an administrative technique designed to control the drugs that physicians and other authorized individuals may prescribe. The control can be to preempt a particular drug of choice, limit the amount of a drug supplied per prescription, or manage an entire therapeutic class according to criteria defined by a controlling agency, usually an insurer. The health care literature yields little information on PA programs, however (Grabowski & Mullins, 1997; Kane 1997; Lipton et al. 1999; Huskamp et al. 2000). There are no rigorous tests of the underlying assumptions inherent in its process, and no study of its effect on the utilization of drugs and subsequent costs of care, even though reduction of total drug spend is evident (Soumerai et al., 1993; Monane et al., 1998; MacKinnon & Kumar, 2001). In order to be judged cost-effective there must be a consideration of administrative costs, the additional benefits gained and the consequences incurred (added patient suffering or morbidity due to a limited treatment choice, for example) with its use. The failure to do so is due, in part, to what Reinhardt describes as the untested or crudely tested medical theories that drive most decisions regarding treatment methods and pharmacy formularies (Reinhardt, 1997).

This paper discusses an early qualitative investigation into PA programs used by various managed care organizations. We sought to obtain information regarding several aspects of PA programs including the decision rules used to determine both the need for a PA for a particular drug product, the costs of the process and the means used to audit and ensure its cost-effectiveness.


A semi-structured interview technique was used to elicit information from a purposive sample of individuals identified by a large pharmaceutical manufacturer as employees of organizations actively using prior authorization for formulary management. Specifically, individuals from PBMs, health maintenance organizations (HMOs), and preferred provider organizations (PPOs) throughout the US were invited to participate in telephone interviews of about 30-45 minutes in length regarding their organization's use of PA for pharmaceutical products. All interviews were conducted by the same researcher (SW) on a date and time designated by the interviewee.

Questions posed were intended to stimulate an open discussion of the PA process. There were four underlying concepts that guided the questions: the rationale for the use of PA (Why is it done?); the criteria for decision-making (How is it done?); the effectiveness of the process (Does it work?); and the cost of the process (How much does it cost and is it cost-effective?). The questions were reviewed by the study sponsor and then pilot tested with knowledgeable individuals known to the researchers. Revisions suggested by these contacts were incorporated into the final interview strategy. These outside experts also assisted in the identification of probe strategies to elicit more in-depth responses and occasionally provided clarification of points made during interviews as the study progressed.


Initial contact was made with 49 key informants. Each person was invited on at least four occasions to participate in the study. In addition, where email addresses could be obtained individuals were also contacted by this means inviting their participation. If the individual indicated that they did not have responsibility for PA programs, they were asked to identify a more appropriate contact in their organization. Complete interviews were obtained from 20 individuals with organizational responsibility for drug formulary policies (7 from PBM organizations, 12 from organizations identified as HMOs and 1 from an organization that provided contractual services to a PPO), for a completed response rate of 41 percent.

All 20 interviewees articulated a commonly-held definition of PA that included quality assurance, patient safety and cost-containment. Cost containment was always identified last although one interviewee, responsible for pharmacy services in a Medicaid-only plan, indicated that in reality cost was that plan's primary concern since it was completely dependent on state and federal funds. The remaining 19 interviewees, however, insisted that clinical questions and safety concerns were of prime importance. In keeping with this definition, interviewees described a drug review process that blended literature with clinical experience and culminated in a decision by a formally constituted Pharmacy and Therapeutics (P & T) committee of physicians and clinical pharmacists that was conveyed to a medical director.

Interviewees demonstrated a marked unwillingness to discuss the amounts charged for a PA service even though average cost figures had been reported in several nationally distributed publications. Two reasons were cited for this reticence. First, because there are levels of intensity for the service, each carrying a different charge depending on the level of clinical pharmacy expertise required, there was not a single dollar figure attributable to PA. Second, within a single organization charges to a client for PA services vary depending on contract negotiations. The actuality uncovered during our interviews regarding the amount charged for a PA was a range from zero dollars (in effect a lost leader) up to estimates of $25.00 per review. None of the organizational representatives could discuss the accounting methods that led to the setting of their charges, but all indicated they believed the charges for their PA program were competitive with like organizations in the marketplace.

The interviewees were unanimous in their opinion that PA achieved the desired effects of lowering utilization of selected drags and reducing overall pharmacy costs. Only two organizations, however, had conducted analyses to determine the impact of their PA program. In both cases, interviewees described naturalistic experiments that resulted when a decision was made to remove a drug from PA. Levels of utilization (the number of prescription claims) were measured for a drug product while the product was under a PA program. After removal of the PA, utilization increased rapidly with an accompanying increase in the pharmacy budget.


The industry-wide acceptance of PA without evidence of effectiveness found in our study comes at a cost. Research reports and lay press coverage indicate that pharmaceutical cost control is, on balance, a failure. Cost-containment efforts to this point, of which PA is one, have not reversed the unrelenting increases seen in the costs for prescription drugs in the US. For the year 2000, an increase of 19% was reported for pharmaceutical costs. Evidence of a reduction in the drug expenditure has been deemed sufficient evidence for the continued use of currently existing efforts. Yet, by research standards, such arguments show only a partial and insufficient explanation for the total effects of PA. Accepting only evidence of a change in drug spend, an easily measured outcome, deters organizations from identifying other cost components many of which are hidden (Reissman, 2000). This low level of evidence is the equivalent of an underspecified analytical model that transfers the residual complexity of care decisions (unintended morbidity, suboptimal recovery rates, etc.) downstream. The need to dig deeper was not discernable among interviewees as long as they met contractual requirements to provide some form of the service.

Interviewees did not confirm or deny the average charges for PA reported in national publications. Instead, any quoted price for a PA was identified as a dollar target only. In actuality the cost of a PA is negotiable. In some cases, a prior authorization program is offered free of charge as an incentive to guarantee contract closure. For other clients the price is greatly reduced, although the specific criteria used to decide upon offering reduced price contracts were not identified. Negotiation decisions may be related to size of the HMO (number of insured lives represented), the competitiveness of the market area in which the HMO is located, or the general competitive nature of the industry itself. The existence of negotiable levels that are based on market pressures and business unit characteristics makes PA charges analogous to the average wholesale price (AWP) defined for a pharmaceutical agent, i.e. a standard referenced price that does not reflect actual market pricing.

None of the organizations represented by our interviewees had employed cost evaluation methodologies to assess the value and effectiveness of PA. We were unable to obtain sufficient evidence that managed care organizations (MCOs) could identify all of the effects (both short term and long term) that result from the selection of one drug entity over another. There was a general inability to identify the dollar costs (the entire flow of resources involved in the prescribing, sequelae of the drug prescribed, and the lost benefit of the drug not prescribed that would otherwise have been realized), that must be included in an acceptable cost-effectiveness or cost-benefit analysis.

If the amount charged for a PA can be zero, then hidden value flows must exist within the broad context of the organization's financial management. The only means of assigning a value to a process that does not have a stated dollar charge is to define resultant outcomes downstream that will have a net profit for the organization. Such futurity contributes to the incoherency of resource flows and makes calculation of a meaningful cost ratio attributable to PA alone a daunting, if not impossible, task (Prosser et al., 2000). Content analysis of our interviews revealed that this inability was clearly recognized, but dismissed as an acceptable lack. There was recognition of administrative costs attached to PA that must be recovered at some point, but the costs were readily dismissed as a cost of obtaining business, rather than a cost eventually passed on to consumers.

Regardless of their questionable effectiveness, PA programs exist to meet the expectations of clients (typically HMOs and large self-insured employers) who demand activity around the drag benefit. Our concern is with the appropriateness of cost containment policies invoked in the absence of consideration for the complexities created by the processes inherent in the policy. While the specific cost containment addressed here relates to pharmaceuticals, many health care cost-containment strategies appear to fall into the same trap (Hyman, 2000).


The emphasis being placed on an expanded drag benefit under Medicare and the role of PBMs in managing drug benefits places great urgency on the need for appropriate evaluation. A review of interview transcripts suggests that the PA process has continued as a formulary management strategy with minimal understanding of the total implications of such a limiting system (positive or negative). None of the participating organizations had formally evaluated their PA programs, including the fees charged for the programs. While some level of cost savings seems likely, the full extent is not known. Careful evaluation is lacking but is clearly needed.


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Angeline M. Carlson
Data Intelligence Consultants (USA)

Stanley E. Williams
Data Intelligence Consultants (USA)

Samuel Wagner
Parmacia Corporation (USA)

Address for correspondence: Angeline M. Carlson, Data Intelligence Consultants, Post Office Box 44993, Eden Prairie, MN 55344 USA,
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Author:Wagner, Samuel
Publication:Research in Healthcare Financial Management
Geographic Code:1USA
Date:Jan 1, 2003
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