Assistant Professor Zarek Brot-Goldberg

A new working paper examining the impacts from restrictions on brand name prescription drug coverage in Medicare programs reveals that “prior authorization” policies generate savings for Medicare that exceed the administrative costs they create.

The new paper from Harris Assistant Professor Zarek Brot-Goldberg and coauthors Samantha Burn, Timothy Layton, and Boris Vabson of Harvard University finds that these policies save $95.88 per beneficiary in drug spending, contradicting the typical characterization of administrative healthcare costs as wasteful.

“We can’t just infer waste based on the presence of administrative costs as bureaucracy may be there for a reason,” Brot-Goldberg said. “This study starts to shed important light on the effects of the half of the overall US healthcare administrative effort that is spent on activities that aim to reduce health care utilization and spending.”

The scholars’ findings provide a fresh perspective on a key issue in the privately-administered, but federally-regulated, health insurance marketplace, which has come under scrutiny in part due to a recent campaign by the American Medical Association.  The campaign claims patient deaths could be caused by prior authorization, a practice where patients can only receive insurance coverage for certain drugs – typically high-cost, niche, on-patent drugs – if they receive explicit authorization from their medical provider.

If not granted prior authorization, a patient must pay the full cost of the drug out-of-pocket or find an alternative medication, which the new study shows that many beneficiaries do. These policies aim to restrict access to costly drugs to only those patients for whom those drugs are deemed critical.

doctor prescribing medication
Spending would be about 3% higher without prior authorization

The new study, “Rationing Medicine Through Bureaucracy: Authorization Restrictions in Medicare,” focuses on Low-Income Subsidy (LIS) program beneficiaries in Medicare Part D, where prior authorization is effectively randomized because recipients are, by default, enrolled in randomly assigned drug plans, a subject Brot-Goldberg has studied in previous research.

Using data from 2007 to 2015, the researchers compare the use of medications by LIS beneficiaries assigned to a plan that put a prior authorization restriction on a drug against those assigned to a plan that did not.

Some of the key takeaways of the study were:

  • Beneficiaries who randomly faced prior authorization restrictions for a drug were 26.8% less likely to fill a prescription for that drug in the following year
  • Of patients who shifted away from a drug due to prior authorization, about half utilize a therapeutic substitute while the other half substitute to no drug
  • Spending on restricted drugs is reduced by $111.57
  • Spending on cheaper, substitute drugs increased by $15.69
  • Spending would be about 3% higher without prior authorization
    graph showing differences

“While it’s clear that there are important cost savings from prior authorization, it remains unclear if it causes undue harm to those patients who chose no substitute medication,” Brot-Goldberg explained, adding that there is not enough data to estimate how prior authorization affects health outcomes like patient mortality.

The researchers’ model does suggest, however, that patients may value the foregone drugs less than the cost savings to plans.

“While prior authorization appears to be an effective policy as used in practice, this does not imply that it would be an effective policy if implemented more widely,” the authors write. “An expansion of authorization restrictions to other drugs, especially those with many users and low prices, could easily be inefficient, generating substantial administrative burden for little value.”