FINC 458: HEALTH INSURANCE

Saint Kuttu, PhD

UTILIZATION MANAGEMENT
 Introduction
• As a result of having health insurance, people typically pay
less out-of-pocket for health services than they would if
they had no insurance. As a consequence, they use more
health services.

• As we earlier, one way of dealing with this problem is to

increase the size of the copays or coinsurance rates that
consumers pay. Faced with higher prices, consumers
choose to forego those visits, drugs, and services that they
perceive as not being worth the out-of-pocket price. This
pushes them back up the demand curve, reducing their
use of health services.
 Introduction
• Another approach to dealing with moral hazard is to use
some form of clinical judgment to decide which units of
health services do not do enough good to justify the
expenditure.

• Even though consumers may be willing to pay $20 for a

visit to a pulmonologist, for example, insurers will only pay
their share of the price if the visit is approved in advance
by a primary care physician. Before patients can be
admitted to a hospital, their internists must receive prior
authorization from insurers for the admission.
 Introduction
• Obviously, these sorts of utilization management
techniques cost resources. The key question, as with
copays and coinsurance, is: how effective are they in
reducing utilization?

• Ultimately, can insurers reduce utilization enough to pay

for the utilization management program, compensate
consumers for giving up services, and add to the corporate
bottom line?
 Defining Utilization Management
• Utilization management (UM) refers to any clinical
restriction on utilization designed to approve or
disapprove care based on clinical necessity.

• UM techniques do not preclude patients from obtaining

the service; they simply say that the insurer is not liable
for the cost of the service if UM procedures are not
followed. Several types of UM techniques have been used
over the years, including:
 Defining Utilization Management
• Preadmission certification. The insurer requires that
nonemergency hospital admissions be approved by the
insurer before the patient is admitted to the hospital.

• Concurrent review. This is typically used in conjunction

with preadmission certification. It specifies the number of
hospital days a patient is authorized to stay. If a physician
wants a patient to stay longer, additional days have to be
requested.
 Defining Utilization Management
• Retrospective review. This inpatient review is undertaken
after the patient has been discharged. If the insurer
determines that the patient should not have been
admitted or should not have stayed so long, it will advise
the provider to follow the insurer’s admission protocols.

• Denial of payment. This inpatient review is used in

conjunction with retrospective review. If the patient
should not have been admitted or stays too long, the
insurer will not pay for the inappropriate admission or
days.
 Defining Utilization Management
• Mandatory second surgical opinion. This protocol requires
the patient to obtain a second opinion before a
nonemergency surgical procedure is undertaken. If the
second opinion does not confirm the initial
recommendation, it is typically left to the patient to
decide whether the procedure should be done.
 Defining Utilization Management
• Case management. This program identifies high-cost
cases. A case coordinator has authority to approve the
substitution of some other wise uncovered services as
lower-cost or more-appropriate alternatives to covered
services. Home healthcare as a substitute for additional
hospital days is an example.
 Defining Utilization Management
• Discharge planning. This program requires the provider to
have a plan in place at the time of admission for the
patient’s care on discharge from the hospital.

• Gatekeeper. This program assigns a primary care physician

to each subscriber. This physician must approve visits to a
specialist, or the insurer is not obligated to pay for the
visit.
 Defining Utilization Management
• Disease management. This program provides coordination
of care across multiple providers for patients with chronic
diseases for which there are well-defined practice
guidelines.
• Intensive case management. This is an individualized
program that targets patients with high-cost and multiple
or complex medical conditions.
 Defining Utilization Management
• These activities are at least conceptually distinct from the
claims adjudication efforts that insurers also undertake.

• Claims adjudication refers to determination of whether a

person, provider, or service is covered under the insurance
contract and whether the price and copayment are in
accord with the contract.

• Thus, claims adjudication may conclude that a contract

does not cover a motorized wheelchair, for example.
 Defining Utilization Management
• It may determine that a particular condition is covered but
that the physician used is not a participating provider and,
therefore, the claim is rejected.

• It may conclude that, while the plan ordinarily does not

cover dental crowns, the crowns may be covered if they
are required as a result of a sports injury.

• In practice, the distinction between UM and claims

adjudication is not always clear
 Defining Utilization Management
• Conceptually, however, the distinction is straightforward:
UM is the determination of the medical necessity of
otherwise covered services. Claims adjudication is the
determination of whether the service is covered.
Preadmission Certification and Concurrent Review

• The first rigorous work to evaluate the effects of UM

programs was conducted by Tom Wickizer and his
colleagues John Wheeler and Paul Feldstein (1989). They
analyzed 12 quarters of utilization experience on 223
insured groups over the 1984 to 1986 period
Preadmission Certification and Concurrent Review

• All of these groups purchased coverage from a single

unnamed insurer, and 41 percent of them purchased a
UM program from that insurer. The UM program
consisted of preadmission certification together with
concurrent review.

• The analysis essentially consisted of the presence or

absence of the UM program, controlling for plan, market,
and worker characteristics, together with season and year
effects.
Preadmission Certification and Concurrent Review

• They found that the UM program was associated with 3.7

percent fewer admissions and 20 fewer hospital days per
1,000 subscribers, but had no effect on length of stay.
Thus, the program achieved its effects by reducing
admissions.

• Wheeler and Wickizer (1990) revisited their data to

examine whether the UM effects were influenced by the
workings of the local medical care market. They argued
that:
Preadmission Certification and Concurrent Review
• A UM program may be more effective if there are higher
admission rates in the community. This may indicate that
some admissions could be treated on an ambulatory basis.

• A UM program may be more effective if there is more

idle hospital capacity in the market. If there are more
empty beds, physicians may be encouraged to
unnecessarily treat more patients on an inpatient basis.
Preadmission Certification and Concurrent Review
• A UM program may be more effective if there are more
surgical specialists per 1,000 population in the area. More
surgeons implies more competition, and somewhat more-
aggressive surgical decisions may be needlessly made.

• A UM program may be more effective if there is less

HMO penetration in the market. If the HMO (managed
care plans) effect dominates, a smaller share of the
population enrolled in an HMO would imply that some
avoidable admissions were occurring.
Preadmission Certification and Concurrent Review
• Wheeler and Wickizer found that, indeed, the UM
program they studied had a larger retarding effect on
admissions when these factors were present in the local
market.

• Thus, the effectiveness of a UM program may depend

significantly on the nature of the local healthcare market.
The Second Generation of UM Studies
• Lessler and Wickizer (2000) used data from the same
insurer they studied previously but focused on the period
from 1989 to 1993. The UM techniques they studied
continued to be preadmission certification and concurrent
review.
Summary
• Utilization management (UM) consists of a variety of
mechanisms to deal with the moral hazard problem by
using clinical judgment to determine whether particular
health services are worth their cost for specific patients.

• Preadmission certification used in conjunction with

concurrent review appears to be successful in reducing
hospital days, although the studies are not necessarily
generalizable. Some evidence indicates that more
aggressive limits on surgical stays for cardiovascular
disease resulted in higher 60-day readmission rates.
Summary
• There is remarkably little evidence regarding the
effectiveness of ambulatory UM. While there is limited
evidence that denials of coverage are relatively common,
two-thirds of these denials appear to relate to claims
adjudication rather than medical necessity.

• Evidence is growing that primary care gatekeeping does

not reduce healthcare utilization or control costs.

• There is little convincing evidence regarding whether

newer forms of UM, such as disease management and
intensive case management, are effective or not.
Thank You