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What Is Utilization Management

Insurance companies and healthcare staff practice utilization management to gauge the efficiency and necessity of medical treatments, services, prescriptions, and facilities on a case-by-case basis. By closely monitoring the healthcare process, these entities can derive data to improve the quality of care received and reduce expenses. UM can apply to all aspects of healthcare, including inpatient visits, ER admissions, doctors’ services, and prescription drugs.

Though utilization management takes many forms, the heart of it occurs in three parts. Prospective review preauthorizes a patient’s eligibility for a prescribed treatment. Concurrent review monitors the treatment process, accumulated costs, and resource utilization. Finally, during the retrospective study, doctors and insurers use treatment data to determine effectiveness and future eligibility.

What is Managed Care? 

Managed care is an organizational and logistics system utilized by healthcare networks to deliver healthcare to medical patients by moderating costs, quality, and utilization. Most privately and publicly funded health insurance providers have contracts with outside managed care organizations (MCOs), including Medicaid, Medicare, and ACA health insurance carriers.

Congress passed the Health Maintenance Organization Act of 1973 to respond to surging medical costs and dysfunctional care practices, leading to the proliferation of Health Maintenance Organizations (HMOs) and providing the first official form of managed care. Since then, managed care has evolved to include utilization management and taken over all aspects of the market. Considering the advent of electronic technologies connecting payers (health insurance companies) and buyers (medical patients), managed care through utilization management has the potential to grow well into the future.

How Does Utilization Management Work? 

Most health insurance providers deploy utilization management through various techniques to prevent specific efficiency and cost issues.

Which Kinds of Health Insurance Utilize UM?

Ninety percent of all active private health insurance plans, in addition to all Medicare and Medicaid plans, use utilization programs as a method of cost control. Some of the most common include:

  • Medicare:  Fee-for-service Original Medicare and risk-based Medicare Advantage plans both require approved doctors and hospitals to participate in utilization management.
  • Medicaid: State Medicaid agencies partner with MCOs to mitigate program expenses and better utilize covered health services, ultimately improving care quality, plan performance, and patient outcomes.
  • Private insurance: A large majority of ACA marketplace and employer group HMO and PPO plans use utilization management to help determine patient cost-sharing, policy exclusions, and the healthcare practitioners they partner with.

What Kinds of UM Are There? 

Utilization management has no single definition. UM includes any process in which healthcare payers attempt to manage costs and influence clinical decision-making through case-by-case directives and assessments. UM can take many forms, including:

  • Demand management:  Forecasts customer demand to prevent the overproduction or underproduction of specific medical products, keeping companies efficient and profitable.
  • Utilization review: Preauthorizing, actively monitoring, and retroactively considering patient care on all levels and making immediate and future adjustments.
  • Case management:  Utilizes patients’ records to help determine appropriate care options and financial responses.
  • Disease management:  Research common diseases affecting the general population to determine efficient treatment strategies and insurance protocols.

What Techniques Are Used In UM? 

Insurance carriers also use the following techniques to implement utilization management:

  • Shape demand for care: Healthcare systems may implement strategies such as service-specific cost-sharing, excluding unnecessary benefits, and consumer education to direct consumers to cost-efficient treatments.
  • Financial incentives:  Insurers can reward capitation or bonuses to doctors and hospitals that provide less expensive care.
  • Payment limits: Healthcare providers often sign contracts agreeing to how much care an insurance company will pay for a covered service.
  • Managing patient flow: Insurers will gatekeep and triage patients away from specialists and other expensive services.
  • Physician education and feedback:  Insurance companies will inform doctors of expected standards of care and criticize unauthorized approaches.

What Issues Does UM Prevent? 

Widespread implementation of utilization management in healthcare has helped alleviate problems previously addressed by MCOs, including:

  • Ineffective, unnecessary, and harmful treatments.
  • One person’s medical issues negatively impacting the resources a hospital can use on other patients with self-insured employee health plans.
  • Exorbitant costs to other beneficiaries.
  • Doctors defaulting to expensive, intricate procedures when cheaper and more efficient treatment strategies may exist.
  • Patients receiving more treatment than necessary or staying in the hospital for too long.
  • Patient or physician drug misuse and related overdoses.
  • Unexpected denials of insurance coverage.
  • Medical staff failing to comply with regulatory procedures.

Predetermination vs. Prior Authorization 

Both preauthorization and predetermination processes involve interactions between healthcare providers and insurance companies to assess and facilitate coverage for medical services.

Preauthorization in healthcare utilization management is a process where a healthcare provider obtains approval from an insurance company before a specific medical service is provided. Predetermination, on the other hand, is a process where the insurance company determines in advance how much they will cover for a particular medical procedure, helping the patient and provider understand potential costs.

Prior authorization functions to:

  • Confirm a patient’s insurance coverage.
  • Let doctors know which services qualify for benefits and inform patients whether they must pay entirely out-of-pocket.
  • Prevent health insurance companies from denying reimbursement for drugs or services rendered after the fact.

Predetermination occurs immediately after prior authorization and exists to:

  • Inform patients of the percentage of the approved treatment their insurance company will cover.
  • Derive details on how the insurance company pays claims and when patients or providers can expect reimbursement.
  • Lets medical staff know which in-network orders and services the insurer has approved.

Though they uncover different information, both practices work together to help doctors request accurate reimbursement, secure timely payments, and avoid providing denied services.

What Is a Utilization Review? 

Teams of healthcare professionals undertake utilization review in three consecutive steps:

  • Prospective review:  Prior authorization occurs before treatment when medical staff evaluate a patient’s coverage details, determine a procedure’s medical necessity, and then request approval from the insurance company.
  • Concurrent review:  During treatment, reviewers monitor and note the patient’s progress and any resources they use as part of the procedure.
  • Retrospective review:  After the procedure, doctors will determine the effectiveness of treatment. Hospitals can also use this information as leverage in negotiating contracts with insurers, guaranteeing accurate reimbursement, and challenging denied claims.

While each process varies, they all exist to help control costs, determine the appropriateness of specific medical services, improve outcomes, and mediate with insurance companies.

Are Medications Subject to UM? 

Drugs with the following characteristics must also undergo prospective, concurrent, and retrospective reviews:  

  • Known safety concerns
  • More expensive alternatives of a similar product
  • Potential for misuse or abuse
  • Specific handling requirements and distribution restrictions
  • Can benefit patients beyond what qualifies as medically necessary

Insurance companies can also require patients to get generic brand drugs, limit the covered quantity, and withhold approval for expensive medicines over an extended period.

What Are the Steps in Utilization Management? 

Insurance carriers require healthcare professionals to adhere to the following utilization management strategies:

  1. Remain educated on insurance standards and conventionally approved practices.
  2. Preauthorize a patient’s eligibility for a proposed treatment.
  3. Collect clinical data on a patient to determine the appropriate level of care and its medical necessity.
  4. Continue to monitor a patient’s progress, prognosis, resource usage, and treatment costs and report findings to their insurer.
  5. Hand over a patient’s post-treatment records for the insurer to review and adjust relevant coverages.

Insurance companies can deny care at any point in this process, at which point the residing physician can file for an appeal.

Does UM Create More Work for the Beneficiary? 

Not really. In fact, utilization management specifically creates work for medical staff. Insurance companies expect providers to stay educated on accepted practices, assess patients’ insurance, communicate with them about their eligibility, file accurate claims, monitor treatment, and compile data for each service received. Doctors are responsible for filing and advocating an appeal should insurers deny any claim based on their reviews.

Pros and Cons 

Utilization management presents many key advantages but also carries some complications.

  • Improved access to care
  • Fewer claim denials
  • Saves money for patients and providers
  • Makes it difficult to determine long term outcomes
  • Increased bureaucracy
  • Potential for difficulty in coordinating communication


Utilization management allows for the following all-encompassing benefits:

  • Improved access to care, better outcomes, and lower overall costs for medical patients.
  • Fewer claims denials.
  • It helps healthcare providers identify areas for improvement and prescribe fitting treatment strategies.
  • Better data and resource development.
  • Informs healthcare providers on how best to conserve and utilize medical resources efficiently, controlling costs and reducing waste.
  • Reduces the chances of prescription drug misuse and affiliated overdoses.
  • It allows for quicker inpatient turnover and keeps hospitals from filling up to capacity.
  • Saves the insurance companies money.
  • Unify medical staff in each health facility around similar accepted practices, allowing for more consistent care.
  • When practiced transparently, it can build trust between patients and their doctors.


However, considering the broad and undefinable nature of utilization management as a whole, it presents many complications:

  • Limits on qualified services can lead to miscommunication and tension between patients, doctors, and insurance providers.
  • Assessing long-term medical outcomes often proves difficult considering the complex nature of healthcare delivery and factors outside hospital grounds that affect human health.
  • Securing approval for experimental or non-conventional procedures requires comprehensive reports that drain valuable time and resources.
  • Utilization management requires medical staff to take on the responsibility of collecting and compiling data instead of focusing entirely on providing healthcare.
  • Utilization management resulting in denied coverage costs patients significantly more out-of-pocket and can lead to lawsuits against insurers.
  • The best medical practices only sometimes prove the most cost-effective, complicating UM priorities.

Putting It All Together 

Most people with private health insurance and all Medicare and Medicaid beneficiaries participate in utilization management whenever they receive healthcare. By controlling and monitoring available medical services, their administration, and their outcomes, insurance companies can structure coverage to provide cheaper, more efficient healthcare that benefits patients, doctors, and their own interests in unison.

Though the complex nature of medicine and human and business interests make utilization management far from perfect, continual analytic development helps insurers more accurately pinpoint medical patterns and refine UM implementation strategies. As our healthcare system continues shifting its values to prioritize patient outcomes above service volume, utilization management will become even more critical with time.

Frequently Asked Questions

Utilization management has equal potential to complicate and strengthen doctor-patient relationships. Some patients will see doctors who adamantly appeal coverage decisions as advocates for their well-being. However, repeat denied coverages and failed appeals could sour these relationships, regardless of reasoning or fault. UM also diverts doctors’ attention and can force them into suggesting care options or setting limits their patients have zero interest in.

Precision medicine customizes patient care based on their specific genes, proteins, and other unique bodily factors. Due to the high costs of precision tests and their potential for misuse, utilization management ensures the right person receives the proper test at the right time. UM also prevents one person’s health issues from negatively impacting how insurers will cover others or what future personalized resources a hospital can use.

Due to the risk of mismanagement and foul play by both medical providers and insurers, utilization management involves many checks and balances and provides doctors with specific financial incentives. Aside from a wealth of data and peer review, the UM “fairness doctrine” prevents providers and insurers from over-asserting a more favorable bargaining position. Either party that pushes the other too far risks losing their business or pricing themselves out of the marketplace. 

Insurers and doctors take a different approach to emergency department management. For example, preauthorization never applies to emergency room procedures, as these institutions save lives on a highly time-sensitive basis. ER personnel may even forego concurrent review, as the nature of ER visits typically requires all staff and resources to be immediately on hand. However, providers can still retroactively review each case to develop future efficiency and budgeting standards.

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