Angela Botiba, DivineMercy Bakare, and Erika Schlosser, Carlson School of Management, School of Public Health, Medical School, University of Minnesota

Contact: botib001@umn.edu

Background

Healthcare workers are essential in the functioning of health systems, which face a significant shortfall in the healthcare workforce. The World Health Organization (WHO) projects a deficit of 10 million health workers by 2030 in low- and middle-income countries, while industrialized nations grapple with workforce shortages [1]. The critical role of labor expenses cannot be overstated, as highlighted by the challenges revealed by the nationwide labor shortage; hospitals like GoodHealth have had to lean heavily on contract labor, which has resulted in a staggering 258% increase in total contract labor expense between 2019 and 2022 [2]. More than that, in recent industry reports, the pressing issue of healthcare workforce shortages and employee turnover continues to grab attention. A 2023 Guidehouse report underscored the implications of worker turnover that, beyond mere financial costs, lead to adverse effects on workers’ well-being and patient care outcomes [3].

GoodHealth, a community hospital in a Midwest city, and similar healthcare organizations have used supplemental staffing from outside agencies to mitigate shortages, but the financial strain associated with such measures, coupled with concerns about compromised quality of care, has led them to reassess this approach. The COVID-19 pandemic created further challenges, with workforce protection and occupational hazards emerging as significant concerns. Increased workloads, workplace violence, and burnout are exacerbating the staffing crisis. This report delves into GoodHealth’s challenges, focusing on nurses and patient support staff, and provides insights and recommendations essential for the hospital’s ability to meet community healthcare needs within its financial constraints.

Current Context of the Healthcare Workforce at GoodHealth

In the face of unprecedented challenges, GoodHealth, a county-owned public healthcare organization in a bustling Midwest downtown, confronts significant hurdles in recruiting and retaining healthcare professionals. Over the years, GoodHealth has benefited from its strong engagement with the community, treating patients with complex needs and the uninsured to building relationships with community leaders to address health inequities; this has led to a strong sense of purpose and commitment among staff more likely to stay and contribute during challenging times. However, the confluence of the COVID-19 pandemic, events surrounding racial justice, and a fiercely competitive job market have amplified the difficulties in staffing the organization adequately. Particularly acute is the scarcity of nursing staff and patient support staff such as medical assistants and nurse aides who assist with tasks such as scheduling appointments, taking vital signs, and monitoring patients, with the organization contending with 520 open positions as of Fall 2023. When considering the critical needs of GoodHealth, it’s essential to understand the distinct motivations and pain points of nursing and patient support staff. Nurses, facing a high risk of leaving the bedside for other organizations offering flexibility, prioritize feeling valued, respected, and supported by their employer. In contrast, patient support staff, at risk of leaving the healthcare industry entirely, seek career advancement opportunities, which may be found outside of healthcare [4]. Recognizing these differences is crucial for tailoring strategies to effectively recruit and retain these vital healthcare professionals.

GoodHealth’s operational landscape is characterized by its role as a 400-bed community hospital, serving as both an academic medical center and a Level 1 Trauma Center. As a standard bearer of the healthcare model, GoodHealth embodies the challenges faced by 84% of U.S. hospitals in the community hospital category [5], meaning it is non-federally funded and provides services to the local population. GoodHealth’s added capacity as a county hospital provides its employees with a state-specific retirement plan. Financially, the organization grapples with substantial reliance on Medicare and Medicaid for patient revenue, compounded by high operating expenses and pension obligations. Despite holding a Disproportionate Share Hospital status for additional funding, GoodHealth’s operating expenses have consistently outpaced its operating revenues since 2019 [6]. The organization also experienced, between 2020 and 2022, a 123% increase in premium and contract labor costs to help fill gaps left by persisting labor shortages, thus contributing to overall increased labor expenses. Within this context, shortages in nursing and patient support staff pose significant challenges for the organization. Factors contributing to the scarcity of healthcare workers include increasing safety concerns, both psychological and physical, associated with healthcare roles. High levels of stress, burnout, and exposure to infectious diseases contribute to the challenging nature of these professions, deterring potential workers and exacerbating existing shortages.

Prior Strategies

GoodHealth has employed various strategies to tackle labor challenges, including reducing reliance on temporary staff and travel nursing by utilizing technology like ShiftMed for streamlined hiring [7]. Despite investing over $225 million in outpatient clinics to attract downtown workers, parking issues hinder recruitment. Homegrown initiatives like the five-week nursing assistant training and Health Care Assistant (HCA) program have seen success but have yet to address shortages fully. The HR team collaborates with marketing to enhance recruitment efforts, and retention initiatives include emotional and financial support, onsite childcare, and assistance with student loans. However, adopting temporary fixes without addressing core issues proves unsustainable. A paradigm shift is needed in workload management and workplace culture to foster a resilient healthcare workforce.

Potential Threats

While GoodHealth has implemented innovative strategies to bolster recruitment, retention, and productivity, workforce gaps persist due to many internal and external challenges. Internally, pandemic-related disruptions and healthcare worker burnout have strained the availability and well-being of HCWs. Additionally, financial losses and internal conflicts, such as a lack of transparency and inadequate response to violence against healthcare workers, have further exacerbated staffing shortages. While this is not a unique scenario for hospitals, GoodHealth nurses reported in 2021 an increased level of violence against nurses attributed to understaffing (200% increase in a single unit), which has led to concerns about patient safety and outcomes  [8]. Financially, the organization contends with rising expenses related to salaries, benefits, and contract labor costs, exacerbated by a patient population largely reliant on government payers and uninsured individuals. This reliance leads to high charity care and bad debt write-offs. Operationally, staffing challenges prompt compensation, safety, and retention concerns, leading to increased union activity and a trend of employees leaving the healthcare industry for better opportunities.

Presence of Unions

The presence of unions at GoodHealth introduces a complex and challenging dynamic that reverberates across various facets of the organization, notably impacting recruitment, retention, and staff utilization. With six active unions and 60% of the workforce unionized and operating under distinct contracts and requirements, the workforce at GoodHealth is subject to a set of intricacies that extend throughout the organization.For its healthcare delivery workforce, GoodHealth has a rich history of unionization efforts with the State Nurses Association and AFSCME playing crucial roles in championing the rights of frontline workers. In 2005, over 1,000 Registered Nurses employed at GoodHealth chose to be represented by the State Nurses Association; this was one of the largest union-organizing victories in recent years [9]. All nurses are still unionized. AFSCME represents over 1,000 medical assistants, pharmacy techs, nurse-licensed practicals, and other job titles at GoodHealth [10].

In addition to affecting organizational dynamics, unions at GoodHealth introduce obstacles due to increased union activity, exacerbating tensions between employees and leaders. As the organization faces financial strains, proposed budgetary cuts to employee health benefits have sparked dissatisfaction among employees, leading to a vote of “no confidence” in the CEO and subsequent executive resignations [11]. Previous instances of employee dissatisfaction, such as picketing over staffing levels and retention concerns, further underscore the challenges in achieving cohesion between employees and executive leadership.

Recommendations

Our recommendations for GoodHealth are structured on strategies aimed at increasing the retention of current employees, recruiting new employees to fill in the current gap, and creating a sustainable pipeline of workers. The goal of these strategies is to market GoodHealth as a desirable employer in the state and to ensure that GoodHealth attracts and retains full-time employees and eventually eliminates the need for high-premium contract labor.

Community hospitals like GoodHealth often face significant challenges influenced by the county board’s oversight, budget constraints, resource allocation, and union dynamics. The county board’s decisions regarding funding allocation and policy directives can significantly impact the hospital’s ability to implement workforce strategies, particularly when faced with limited financial resources. Budget constraints further exacerbate these challenges, often forcing hospitals to prioritize essential services over workforce development initiatives. Additionally, navigating union dynamics presents a complex landscape, as unions may support and resist changes depending on their perceived impact on workers’ interests and collective bargaining rights. Balancing the competing demands of stakeholders while effectively allocating resources becomes crucial in addressing workforce challenges and ensuring the delivery of high-quality patient care at GoodHealth.

Short-Term Recommendations

Due to the state of the healthcare shortage at GoodHealth, it is paramount that some strategies be urgently employed to curb the bleeding and retain the current staff. We have created four short-term recommendations to help increase the staffing levels at GoodHealth. These include encouraging leadership engagement with the workforce, creating an employee harm index, constructing a wellness champion program, and implementing differential pay. These short-term initiatives will require little to no funding in the first year of implementation.

Leadership Engagement

There is a history of mistrust of leadership at GoodHealth between employees and executive leaders. Nurses have expressed distrust in the CEO’s decisions, particularly those affecting patients and driving caregivers away from the bedside [12]. We recommend increasing leadership engagement with the healthcare workforce to address this issue. Accessibility and transparency should be at the forefront of GoodHealth’s leaders. To communicate this, we recommend that leaders conduct walkabouts/rounds and host monthly calls to create meaningful connections and understand the needs of their healthcare workers. Along with the walkabout, we recommend a monthly town hall or a standing virtual meeting for leaders to communicate organizational changes and for healthcare workers to voice their concerns. Trust is a cornerstone of transparency. Encouraging a two-way conversation between the leaders of GoodHealth and the healthcare workers will promote trust, responsiveness, and shared responsibility.

Employee Harm Index

Violence against healthcare workers is a pressing issue leading to physical and emotional harm. This phenomenon has contributed, in part, to the departure of healthcare workers from the field. Recognizing the urgency of this issue, we recommend that GoodHealth create an Employee Harm Index (EHI). This platform will provide a mechanism for healthcare workers to report incidents of physical and verbal violence against them. The EHI will serve as a real-time tracking system and be analyzed every month to provide insight into the frequency, nature, and location of violence against healthcare workers. Information from the EHI will be used to quickly implement targeted interventions and measures to ensure the safety of the healthcare workers. The EHI will empower healthcare workers and represent a proactive approach to tackling workplace violence and preventing harm before it escalates.

Wellness Champion

The current healthcare worker shortage is both a result of and a contributor to burnout. Nurses and patient support staff often face heavy workloads, long hours, and regularly witness traumatic events and may experience secondary trauma or compassion fatigue when dealing with patients’ critical situations. Thus organizations like GoodHealth must implement wellness initiatives that address these issues. The Wellness Champion initiative aims to acknowledge the challenges related to burnout and foster a culture of well-being in the hospital. Healthcare workers will nominate their colleagues as Wellness Champions, individuals who will serve as point persons to assess mental well-being. These individuals will communicate wellness initiatives, motivate and encourage their colleagues to participate in wellness programs, and plan events to improve mental well-being.

The needs of healthcare workers are evolving, and no one understands this better than a colleague. To ensure the program’s feasibility, an annual discretionary budget of $100,000 will be reserved for any projects that need funding. The Emergency Department will be the first department to undergo this initiative. The program’s efficacy will be evaluated over three months, and based on the data collected and initial feedback, the program will be expanded to other departments at GoodHealth. Wellness Champion initiatives have been employed at various institutions since 2000 and have been shown to reduce healthcare costs and increase employee productivity [13].

Differential Pay

At GoodHealth, healthcare workers are currently working understaffed shifts with inadequate support leading to an increased workload. The increased workload is a major contributor to the burnout many healthcare providers feel and may be a factor in the large number of workers looking to leave the industry. To help with the retention efforts of employees at GoodHealth, we recommend the implementation of short-term differential pay for staff working understaffed shifts. This strategy acknowledges the current situation and compensates healthcare providers for the additional workload [14]. It also signals that GoodHealth is committed to rectifying the issue. The increased wages will further incentivize the institution to work harder to ensure that healthcare workers don’t continue working understaffed shifts, as it will affect operating expenses. The decision to increase compensation will depend on various factors, including improvements to the organization’s financial health (e.g. phasing out costly contract labor), and continued subsidies provided by the County.

Union Impacts

While the recommendations above strive to increase healthcare worker retention at GoodHealth, the unions will have to be active in the initiation. Most local unions have established or are actively working on incorporating differential pay in their contracts, and thus, the differential pay discussed above will only apply to non-unionized workers. The unions will favorably receive the implementation of the EHI and wellness champion initiative as it is designed to improve workplace safety and reduce violence against healthcare workers. GoodHealth must collaborate with the unions representing their healthcare workforce to ensure these initiatives are genuinely in the best interest of their employees. The success of these initiatives relies on the unions’ buy-in, which can help refine and promote them with the healthcare workers.

Mid-Term Recommendations

Ever since the pandemic, employees have been increasingly looking for more ways to bring flexibility into their work. There are three different flexible staffing structures that we recommend GoodHealth implement to address these flexibility requests, especially for those in nursing and support roles. These recommendations include the Baylor Shift, staffing at “top-of-license” and creating an apprenticeship.

Implementation of Baylor Shift

The first flexible structure is called “The Baylor Shift”. This staffing structure was created by Baylor University Medical Center in the 1980s to help with weekend staffing shortages and improve the work-life balance of employees [15]. The objective of this structure is to allow nurses to take two 12-hour weekend shifts a week, instead of the standard 36-hours per week nursing schedule, and still be considered full-time employees while receiving full compensation and benefits. The Baylor Shift would allow for a significant increase in flexibility for nurses. This would help GoodHealth fill specifically difficult shifts such as the weekend shift.

The implementation of this program would consist of three different phases. The first phase would involve the creation of the program, understanding the specifics of this organization, along with the recruitment of employees into the program. With the launch of a new program, one of the first and most important parts is to educate the population about the new opportunity.

Staffing at “Top-of-License” and Education

The next staffing structure recommendation we have is to staff employees in “top-of-license” roles. Staffing clinicians in “top-of-license” roles is a strategic approach that maximizes the utilization of healthcare professionals’ skills and expertise [16]. This model involves assigning tasks and responsibilities to clinicians that align with their highest level of education, training, and qualifications. By ensuring that clinicians focus on activities that uniquely require their advanced medical knowledge, decision-making abilities, and clinical expertise, healthcare organizations can optimize efficiency and enhance patient care. Staffing clinicians in “top-of-license” roles not only allows healthcare providers to operate at their full potential but also contributes to a more collaborative and integrated healthcare delivery system. The refinements of the program should continue over the next year to ensure that it is a suitable and sustainable action for the organization.

The adoption of a “top-of-license” staffing approach emerges as a strategic initiative for GoodHealth to maximize the skills of healthcare professionals while optimizing patient care. This model recognizes the diverse expertise within the healthcare team, fostering collaboration and a balanced distribution of responsibilities. When employees are practicing at their “top-of-license”, productivity and staff satisfaction increase, and providers end up having more time to spend with their patients [17].

Apprenticeship Program

The last structure implementation would be the creation of an apprenticeship program with local universities. As the seasons change, so do the needs of the employees. For example, when summertime comes around, kids will typically go on school break and the needs of some employees will change. In addition, during the summer months, many employees want to use their hard-earned benefits to enjoy time off. Our proposed solution would offer increased flexibility to those whose needs have changed during specific times of the year, especially targeting the summer months. We would look to partner with local universities close to GoodHealth’s campus to utilize the current students and create a more flexible schedule for employees. This partnership would target students who are interested in pursuing a career in the healthcare field or are already in a health professions program such as nursing.

Union Impacts

With all of the staffing structure recommendations discussed above, it is imperative to also discuss the impact that unions may have on these recommendations. After discussions with GoodHealth’s HR team, it became clear that unions have a significant impact on the ability to change staffing structure and utilization. For these recommendations to work, GoodHealth needs to create strong relationships with union representatives and be sure to include them in the creation of these programs. Allowing each union to have a voice in the creation and implementation of these programs is essential to the success they produce. The support from unions is especially important in the adjustment of staffing structures and needs to be highly considered when implementing new staffing programs.

Long-Term Recommendations

Our final set of recommendations has a long-term range and is focused primarily – not exclusively – on building the talent pipeline of the workforce of the future. These recommendations address career mobility, collaboration, and management of workload through cross-functional collaboration and the injection of flexibility into how care can be delivered.

Recruiting Universal Workers

Our first recommendation to build up the talent pipeline is to recruit and prepare universal workers for a career at GoodHealth. By adopting a universal healthcare worker strategy, GoodHealth can tap into a pool of unusual profiles of workers and introduce them to a hospital setting. The state GoodHealth is located in is home to a large population of foreign-born workers who primarily work in home health or long-term care facilities. These workers are primarily compensated through Medicaid. As an illustration in Washington State, personal care aides are mandated to undergo 75 hours of entry-level training along with 12 hours of ongoing education. This training closely aligns with the training prerequisites set at the federal level for certified nursing assistants and home health aides [18]. This would require establishing clear training standards based on competencies to prepare individuals for roles as “universal workers” across various care settings.

Implementation of Interdisciplinary Teams

The implementation of interdisciplinary teams has emerged as a transformative approach, bridging diverse fields to provide holistic and patient-centered care [19]. This innovative program leverages the collective expertise of professionals from various disciplines, such as physicians, nurses, social workers, and therapists, to collaboratively address complex healthcare challenges. Through seamless communication and shared decision-making, these interdisciplinary teams foster a comprehensive understanding of patients’ needs, considering both medical and non-medical factors [20]. This synergistic approach not only enhances the quality of care but also promotes efficiency in diagnosis, treatment, and long-term management.

Career Lattice Pathways

The next long-term recommendation for GoodHealth is to encourage workers to identify their desired career goals and provide assistance to them in helping meet them. This recommendation encourages a flexible and dynamic approach to career progression, allowing and encouraging employees to navigate diverse paths within the organization [21]. This recommendation would require a meeting and discussion with the union leaders to help create a program that is suitable for the employees and their contracts. It also requires GoodHealth to encourage regular career conversations between employees and supervisors looking to identify individual strengths, interests, and aspirations. In addition to providing career counseling and encouragement, GoodHealth should provide resources such as training programs, mentorship opportunities, and skill-building initiatives to support employees in acquiring the necessary competencies for their chosen career lattice paths.

Virtual Clinical Platforms

The last recommendation for GoodHealth involves the implementation of virtual clinical platforms to introduce flexibility into the roles of nurses, allied health professionals, and patient support staff. This initiative aims to leverage technology to create virtual environments where healthcare professionals can conduct certain clinical and administrative tasks remotely, allowing for a more flexible work arrangement. By utilizing virtual clinical platforms, GoodHealth can address challenges related to scheduling constraints and flexibility in work hours [22]. The implementation will require enlisting a consulting firm like Deloitte or Accenture that focuses on technological implementation to help the organization evaluate current workflows and identify the best platform to fit GoodHealth’s workflow.

Union Impacts

The impact of unions on the recommended strategies for building GoodHealth’s talent pipeline would likely be multifaceted. The recruitment of universal workers might find support from unions, especially if they perceive it as a means to expand employment opportunities for their members. The unions could play a pivotal role in identifying core competencies and collaborating with health organizations to ensure their members are adequately prepared for roles in hospitals. The implementation of interdisciplinary teams might also receive backing from unions, as it aligns with the ethos of promoting worker collaboration and inclusivity.

Financial Analysis

For more details, please refer to Table 1.

Cost Savings

The basis of our financial analysis to generate additional funds to allocate to our proposed solutions lies in phasing out contract labor and savings generated from increased retention rates.

Transition away from Contract Labor

The potential for significant cost savings lies at the heart of our proposal to phase out contract labor at GoodHealth. Two distinct approaches were employed to estimate the annual savings resulting from this initiative.

Approach 1: Using job openings/vacancies percentage

Analyzing the vacancy rate further substantiates the potential savings. We determined that in 2022, 22% of GoodHealth’s nurse workforce comprised contract nurses, totaling approximately 396 travel and temporary nurses. Travel nurse’s contracts can span anywhere from 2 to 26 weeks, depending on factors such as the travel nursing agency and facility requirements [23].

As of January 4, 2024, with 520 job openings, 24% of which were in nursing (125 positions), the projected cost of filling these positions with travel nurses was approximately $22.5 million. Conversely, using registered nurses (RNs) for the same positions would result in an estimated cost of $10.5 million. Assuming an RN FTE fills every opening, our anticipated savings is approximately $11 million. It’s important to note that these figures represent a conservative estimate, and segmenting the data by nurse pay and department could potentially yield even more significant savings. The total cost savings, therefore, range from a conservative $11 million to a more optimistic $39 million.

Approach 2: Eliminating 50% of travel nurse/temporary healthcare worker

In 2022, the annual premium and contract labor expenditure reached $71.2 million. By conservative estimates, eliminating just half of this cost by reducing travel nurses and temporary healthcare workers would yield savings of approximately $35.6 million.

Retention Savings

The average hospital turnover cost for nursing staff is between $28K and $51K, and $25-30K for frontline support staff [24]. GoodHealth currently has a retention rate of 87% across the organization; GoodHealth currently tracks retention rates globally across care settings and roles. The total number of all nurses is 1,762 671 for patient support staff at a turnover rate of 13%. Applying the top of the range, we estimated turnover costs of $11.7 million for nursing staff and $2.6 million for patient support staff for a total turnover of $14.3 million, our total turnover costs at an 87% retention rate.

If we calculate the turnover costs at 7% (93% retention rate) using the same logic, we have total turnover costs of $7.7 million. The differential is $6.6 million in turnover savings from higher retention rates.

Estimated Costs of Implementation

Short-Term Recommendations

All short-term recommendations, except for the leadership engagement initiative, involve associated costs. As leaders are expected to maintain accessibility without additional funds allocated, this initiative remains cost-free. We recommend a 12% increase in the annual rate for nurses ($40/hour) and support staff ($17/hour) to retain workers during understaffed shifts. Starting in 2025, a yearly budget of $100,000 will be allocated for the wellness program. Implementing a primary Employee Harm Index in 2024 will be followed by a standardized platform with an estimated cost of approximately $15,000.

Mid-Term Recommendations

For the Baylor shift initiative, we assume that employees who prefer this shift pattern will fill 20% of current nurse role openings. The average salary for a Baylor shift nurse is $113,000 [25]. A 10% hourly pay raise is proposed for nurses and patient support staff working weekend shifts. Additionally, we suggest an hourly pay of $20 for 30 students per 8-hour shift over 12 weeks for the Apprenticeship initiative. These mid-term expenses are proposed to be incurred starting in 2025.

Long-Term Recommendations

Long-term recommendations aim to establish a sustainable workforce pipeline at GoodHealth. Onboarding costs an average of $1400 per employee, with an additional $500 for certifications or education materials. With 50 employees in mind, we propose a budget accordingly. The Career Lattice initiative suggests transitioning 1.5% of nurses and patient support staff into new roles yearly, with a 20% salary increase. Expanding a virtual clinical platform across 30 departments in 2029 is estimated to cost $200,000. Based on GoodHealth’s 2022 financial report and benchmark values, these projections anticipate substantial cost savings of $47-105 million alongside an investment of $26 million over a 6-year plan. However, inherent limitations exist, including potential workforce fluctuations and economic shifts. GoodHealth’s leadership should remain vigilant and periodically reassess financial projections to ensure alignment with evolving dynamics.

Conclusion

Our workforce recommendations for GoodHealth form a comprehensive strategy to revitalize employee networks and ensure Healthcare workforce stability at GoodHealth by tackling immediate staffing challenges while building a robust and enduring workforce. The approach, spanning short-, mid-, and long-term initiatives, emphasizes collaborative efforts with unions and employees, ensuring alignment with organizational goals and prioritizing employee well-being. The financial analysis supports the viability of the proposed initiatives, projecting significant returns on investment for GoodHealth. Estimated cost savings, ranging from $47 million to $105 million, are carefully calculated based on phased implementation and critical assumptions. As GoodHealth adopts these recommendations, the following steps involve collaborative efforts with unions and employees. Open communication, regular feedback, and inclusive decision-making will be crucial in navigating implementation.GoodHealth is poised to redefine healthcare workforce management for a sustainable and thriving future by setting benchmarks in talent management, cost efficiency, and employee well-being.

Table 1. Financial Analysis (Values in Thousands)

Endnotes

[1] World Health Organization. Health workforce. https://www.who.int/health-topics/health-workforce#tab=tab_1. n.d.

[2] Syntellis and The American Hospital Association. 2022. https://www.syntellis.com/sites/default/files/2023-03/AHA%20Q2_Feb%202023.pdf

[3] Guidehouse. Prioritizing Well-Being in the Healthcare Workforce. 2023. https://guidehouse.com/insights/healthcare/2023/prioritizing-well-being-in-healthcare?utm_source=bambu&utm_medium=social&utm_campaign=advocacy&blaid=4718445

[4] AMN. 2023 AMN Healthcare Survey of Registered Nurses. https://www.amnhealthcare.com/amn-insights/nursing/surveys/2023/. May 2023.

[5] American Hospital Association. Fast Facts on U.S. Hospitals. https://www.aha.org/statistics/fast-facts-us-hospitals. 2024.

[6] Hennepin Healthcare System, Inc. Financial Report. https://www.hennepinhealthcare.org/wp-content/uploads/2023/05/Hennepin-Healthcare-System_22-FS_Final.pdf. December 2022.

[7] Gooch K. Health Systems Create Alternatives to Contract Workers. Becker’s Hospital Review. 2023 Sep 13.

[8] Minnesota Nurses Association (MNA). 2022. https://mnnurses.org/hennepin-healthcare-nurses-report-rising-violence-against-nurses-and-patients-cite-under-staffing-unresponsive-management-as-barriers-in-new-survey/

[9] Workday Magazine. 2005.

https://workdaymagazine.org/hcmc-nurses-organize-with-mna/

[10] AFSCME. N.d. https://www.afscme2474.org/about-2474

[11] Nelson T, Krueger A. Hennepin Healthcare Nurses Picket Outside Minneapolis Hospital. MPR News. 2022 Aug 22.

[12] Minnesota Nurses Association (MNA). Hennepin Healthcare leaders resign under pressure by nurses to hold CEO accountable to workers and patients. 2024. https://mnnurses.org/hennepin-healthcare-leaders-resign-under-pressure-by-nurses-to-hold-ceo-accountable-to-workers-and-patients/

[13] Broyles D. What Employers Should Know About Shift Differential Pay. Complete Payroll Solutions. https://www.completepayrollsolutions.com/blog/shift-differential-pay. 2022 Jun 23.

[14] Weinberg A. Ensure Practice Staff Works to the Top of Their License. Physicians Practice. 2016 Apr 28.

[15] Stone R. Bryant N. Feeling Valued Because They Are Valued. LeadingAge LTSS Center @ UMass Boston. 2021 Jul.

[16] Health Carousel Nursing & Allied Health. How Long Can a Travel Nurse Stay in One Place. n.d.

[17] Stone R. Bryant N. Feeling Valued Because They Are Valued. LeadingAge LTSS Center @ UMass Boston. 2021 Jul.

[18] Salary.com. Job Posting for Nurse Weekend Warrior/Baylor Program at Edenbrook Edina. 2023 Dec 26.

[19] Rosen MA, DiazGranados D, Dietz AS, Benishek LE, Thompson D, Pronovost PJ, Weaver, SJ. Teamwork in healthcare: Key Discoveries Enabling Safer, High-quality Care. The American Psychologist. 2019 Feb 4. 73(4), 433–450.

[20] Bendowska A, Baum E. The Significance of Cooperation in Interdisciplinary Health Care Teams as Perceived by Polish Medical Students. Int J Environ Res Public Health. 2023 Jan 5;20(2):954.

[21] Society for Human Resource Management. Developing Employee Career Paths and Ladders. n.d.

[22] Abernethy A, Adams L, Barrett M, Bechtel C, Brennan P, Butte A, et al. The Promise of Digital Health: Then, Now, and the Future. NAM Perspect. 2022 Jun 27. 2022:10.31478/202206e.

[23] Salary.com. Job Posting for Nurse Weekend Warrior/Baylor Program at Edenbrook Edina. 2023 Dec 26.

[24] Snyder K, Bottorff C. Key HR Statistics and Trends in 2024. Forbes Advisor. 2023 May 17.

[25] Ryzhkov A. How Much Does It Cost to Start Virtual Care? FinModelsLab. 2023 Aug 19.

Stephen T. Parente, University of Minnesota, Carlson School of Management

Contact: paren010@umn.edu

Economists teach that robust markets require high-quality products, consumers willing to buy, and price information for the service or technology being purchased. And yet, because healthcare pricing can be opaque and confusing, a prospective U.S. healthcare consumer will likely encounter frustration when trying to find out the price of an MRI. They might search online, only to be met with a lack of transparent pricing information. Calling healthcare providers may lead to long hold times and vague answers, or maybe remarks like, “it depends on how we provide the service,” adding to the frustration. Ultimately, the consumer experience highlights the systemic issues within the U.S. healthcare system, where pricing transparency remains a significant challenge.

Consumer medical price transparency has been a concept for over 100 years. It’s just never been called that. Before the age of private health insurance, almost all of U.S. healthcare was cash-based (like many healthcare markets around the world, and like cosmetic surgery markets in the United States); consumers were concerned about medical care prices. Beginning with the Great Depression of the 1930s, private health insurance entered the market throughout the United States and began to insulate consumers from direct payment for medical care. Today, with the high cost of insurance and models like high-deductible health plans, there is new interest in price transparency, driven by the current and previous presidential administrations. This new effort has the potential to finally give consumers prices and choices at the point of sale in a way not seen in American healthcare since the 1920s, when the probability of entering a hospital for an inpatient stay and exiting alive was a coin-toss.

In 2019, the Trump administration began to pursue two separate courses for price transparency through Executive Order [1]. The first effort was a federal rule that required all hospitals to list prices for shoppable services for specific Current Procedural Terminology (CPT®) and diagnosis-related group (DRG) codes. This hospital price transparency rule has received the most notice in academic literature and public policy discussions. The second Trump administration effort was to create a private insurer requirement to disclose on a monthly basis the allowed charges (i.e., provider payment plus patient cost-sharing) for all providers’ CPT codes. In other words, each health plan is now required to post their previously confidential prices actually paid to hospitals, not the hospital charges billed to the plan. Using these data, we can now see the actual prices, and variation in prices, across health plans for each hospital.

To make these data accessible, the federal requirement mandated that insurers must publicly post machine-readable files [2]. The goal from the beginning was that in structuring data this way, software application developers would be able to harness the disclosed records and transform them into consumer-friendly price transparency applications. Although the Biden administration revised or terminated many Trump administration executive orders, the price transparency rules were left unaffected. In fact, the Biden administration embraced and fully executed them. As of July 2022, the insurer price transparency rule went into effect, and after that, almost every major US health insurer has disclosed their negotiated prices every month [3].

We have now had some time with these new rules to assess whether the price transparency strategy has succeeded as envisioned. Nearly two years since the requirement went into effect, what innovations have the data generated? Researchers have begun publishing their analyses of this data trove (see for example: https://hmpi.org/2023/12/10/price-variability-of-heart-transplant-and-ventricular-assist-procedures-across-the-united-states/). But the intent of this effort was to drive the data to consumers. While a handful of firms use the data to give consumers access, little of it has become the ultimate consumer shopping tool originally envisioned. Imagine the potential of medical price transparency for consumers with an experience similar to what they get shopping on Amazon or any other easy-to-use web-based interface largely platformed on a smartphone. Are we there yet? Sadly, the answer at this point is no.

But there is hope on the horizon, or at least an opportunity to argue that there are glimmers of hope. In 2023, I published a paper estimating the cost savings from transparency tools applied to the 70 shoppable services that CMS specified for consumer medical care shopping. [4] I assumed cost savings of approximately 40% or so associated with cash-based pricing for these medical services, based on earlier estimates by Laffer and VanHorn [5].  For insured patients, several scenarios were modelled, with variations based on different assumptions. The highest estimate was $80.1 billion in savings to the U.S. healthcare system, while the most modest was $17.6 billion in savings. These are annual savings estimates, with expectations that they will increase as medical care inflation increases. However, these estimates require consumer technology on the scale of Amazon, Apple, or Google entering this market and making these prices available to consumers for shopping.

Rationale For Entry by Big Tech

While these tech giants have yet to emerge in this market, the opportunity is ripe for them to do so. Here are three reasons why:

The first is that the insurer files were structured entirely for big tech. Right now, the average entrepreneur who wants to engage in this market needs to be able to download hundreds of terabits of data every month. As noted in an early data blog column [6], the amount of data currently being released monthly by private insurers, uncompressed, runs into the petabyte range, dwarfing the Library of Congress, the LibGen catalog, the full English Wikipedia, and the entire HD Netflix Catalog — combined. The average entrepreneur working in this space must procure data storage space from cloud providers if they do not have the data stored on their own servers. A 2022 start-up firm downloading these data estimated a data storage cost of $85,000 per month through Amazon Web Services. Large tech platform companies are ideally suited to this task. They have already internalized their storage costs for a task like this. When the Trump administration designed the specifications for price transparency, the federal rule was written with the assumption that large-scale tech platforms could machine-read the data (based on a JSON file structure) and summarize it quickly. Thus, big tech firms can do precisely with these files what they excel at: downloading the data quickly, stripping out the necessary information, and putting the data together into consumer-usable applications.

The second reason big tech should engage is that they have been searching, largely unsuccessfully, for game-changing applications in the healthcare market that makes up 18% of U.S. GDP. Many who have watched this space for the better part of 25 years, when healthcare e-commerce emerged as a topic back in the late 1990s, know that these tech firms have seen limited successes in the health sector. For example, Amazon has been successful with PillPack and their echocardiogram device. Still, the market in which they operate is limited. On the other hand, their endeavors to acquire primary care practices and develop a medical care market have improved with the combined store front of Amazon Health and primary care clinics (One Medical), telehealth, and online pharmacy [7].  Google Health has tried different efforts in this market but has yet to achieve the potential of what it envisioned or delivering a product/service with the same ubiquity of their search engine. Other tech firms, ranging from Best Buy to Apple and Facebook, have explored this space but also without breakout success. Thus, they’ve essentially left relatively untouched a $4.5 trillion US opportunity for digital transformation. For these firms, there should be an opening to build from these new data to kickstart this market at scale.

The third reason big tech should move into this market is that consumers already trust their platforms. On the transaction side, many millennials and older consumers know that the notion of actually sharing credit card information on the Internet to buy a product was considered risky in 1996, two years after Amazon was birthed as an alternative to Barnes & Noble bookstores. Yet, firms took that risk seriously and, in the end, security and convenience trumped that risk concern for the average consumer. Today, almost all Internet commerce operates on credit card platforms, with reliable websites offering a relative degree of safety, and the consumer’s privacy concerns have diminished. The need for convenience should be one of the primary reasons medical price transparency through tech firms has the most significant potential to shape the market.

On the data side, consumer tech firms have already proven to consumers some degree of data security. Without this assurance, we as a society would not buy a range of digital services, from streaming services to online banking to shipping logistics, that are entirely dependent on daily credit card transactions operating in microseconds. Of course, medical privacy is a significant concern for any consumer. The new shopping tool could reveal confidential medical information – how else could someone shop for the price of a total joint replacement or some more sensitive medical procedure.

Back to the Market

This all comes together with some very novel service concepts for consumers. Outside of the federal transparency rule, the 21st Century Cures Act and subsequent federal regulations included a critical provision that reconfirmed consumer ownership of their medical record data [8]. While most consumers think of their medical records as simply information that medical providers access when they are seen, they should also understand that the documentation that health insurers keep from claims data is, while not comprehensive in terms of medical detail, still quite revealing regarding the timing, pricing, and sources of care.  In fact, in some instances claims data is superior to many very siloed hospitals’ electronic medical record systems!

The 21st-century Cures Act permits the consumer to ask for their medical record data and their health insurance data from United Healthcare, Aetna, Humana, or any other major health insurer. Now imagine if a big tech firm representing that consumer has consent to access their insurer data and their medical records [9]. The tech firm could then use a combination of medical price data from the insurers and abstraction of their claims records to examine the consumer’s previous medical care preferences and care pattern. With this information, the firm can predict future health needs and provide real shopping options. It could help consumers shop for future primary or secondary prevention services, or for medical procedures. It could also highlight that given their utilization pattern, a given insurer has the best prices in their local market.

Integrating health data will require technology firms to obtain adequate and clear patient consent and abide by strict data privacy protocols. Once the insurers provide their data, the claims data will effectively provide a longitudinal record locator to find additional clinical data from the medical providers that rendered services and were paid by that insurer.

The insurer data trail must be maintained for between five and 10 years, regardless of whether that person has left that health plan. Why is this information valuable? A person’s medical data might be spread across disparate health systems; for example, imagine a snowbird living between Minnesota and Phoenix. While both healthcare systems may use the electronic health record software from Epic, the largest platform in the United States, they may need to have those systems connect and share data. Because the customer has a health benefit with insurance claims being paid to both providers in Phoenix and Minneapolis, they can see all those transactions and effectively reach out to those medical providers for additional data. Now, this may seem like an odd way to get one’s medical data, but the digital data ecosystem for a patient is vastly complex and not always interconnected. The best mechanism to see a timeline of a person’s prior medical history is the very clunky yet highly efficient health insurance claims data trail of the consumer’s journey.

Transforming Healthcare

We have just outlined a pretty compelling use case to bring together disparate data into an actionable platform to deliver digital services to consumers. While the personal health record is an ideal architecture for service delivery, it has never achieved its promise in the U.S. A price transparency tool on smartphone should provide the right catalyst for consumer engagement since most of us now care about healthcare prices. Why would big tech care? Because they’ve tried in so many different ways to get the consumer to hand-enter their data or scan their data and largely failed. If as an alternative big tech can get consumers’ permission to extract the data that is already in electronic form, they would automatically create the continual data feed sought by either Apple or the Google health platforms. That, combined with a robust shopping experience, would enable the medical price transparency revolution that folks are so eagerly waiting for.

Will this transformation be easy? Not likely, based on a recent survey data from Vanderbilt University: 78% of Americans surveyed expect prices to vary less than twice the price [10]. Most consumers need to realize that there could be a sixfold variation for the same medical procedure in the same geographic area and potentially the same hospital system [11]. This lack of consumer awareness is a primary stumbling block to getting consumers to see the value of medical price shopping tools. As already discussed, consumers with high-deductible health plans are concerned about paying for care before that deductible has been met and keeping costs low, so they would benefit from such technology. Furthermore, for millennials and most likely Gen Z, who are the true digital natives in this space, the potential for pinpoint-click-and-buy-and-reserve medical care might evident far sooner. What I have found in 20 years of qualitative consumer-driven health plan research is that when folks finally have a high-deductible health plan, either by choice or for security reasons, they frequently go through several stages of grief. Finally, they end with acceptance and, even more importantly, empowerment regarding medical care choice and cost.

The year 2025 is right around the corner. When I was in government, that is the year I forecasted up to $80.1 billion in savings from medical care price transparency. That estimate seems a bit premature, unfortunately. However, the opportunity is still ripe for the taking. A handful of startup firms are beginning to realize how to harvest this data efficiently and, more likely than not, will come forward with different plans to either license technology to big tech to go to the next level.

My hope is that the entrepreneurial spirit that drove the Trump and Biden administrations’ federal rules on price transparency will persist. With the new insurer price disclosure information, the necessary conditions for market change have been met with petabytes of data. It is still an open question of whether we will ultimately see consumer tools that enable full medical price transparency and opportunities for consumers to own their medical data and take control of their medical lives. Realization by consumer tech of the enormous financial potential from harnessing these new price transparency data will be one sufficient condition to make it so.

References

1. Executive Office of the President. Improving price and quality transparency in American healthcare to put patients first. 2019. Accessed August 28, 2022. https://www.federalregister.gov/documents/2019/06/27/2019-13945/improving-price-and-quality-transparency-in-american-healthcare-to-put-patients-first.
2. CMS-Transparency-in-Coverage- CMS-9915-F. Center for medicare and medicaid services. Created October 27, 2020. Accessed August 28, 2022. https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/CMS-Transparency-in-Coverage-9915F.pdf
3. Health-Insurance Providers Begin Publishing Prices for Medical Care. WSJ. July 1, 2022, https://www.wsj.com/articles/health-insurance-providers-begin-publishing-prices-for-medical-care-11656685249
4. Stephen T Parente. Estimating the Impact of New Health Price Transparency Policies. Inquiry. 2023 Jan-Dec;60:469580231155988.
5. Lawrence Van Horn, Arthur Laffer, Robert L. Metcalf. 2019. The Transformative Potential for Price Transparency in Healthcare: Benefits for Consumers and Providers. Health Management Policy and Innovation, Volume 4, Issue 3.
6. Alec Stein. A trillion prices. https://www.dolthub.com/blog/2022-09-02-a-trillion-prices/
7. Changes at Amazon-owned health services cause alarm among patients, employees, Washington Post, Feb 28, 2024, https://www.washingtonpost.com/technology/2024/02/28/amazon-health-one-medical/
8. Individuals’ Right under HIPAA to Access their Health Information 45 CFR § 164.524, HHS, https://www.hhs.gov/hipaa/for-professionals/privacy/guidance/access/index.html
9. Stephen T Parente and Charles E Phelps. Reimagining Patient Data Access for Researchers. Value Health. 2023 Sep;26(9):1329-1333. doi: 10.1016/j.jval.2023.06.012. Epub 2023 Jul 3. PMID: 37406962.
10. Lawrence Van Horn. Primary Research: Understanding healthcare consumerism: Attitudes, beliefs, and tradeoffs. Presentation at National Health Policy Conference, April 4, 2022, Crystal City, VA. https://tinyurl.com/VanHorn-NHPC-APR2022 Accessed April 3, 2024.
11. John Xuefeng Jiang, Martin A Makary MA, Ge Bai. Commercial negotiated prices for CMS-specified shoppable surgery services in U.S. hospitals. Int J Surg. 2021 Nov; 95:106107.

Austin J. Allen, UNC Kenan-Flagler Business School, UNC School of Medicine, and Markus Saba, UNC Kenan-Flagler Business School, UNC Center for the Business of Healthcare

Contact: Markus_Saba@Kenan-Flagler.UNC.edu

Introduction

Prior authorization. This has become a healthcare buzzword in the setting of emotionally charged headlines about patients not receiving care, proposed legislative changes, and a myriad of responses from health insurers, providers, and patients.

Before diving into this issue, it is critical to answer the question “What is prior authorization?” In the simplest terms, prior authorization is a mechanism utilized by payors which requires approval from the payor before a healthcare service is rendered in order to obtain reimbursement for the service. The purpose of prior authorization is widely accepted to be preventing overutilization of healthcare services as a means of controlling cost. While the general purpose of prior authorization is a matter that most stakeholders can agree with, the logistics and application of prior authorization have evolved into an extremely complicated system. The administrative burden of prior authorization for healthcare providers alone was estimated to cost between $23 and $31 billion annually¹ in 2009 for outpatient physicians. Legal battles have also emerged, challenging whether insurers are utilizing prior authorization to protect their own economic interests above the interests of the patients they have contracted to provide healthcare insurance.^2,3

One important distinction to make with prior authorization is the difference in process / motivation for pharmaceuticals versus services (ex: surgical procedures). For pharmaceuticals, payors may introduce step-tiered therapy to direct patients towards lower cost or higher discount medications as the first line of therapy. In most scenarios, healthcare providers bear the burden of coordinating this administrative process with no financial incentive, as their payment is tied to medical decision making, not which medication is prescribed. In the setting of prior authorization for services like a surgical procedure, prior authorization exists to ensure all appropriate lower risk/lower cost measures have been exhausted. Financial incentives with services are aligned with the healthcare provider directly involved, as the provider requesting authorization stands to receive payment if the prior authorization is approved and services are provided.

In the setting of ongoing changes with prior authorization, the goal of this article is to synthesize the current landscape of prior authorization. In this review article, included is a summary of the stereotyped perspectives stakeholders commonly have about prior authorization, evidence examining the impact of prior authorization, ongoing legislative initiatives, and additional recommendations that could improve the prior authorization process for all stakeholders.

Stereotyped Perspectives

Payors: It is important to note that in the setting of the U.S. economy with the world’s largest healthcare expenditure, payors are one of the few stakeholders directly incentivized to reduce total healthcare cost. Healthy patients who don’t utilize services are a financial benefit for payors.

At the simplest level, payors utilize prior authorization to decrease the cost of healthcare by preventing use of unnecessary services. Rather than reimbursing any and every service rendered, prior authorization can be used as a rationing mechanism to ensure that the services utilized by patients are appropriately indicated. Indeed, most payors publish guidelines regarding which services are eligible for reimbursement, as well as the requirements for obtaining reimbursement. However, it is important to note that while guidelines are published, they may be inconsistent from insurer to insurer, and are difficult to locate online.⁴

Another important role of prior authorization for payors is directing patients to lower cost or higher margin services in a step-tiered manner. For example, patients with back pain may be required to undergo less invasive therapy like physical therapy before undergoing surgery.  While the goal may be reducing overall utilization of services, step-tiered therapy becomes even more complicated, but potentially more lucrative, for managing pharmaceutical prescriptions. Payors may direct patients to lower-cost medication classes as a primary treatment modality before authorizing more expensive (and novel) treatment mechanisms. Similarly, patients may be directed to lower-cost or higher margin medications within the same class of drugs, based on which medication the payor has negotiated the best rate. Ultimately, payors are incentivized to steer patients towards the medication that achieves the best outcome at the most cost-effective price.

Pharmaceuticals: Pharmaceutical companies have a mixed relationship with prior authorization. On one hand, with a financial incentive to sell as many medications as possible at the highest margins, barriers like prior authorization theoretically detract from maximum prescriptions and profit. However, even though prior authorization may decrease net market availability, strategically negotiated relationships through pharmacy benefit managers (PBMs) may result in prior authorizations steering an increasing client share to a company’s drug product over competitors, albeit at a lower negotiated rate than list price.

Adding an additional layer of complexity to a pharmaceutical company’s view on prior authorization is that in some therapeutic areas, profit can be maximized by altogether avoiding the prior authorization process. For example, demand for a medication (ex: GLP-1 agonists like Ozempic for weight loss) may be high enough with direct pay that there is little incentive to enter into lower negotiated list prices that require a prior authorization process. Alternatively, the incidence of a disease may be so low that maximum profit has to be extracted from each patient to offset the research, development and manufacturing costs, thus incentivizing the manufacturer not to enter into a lower negotiated rate with any contractor and ensuring that all patients who access the drug go through an insurance exemption request outside of typical prior authorization mechanisms. Ideally, pharmaceutical companies view prior authorization as a barrier and would prefer to have a free market without restrictions.  As a result, pharmaceutical companies try to work within the existing system of PBM negotiations and prior authorization in order to maximize revenue and profits. This is particularly true in highly competitive markets or once a branded drug loses exclusivity and generic competitors enter the market. In these situations, prior authorization requirements from payors steer patients towards lower cost medications and ultimately drive price competition among pharmaceutical companies.

Providers: Physicians and other healthcare providers typically view prior authorization in a negative lens. For many, prior authorizations are viewed as an encroachment on autonomy that prevents practicing medicine as they would optimally desire.⁵ Providers also report feeling that guidelines for prior authorization, although published by payors, are inconsistent, difficult to access, and create an unethically difficult process for securing fair reimbursement. Unsurprisingly, an AMA survey reported that most physicians believe prior authorization negatively impacts patient care.⁶ Objective studies characterizing the burden of prior authorization on clinical workflows and patient care are limited; however, studies have shown that policies from insurance companies are sometimes not aligned with evidence-based medicine practices⁷, and that there can be significant variation in indications for the same service from payor to payor.⁴ Even more frustrating for providers, the medical directors at payors who make policy decisions and decide the fate of prior authorization requests allegedly have a higher track record of negligence and lawsuits while in clinical practice.⁸

Factors like this have been established to be contributors to clinician burnout given that it can feel like stakeholders with no direct patient care contact are dictating how care is provided, with no liability for reimbursement or how delays/denials of payment ultimately hurt patients. Beyond the issue of obtaining prior authorization, some providers have also highlighted other strategies that payors utilize to deny payment even after prior authorization is obtained successfully, though data showcasing the prevalence of this issue has not yet been published.⁹

It makes sense that physicians and other providers would like to have more control over these variables in patient care with less rigorous prior authorization processes. However, it deserves mentioning that although providers spend more time training to participate in the healthcare value chain than any other stakeholder, there has traditionally been an incentive to render as much care as possible under fee-for-service or volume-based reimbursement models. Indeed, some physicians have spoken out about how some rationing of resources is necessary to control cost, and other evidence points toward even the best trained physicians not being able to judge high yield care decisions.¹⁰  Furthermore, it is often difficult to access pricing information when making clinical decisions, which limits the ability to make cost-effective decisions, even if this is a salient concern providers are trying to address.

Hospitals / Care Facilities: Hospitals and healthcare facilities typically view prior authorization from a similar lens as providers. Prior authorization represents an obstacle to payment, and for a business model built on payment for services rendered, it is easy to see why prior authorization is frustrating. A professional with over four years of experience in the reimbursement department of a major corporate hospital system echoed these frustrations about difficulties in the prior authorization process.¹¹ However, complaints focused more on the logistics of managing prior authorization and tracking reimbursement, not a principal problem with prior authorization itself. While some of the challenges may be attributed to internal processes which could be improved, a vast majority of the frustrations were due to objective complaints about the process of obtaining prior authorization from payors. Another practice administrator also reported similar sentiments, describing significant variation in the modality by which payors require prior authorization requests to be submitted, having no way to track prior authorization requests without submitting a payment request and having it denied, and trying to comply with strict technical criteria for when and where a service could be rendered if payment was to be provided after successful prior authorization. Long term care facilities brought the issue of prior authorization to a headline recently with reports about automated systems of prior authorization denial.^12,13 All of these variables combine to create a dynamic where hospitals and care facilities stereotypically view the prior authorization process negatively.

Patients: It is important to note that patients are the only other stakeholder, beyond payors, directly incentivized to reduce the cost of healthcare. The literature has provided evidence of this phenomena, where costs of care decreased by 11.8% – 13.8% when patients switched to a high-deductible plan.¹⁴ In cases where prior authorization protects patients from low-value care, patients may ultimately be appreciative of the role that prior authorization plays; however, it is difficult to convey this information. In cases where patients are unaware of prior authorization, or where it has no impact on their treatment regimen and timing, patients are likely indifferent to the prior authorization process. However, in cases where prior authorization results in delays in care, frustration typically abounds. This is easy to understand, given that patients almost always pay monthly premiums to a service they perceive does not provide the value it is supposed to deliver. Online reports from patients about the frustration with prior authorization are common, and a graphic showcasing a somewhat comedic, but not unrealistic, prior authorization process diagram highlights the complexity involved in modern day prior authorization (Figure 1).

Ultimately, failed prior authorization does not preclude a patient from obtaining services given that they could pay cash at the list price for anything insurance denies; however, the high cost of healthcare often makes this an unrealistic option. Debate is ongoing whether payors should inherit some legal responsibility for denied/delayed care given that premiums are paid specifically to be able to access care.¹⁵

Figure 1: Patient’s diagram showcasing their experience trying to navigate the prior authorization process to obtain a prescription. Replicated from the Twitter account of Dr. Mark Lewis.

Fact Check and Areas for Future Research

It is easy to understand the sometimes subjective and emotional arguments that stakeholders present for why prior authorization is viewed favorably, or unfavorably, from their perspective. However, to try to understand how prior authorization is truly impacting the field, objective data is needed. Summarized below are questions which aim to highlight the influence of prior authorization on healthcare, data that was uncovered during the course of this review to answer those questions, and areas for future academic study that would help to better characterize how current prior authorization processes impact healthcare delivery.

What percentage of prior authorizations are ultimately approved? 2021 Medicare Advantage prior authorization decisions were the only publicly available source located for analysis.¹⁶ In this report, 33.2 million out of 35.2 million (94%) of claims were approved on the first submission. Of the 2.0 million (6%) claims that were either partially or fully denied, only 212,000 (11%) were appealed. However, 173,000 of 212,000 (82%) appeals were successful. Thus, the net approval rate was ~ 33.5 million out of 35.2 million, meaning that 95.2% of prior authorization claims were ultimately approved.¹⁶ If so many claims are approved, it is easy to wonder if some of these prior authorizations are not necessary. However, details on the types of prior authorization requests that are approved and denied, as well as reasons for denial, are lacking. Furthermore, data characterizing prior authorization outcomes for commercial insurers was not located during this review. Detailed research to better demonstrate prior authorization outcomes would be beneficial to begin showcasing whether net savings from prior authorization offset the administrative expense of prior authorization management.

What percent of services require prior authorization? Each plan has different rules about which services require prior authorization, which may even vary on a regional level for things as simple as HIV pre-exposure prophylaxis.¹⁷ In the sample of Medicare Advantage claims highlighted above, the number of prior authorization requests ranged from 0.3 million to 2.9 million per firm.¹⁶ This heterogeneity makes it challenging to characterize how many services require utilization of prior authorization versus how many services can be provided and reimbursed without prior authorization.

Although the exact proportion of services requiring prior authorization is difficult to quantify, one trend that has been reported is an increase in the number of services requiring prior authorization over time. Specifically, Medicare Part D prior authorization was required for ~24% of covered medications in 2019, up from only 8% of medications in 2007.¹⁸ This estimate about the number of medications requiring prior authorization is in line with estimates that in 2017, 25% of Medicare Part B claims would be subject to prior authorization requirements if serviced by a private insurer.¹⁹ While the precise number of claims requiring prior authorization is still only an estimate, prior authorization processes impact a notable portion of total healthcare expenditure. Future work characterizing the burden of prior authorization in different areas of healthcare (ex: medications vs procedures vs rehabilitation fees) would be beneficial.

Does prior authorization save the system money? The standard argument for prior authorization is that it saves insurers money.⁷ This is particularly true for step-tiered therapies where payors are able to direct patients to medications with better negotiated rates. However, a study examining mandatory referral to a physiatrist prior to spine surgery found that this change in the prior authorization process resulted in delays in surgery, increased net cost of care, and did not decrease the long-term incidence of spine surgery.²⁰ Examples like this where prior authorization requirements increase the cost of care may be limited; however, if the initial intervention in a step-therapy is unsuccessful and was attempted only because of insurance requirements, net cost of care is potentially increased. The potential for increased cost with any prior authorization requirements should be carefully considered and not just assumed to be a net savings.

How much does the administrative burden of prior authorization cost annually? Providers and other stakeholders frequently complain about the burden of managing prior authorization requests. It is true that administrative tasks and expenses are a part of any business process. However, the exact degree to which prior authorization requests burden providers has been studied in only a limited fashion. A 2009 study estimated that outpatient physician practices spent between $23 billion and $31 billion a year on interactions with health insurance firms.¹ Each physician may generate 45 prior authorizations per week, though this number may vary significantly by specialty and practice setting.⁶

Another study characterizing the burden of prior authorization requests in outpatient superficial vascular surgical procedures noted that most prior authorization denials were the result of improper documentation to meet payor standards. While the initial reaction to this may be that the provider should develop improved standards of documentation, this does not portray the full scenario. Cost-analysis revealed that the physician group spent over $110,000 on administrative expenses related to prior authorization during the study year, whereas the prior authorization denials were estimated to save payors less than $60,000. It is important to note that these cost estimates are only for a select subset of procedures and do not appear to reflect the total administrative cost for the practice.²¹

While studies characterizing the distribution of burden in navigating prior authorization are limited, this issue deserves particular attention. Each payor’s plan may only have one prior authorization process, but each healthcare provider typically serves patients with numerous different insurance plans. Because of this, the burden on the healthcare provider to navigate prior authorization processes is significantly greater than burden on a payor. Reform is needed to ensure equitable distribution of administrative burden across all stakeholders. Additional study should be directed at better quantifying the current administrative burden for providers and practice administrators versus payors in managing prior authorization requests.

How long does it take for providers to submit a prior authorization request? And how long does it take for a payor to make a prior authorization decision? Another potential point of disparity between providers and payors in administrative burden is the time required to submit and review a prior authorization request. Studies have cited prior authorization requests taking an average of 9.5 minutes / submission in urology²² to a median of 12 minutes / request in dermatology.²³ Conversely, claim reviews have been reported to be as low as 1.2 seconds/review for insurers.³ While the disparity in time reported in these studies may overestimate the difference in time burden, there does appear to be evidence that on average, providers and their colleagues spend more time working on prior authorization requests than payors spend reviewing them. This is not inherently wrong; however, in cases of inappropriate denial, any perceived disparity in effort invested into the process may add to frustration. Additional research to better highlight the time required to manage prior authorization requests in relation to the total scope of business would be beneficial.

Who makes prior authorization determinations? The process payors utilize to make prior authorization review is not abundantly transparent and seems to vary on a case by case basis. NaviHealth, a product previously utilized by both Humana and UnitedHealth, utilized an AI algorithm (“nH Predict”) to determine whether patients qualified for long-term care after a hospitalization. A class action lawsuit is now underway against both companies for inappropriately denying care. Similarly, a class action lawsuit against Cigna is ongoing for its utilization of a tool dubbed “PXDX” which reportedly allowed for bulk denial of prior authorization requests without review. ^2,3 Media reports have also described that a higher share of physicians participating in prior authorization review allegedly have worse track records in clinical care.⁸ Frustration also abounds when providers trained in a different specialty deny care. While reports of these stories are widespread, the objective study of how reviews occur has not been established and deserves further investigation.

How are prior authorization decisions communicated? There does not appear to be a uniform method for communicating prior authorization decisions. We uncovered less insight into the process of prior authorization for pharmaceuticals and step-tiered therapy. However, a professional with over four years of reimbursement experience reported frustration with the communication process for prior authorization decisions for surgical procedures. Frequently, the team member requesting prior authorization worked in close collaboration with the clinical care member. The person responsible for obtaining reimbursement was in a completely different department. This resulted in difficulty communicating the prior authorization approval; however, even when this communication occurred successfully, there were times when a denied prior authorization was only uncovered after submitting a claim for reimbursement. The reason for denial was not always included in this communication.¹¹ Although the precise methods of communicating prior authorization decisions have not been uncovered, better transparency in tracking prior authorization decisions, and the rationale for denials, would seem to be beneficial.

Steps for Reform

Prior authorization is a topic that often solicits an emotional reaction. While some argue that a complete overhaul of the American system is needed, the goal of this review was to better understand the current landscape of prior authorization and elucidate realistic action steps that could be implemented to improve the experience for all stakeholders.

1. Encourage collaborative work between healthcare stakeholders, including insurance companies and physicians. Legislative mandates can be passed to try and encourage positive change; however, change is typically more effective if direct stakeholders can be encouraged to “do the right thing” and make changes that are in everyone’s best interest without legal battles.¹⁵
2. Develop a uniform electronic prior authorization process so that requests can be managed with less administrative burden. Under the current system, the variety of methodologies for managing prior authorization requests is extremely challenging. Some electronic prior authorization platforms are available, but not widely utilized in clinical practice.²⁴ As a transition occurs to electronic authorization requests, it is important that the system doesn’t switch from every company having their own unique prior authorization paper form to their own unique prior authorization portal.²⁵ To realize the full potential synergy and impact of an exclusively electronic prior authorization request system, centralized and common tracking requirements need to be established. While implementing a uniform electronic system may seem like a challenge, the pharmaceutical industry already made this transition from paper scripts into electronic prescriptions that are compatible across many different electronic medical records and pharmacies. This precedent should help drive change to develop a compatible and centralized methodology for tracking prior authorization requests. Data from other industries also supports that uniform information exchange processes improve efficiency.²⁶
3. While there are certainly examples of providers who abuse the system, the vast majority are judicious about providing care in line with established standards. Gold cards would serve as a method for payors to reward providers with a demonstrated track record of appropriate clinical decisions. For those providers with a gold card, the prior authorization process could be excluded or significantly more streamlined. Periodic review of cases after obtaining gold card status would ensure that providers don’t go unchecked. This option is particularly attractive because it incentivizes collaboration between two of the stakeholders who currently have with the highest amount of tension and has been endorsed by the AMA.²⁷
4. Many governing bodies in medicine invest considerable time into determining treatment algorithms based on the most up-to-date research studies. These care pathways are designed to maximize patient outcomes in a cost-effective manner. However, research studies have shown significant heterogeneity in coverage policies between different payors. Even worse, care policies are not easily accessible (or accessible at all) for some plans. For example, in a research study examining the criteria required to obtain a cervical MRI, only 66% of plans had publicly available clinical guidelines, and many of these guidelines did not follow American College of Radiology clinical appropriateness criteria.⁴ The full extent of discrepancy between payor guidelines and societal evidence-based recommendations has not been explored; however, this is a concerning trend. Developing a more consistent set of publicly available guidelines for care coverage would help to streamline prior authorization for many cases. For the limited set of cases that don’t fit neatly into guidelines, there should be more ample resources to go through a legitimate prior authorization process and consider unique reasons for why a different care pathway may make sense for that individual patient.

 Ongoing Legislative / Government Initiatives

There are a variety of ongoing legislative initiatives designed to improve the process of prior authorization for all stakeholders. Some of these align with the recommendations presented above, while others represent different approaches for improving prior authorization processes. Summarized below are a few of the current national legislative initiatives, and one of North Carolina’s legislative initiatives. Similar state-level initiatives are ongoing in over 30 additional states.²⁸

1. Centers for Medicare & Medicaid Services (CMS) Rule CMS-0057-F: Passed in January 2024, this mandate will require impacted healthcare plans (Medicare Advantage, state Medicaid and Children’s Health Insurance Program Fee for Service, and some plans on the Federally Facilitated Exchanges) to transition to more expedient prior authorization reviews (< 72 hours) and electronically streamline the prior authorization process, along with more transparent information about prior authorization requirements (excluding drugs). Compliance with this requirement will not be fully mandated until January 1, 2027.^{29, 30}
2. HR 4968: Getting Over Lengthy Delays in Care as Required by Doctors (GOLD CARD) Act of 2023:³¹ Qualified physicians with a record of at least 90% approval rates in the prior year would be exempt from some prior authorization requirements in Medicare Advantage plans.
3. HR 5213, Reducing Medically Unnecessary Delays in Care Act:³² Clinical criteria for which services are (or are not) covered by Medicare Advantage plans must be developed in collaboration with a qualifying physician who has an active medical practice in the specialty.
4. 652, Safe Step Act³³ and HR 2630, Safe Step Act:³⁴ Step-therapy protocols exist to guide patients toward lower cost or higher margin services in the initial treatment steps. Payors would have to establish exemption processes for their step-therapy processes to allow for more rapid approval of services under several specified clinical conditions.
5. NC HB 649:^{35,36, 37} This bill includes a variety of additional stipulations that would reshape the process of prior authorization in North Carolina, highlighted by key features summarized below:

• • Clinical review based on nationally recognized medical standards.
  • Flexible to allow for deviations from the standard care pathways when justified on an individual basis.
  • Prior authorization denials only from physicians in that specialty.
  • Patient must be notified if medical necessity is questioned by the payor.
  • Payor must maintain a complete list of services where prior authorization is required.
  • Shorter timeframe for prior authorization decisions, ranging from 60 minutes for emergency services to 48 hours for non-urgent services.

Conclusion

Prior authorization was initially developed as a check and balance to control cost. The evolution of healthcare business has morphed prior authorization into a complicated system that payors utilize for a variety of purposes, including steering patients towards lower cost and higher margin treatment options. While payors argue that all of this is undertaken with the goal of providing the highest quality care at the lowest possible price, other stakeholders such as providers, administrators, and patients report frustration that the barriers to navigating prior authorization processes serve as an unethical barrier to timely care and appropriate reimbursement. Anecdotal reports of frustrating care denials are abundant; however, limited studies have provided an objective assessment about the prevalence and impact such denials have on patient care. Regardless, most evidence suggests that the current process of obtaining and tracking prior authorizations has become inefficient.

Increasing frustration has prompted significant legislative scrutiny of the prior authorization process. Work is underway to refine the prior authorization process with new rules and regulations. A roadmap showcasing specific legislative initiatives and other improvement strategies is highlighted in this report, including recommendations for streamlined electronic prior authorization processes, gold card policies rewarding providers with an established track record of appropriate clinical decisions, and more standardized guidelines on indications for which care will and won’t be covered. Government interventions sound promising; however, without careful consideration during the implementation process, additional downstream consequences may occur. Ultimately, we believe improvement in prior authorization requires improved data characterizing the burden of current processes, increased transparency about how prior authorization decisions are made, and close collaboration between all stakeholders so that additional burdens are not inadvertently placed on healthcare providers and patients in an attempt to streamline the prior authorization process.

References

1. Casalino LP, Nicholson S, Gans DN, et al. What does it cost physician practices to interact with health insurance plans? Health Aff Proj Hope. 2009;28(4):w533-543. doi:10.1377/hlthaff.28.4.w533
2. Minemyer P. Cigna hit with class action alleging it used an algorithm to reject claims. Fierce Healthcare. Published July 25, 2023. Accessed December 19, 2023. https://www.fiercehealthcare.com/payers/cigna-hit-class-action-alleging-it-used-algorithm-reject-claims
3. Cigna Sued Over Alleged Automated Patient Claims Denials. Accessed December 4, 2023. https://news.bloomberglaw.com/health-law-and-business/cigna-sued-over-alleged-automated-patient-claims-denials
4. Berman D, Holtzman A, Sharfman Z, Tindel N. Comparison of Clinical Guidelines for Authorization of MRI in the Evaluation of Neck Pain and Cervical Radiculopathy in the United States. JAAOS – J Am Acad Orthop Surg. 2023;31(2):64. doi:10.5435/JAAOS-D-22-00517
5. Schwartz B. Post | LinkedIn. LinkedIn. Accessed November 27, 2023. https://www.linkedin.com/posts/ben-schwartz-md_health-healthcare-medicine-activity-7071638000006254594-vQwY/?utm_source=share&utm_medium=member_desktop
6. American Medical Assocation. AMA Prior Authorization (PA) Physician Survey.; 2022. https://www.ama-assn.org/system/files/prior-authorization-survey.pdf
7. Sharma SP, Russo A, Deering T, Fisher J, Lakkireddy D. Prior Authorization: Problems and Solutions. JACC Clin Electrophysiol. 2020;6(6):747-750. doi:10.1016/j.jacep.2020.04.022
8. Burke PR David Armstrong,Doris. Doctors With Histories of Big Malpractice Settlements Now Work for Insurers. ProPublica. Published December 15, 2023. Accessed December 19, 2023. https://www.propublica.org/article/malpractice-settlements-doctors-working-for-insurance-companies
9. Tumialan L, Camarata P. ‎It’s Not Brain Surgery – The AANS Practice and Business Management Podcast – Presented by the AANS on Apple Podcasts. Accessed October 25, 2023. https://podcasts.apple.com/us/podcast/denial-of-payment-after-successful-prior/id1628126631?i=1000626049047
10. Episode 164: Scarcity in Neurosurgery. Accessed December 4, 2023. https://soundcloud.com/user-838542034/episode-164-scarcity-in-neurosurgery
11. Miller J. Perspective on Prior Authorization from Experienced Professional with Over 4 Years Experience in the Reimbursement Department. Published online November 20, 2023.
12. Pierson B, Pierson B. Lawsuit claims UnitedHealth AI wrongfully denies elderly extended care. Reuters. https://www.reuters.com/legal/lawsuit-claims-unitedhealth-ai-wrongfully-denies-elderly-extended-care-2023-11-14/. Published November 14, 2023. Accessed December 19, 2023.
13. Ross BH Casey. UnitedHealth discontinues a controversial brand amid scrutiny of algorithmic care denials. STAT. Published October 23, 2023. Accessed December 19, 2023. https://www.statnews.com/2023/10/23/unitedhealth-optum-navihealth-rebranding-algorithm/
14. Brot-Goldberg ZC, Chandra A, Handel BR, Kolstad JT. What does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics*. Q J Econ. 2017;132(3):1261-1318. doi:10.1093/qje/qjx013
15. Burgin J. NC Legislative Perspective on Prior Authorization. Published online December 4, 2023.
16. Biniek JF, Published NS. Over 35 Million Prior Authorization Requests Were Submitted to Medicare Advantage Plans in 2021. KFF. Published February 2, 2023. Accessed December 4, 2023. https://www.kff.org/medicare/issue-brief/over-35-million-prior-authorization-requests-were-submitted-to-medicare-advantage-plans-in-2021/
17. Regional Disparities in Qualified Health Plans’ Prior Authorization Requirements for HIV Pre-exposure Prophylaxis in the United States – PMC. Accessed December 19, 2023. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7272119/
18. Resneck JS Jr. Refocusing Medication Prior Authorization on Its Intended Purpose. JAMA. 2020;323(8):703-704. doi:10.1001/jama.2019.21428
19. Schwartz AL, Brennan TA, Verbrugge DJ, Newhouse JP. Measuring the Scope of Prior Authorization Policies: Applying Private Insurer Rules to Medicare Part B. JAMA Health Forum. 2021;2(5):e210859. doi:10.1001/jamahealthforum.2021.0859
20. Goodman RM, Powell CC, Park P. The Impact of Commercial Health Plan Prior Authorization Programs on the Utilization of Services for Low Back Pain. Spine. 2016;41(9):810-815. doi:10.1097/BRS.0000000000001329
21. Lee V, Berland T, Jacobowitz G, et al. Prior authorization as a utilization management tool for elective superficial venous procedures results in high administrative cost and low efficacy in reducing utilization. J Vasc Surg Venous Lymphat Disord. 2020;8(3):383-389.e1. doi:10.1016/j.jvsv.2019.10.016
22. Madhusoodanan V, Ramos L, Zucker IJ, Sathe A, Ramasamy R. Is Time Spent on Prior Authorizations Associated With Approval? J Nurse Pract JNP. 2023;19(2):104479. doi:10.1016/j.nurpra.2022.10.008
23. Carlisle RP, Flint ND, Hopkins ZH, Eliason MJ, Duffin KC, Secrest AM. Administrative Burden and Costs of Prior Authorizations in a Dermatology Department. JAMA Dermatol. 2020;156(10):1074-1078. doi:10.1001/jamadermatol.2020.1852
24. Bhattacharjee S, Murcko AC, Fair MK, Warholak TL. Medication prior authorization from the providers perspective: A prospective observational study. Res Soc Adm Pharm. 2019;15(9):1138-1144. doi:10.1016/j.sapharm.2018.09.019
25. Forys A. Review of Prior Authorization. Published online November 27, 2023.
26. Cutler DM. Reducing Administrative Costs in U.S. Health Care.
27. House bill advances “gold card” model on prior authorization. American Medical Association. Published August 30, 2023. Accessed December 20, 2023. https://www.ama-assn.org/practice-management/prior-authorization/house-bill-advances-gold-card-model-prior-authorization
28. Bills in 30 states show momentum to fix prior authorization. American Medical Association. Published May 10, 2023. Accessed December 19, 2023. https://www.ama-assn.org/practice-management/prior-authorization/bills-30-states-show-momentum-fix-prior-authorization
29. $15 billion win for physicians on prior authorization. American Medical Association. Published January 18, 2024. Accessed February 25, 2024. https://www.ama-assn.org/practice-management/prior-authorization/15-billion-win-physicians-prior-authorization
30. CMS Interoperability and Prior Authorization Final Rule CMS-0057-F | CMS. Accessed February 25, 2024. https://www.cms.gov/newsroom/fact-sheets/cms-interoperability-and-prior-authorization-final-rule-cms-0057-f
31. Rep. Burgess MC [R T 26. H.R.4968 – 118th Congress (2023-2024): GOLD CARD Act of 2023. Published July 28, 2023. Accessed December 4, 2023. https://www.congress.gov/bill/118th-congress/house-bill/4968
32. Rep. Green ME [R T 7. H.R.5213 – 118th Congress (2023-2024): Reducing Medically Unnecessary Delays in Care Act of 2023. Published August 15, 2023. Accessed December 4, 2023. https://www.congress.gov/bill/118th-congress/house-bill/5213
33. Sen. Murkowski L [R A. S.652 – 118th Congress (2023-2024): Safe Step Act. Published March 2, 2023. Accessed December 4, 2023. https://www.congress.gov/bill/118th-congress/senate-bill/652
34. Rep. Wenstrup BR [R O 2. H.R.2630 – 118th Congress (2023-2024): Safe Step Act. Published April 13, 2023. Accessed December 4, 2023. https://www.congress.gov/bill/118th-congress/house-bill/2630
35. Aldridge R. NCMS Aided HB 649 Passes House Health Committee, Prior Authorization Bill Now heads to Rules Committee. North Carolina Medical Society. Published April 25, 2023. Accessed December 4, 2023. https://ncmedsoc.org/ncms-aided-hb-649-passes-house-health-committee-prior-authorization-bill-now-heads-to-rules-committee/
36. House Bill 649 (2023-2024 Session) – North Carolina General Assembly. Accessed December 4, 2023. https://www.ncleg.gov/BillLookUp/2023/H0649
37. Ledger C. Her health insurer delayed her MRI – as the cancer spread. North Carolina Health News. Published May 8, 2023. Accessed December 4, 2023. http://www.northcarolinahealthnews.org/2023/05/08/health-insurance-prior-authorization-bill/

Paul Grootendorst, Leslie Dan Faculty of Pharmacy, University of Toronto

Contact: paul.grootendorst@gmail.com

The Florida state government recently obtained approval by the U.S. Food and Drug Administration to import low-cost prescription drugs in bulk from Canada. In this article, I describe Florida’s importation plan, review the reasons that drug prices are lower in Canada and assess the prospects that Florida’s plan will succeed from the Canadian perspective.

Florida Governor Ron DeSantis has since 2019 petitioned the U.S. federal government for the right to import drugs from Canada.  The U.S. FDA has recently acquiesced. [1]  Other state governments are also hoping to import drugs from Canada.[2]  Governor DeSantis proposes to initially import drugs from several therapeutic classes for use by beneficiaries of several state-funded drug plans, namely those administered by the Agency for Persons with Disabilities, Department of Children and Families, Department of Corrections, and Department of Health.  The program will eventually expand to procure prescription drugs for use by state Medicaid beneficiaries.  The state government expects to save $183 million per year once the program is fully implemented.[3].

One can understand Florida’s motivation: list prices for patented drugs in the United States are multiples of those paid in Canada. Canada’s Patented Medicine Prices Review Board (PMPRB) has reported on the relative U.S.-Canadian list prices for patented drugs since 1988.  The data, illustrated below, indicate that U.S. prices have increased markedly since 2010.  In 2021, U.S. list prices were about 3.5 times Canadian prices.

Figure 1. Weighted average US to Canadian patented drug list price ratios, by year, 1988-2021

Note: these are the Canadian sales weighted averages of ratios of U.S. to Canadian pre-rebate prices of patented drugs.  Ratios are multiplied by 100.  Prices are reported by patentees selling products in both Canadian and U.S. markets.  U.S. prices converted into Canadian dollars using market exchange rates.  Data source: Patented Medicine Prices Review Board Annual Reports.[4]

The Florida state government obtains discounts off these list prices. By law (OBRA 1990), the rebate on drugs used by Medicaid beneficiaries is 23.1% of the Average Manufacturer Price (AMP) or the difference between the AMP and “best price,” whichever is greater.[5]  In exchange for these statutory rebates, Medicaid covers all the manufacturer’s FDA-approved drugs.

The AMP is defined as the average price paid to drug manufacturers by wholesalers for medications sold through retail pharmacies.[1]  The “best price” is defined as the lowest available price to any wholesaler, retailer, or provider, excluding the prices negotiated by certain government programs such as the health program for veterans.[5]  Under the 340B program, manufacturers are required to provide discounts to “covered entities,” but the sales of these products are not subject to Medicaid rebates nor to inclusion in the best price calculation.[6]  State-funded drug plans can also negotiate additional discounts off these statutory price discounts.[5] Even after these discounts, however, state Medicaid programs evidently pay more than Canadian list prices. In 2017, Medicaid paid 45% of U.S. prescription drug list prices; [5] in 2022, Canadian drug plans and hospitals paid about 28% (pre-rebate) of U.S. list prices.[7]  This likely explains why the Florida state government wants to import drugs from Canada.

Why are drug list prices lower in Canada?  One possible reason is that incomes are lower in Canada. Another reason is Canada’s use of price regulation. Canada’s PMPRB, a federal government agency, uses both internal and external reference pricing to limit the introductory list prices of patented drugs. New drugs that the PMPRB deems to be therapeutically innovative can be priced no higher than the median of the prices charged in various comparator countries. Until recently, the comparison countries were the ”PMPRB7”: France, Germany, Italy, Sweden, Switzerland, the United Kingdom, and the U.S.  Because many new drugs were launched in just Canada and the U.S., U.S. prices became the effective price ceiling.[8]  To lower the price ceiling, in July 2022 the PMPRB changed the comparison countries to the ”PMPRB11”: Australia, Belgium, France, Germany, Italy, Japan, the Netherlands, Norway, Spain, Sweden, and the United Kingdom. The PMPRB11 removes two high price countries, the U.S. and Switzerland, and adds six countries with relatively low prices: Australia, Belgium, Japan, the Netherlands, Norway, and Spain. [9]

Public drug plans in Canada also engage in price negotiation. These federal, provincial, and territorial plans have created two agencies, one of which provides evidence on cost effectiveness of new drugs at their list prices.[10]  Using this evidence, the public plans separately identify drugs that meet unmet needs and that could be cost effective at lower prices. They then rely on another agency that negotiates over the size of confidential discounts off manufacturers list prices. [11]  The exact discounts are unknown, but they are said to be in the order of 25% of list prices.[12]  Governments are willing to walk away if a deal cannot be reached, particularly for drugs which provide small therapeutic value. [13]

Private, typically employer-sponsored, drug plans, which cover about 40% of outpatient prescription drug costs, have historically paid list prices and had minimal formulary restrictions. But during the last decade, they have increasingly also used cost-effectiveness analyses to set maximum reimbursement prices. As with the public plans, the private plans negotiate over the size of the confidential rebate. But because they do not tend to use “take it or leave it” offers, and because each private plan negotiates over a small book of business, the discounts are said to be much smaller than those obtained by the public plans.[12]

Other industrialized countries pay list prices that are even lower than in Canada. For example, list prices paid in Australia, France and the United Kingdom were, respectively, 70%, 73% and 84% of list prices paid in Canada in 2022.[7] One possible reason is that these countries operate national public drug plans, so that they are the single largest purchaser of prescription drugs in the country. Canada’s public drug plans, by contrast, tend to cover those without employer-provided drug coverage, such as seniors, and those with very low incomes.  These public plans collectively reimburse only about half of non-hospital prescription drug sales.

In summary, Canadian drug list prices – while high internationally – are much lower than U.S. list prices. This is likely because of income differences, Canada’s federal price regulation and possibly because until recently private plans paid prices close to list price so that charging U.S. prices would price them out of the market. State Medicaid plans obtain statutory price discounts off list prices and can negotiate additional discounts, but evidently net prices remain higher than Canadian list prices. One possible reason for this difference is that state Medicaid programs are mandated to include drugs on their formularies in return for the statutory rebate. In addition, Medicaid is organized at the state level, and each state Medicaid plan accounts for only a small share of the total prescription drug market. Collectively, the Medicaid plans spent $92 billion (before rebates) in 2022; [14] this is only 22% of the $429 billion spent on retail prescription drugs (again, before rebates) in the U.S. in 2022. [15]

What are the prospects for Florida’s drug importation plan? From the Canadian perspective, the proposal appears to be dead in the water. Canada works hard to maintain the low cost of prescription medications to help control the costs of health care in Canada. As a matter of policy, Canada has no interest in jeopardizing its current advantage in prescription drug pricing to support the U.S. market. The Canadian government, and the Canadian pharmaceutical industry, have taken several steps to support its domestic market in the face of programs like the Florida reimportation scheme.

Drug distributors and wholesalers in Canada are federally licensed. [16] Federal regulations in place since 2020 ban the export of pharmaceuticals outside the country if there are “reasonable grounds to believe that doing so could cause or worsen a drug shortage.” [17]  So distributors are only able to legally export surplus drugs – i.e. drugs with large inventories, well in excess of domestic demand.  It appears that few drugs currently meet this requirement.

Further, almost all Canadian brand drug manufacturers are multinationals that sell in both the U.S. and Canadian markets. These manufacturers charge higher prices in the U.S. because of the structure of the U.S. market. It seems unlikely that manufacturers will allow drugs intended for sale in Canada to be diverted to the U.S. if these reimported products displace sales that would have been made at higher U.S. prices. Thus, manufacturers carefully manage sales to distributors within Canada to ensure that there are not excess inventories available for reimportation to the U.S.

Canadian drug manufacturers have additional ways of preventing diversion by requiring domestic wholesale distributors and pharmacies to refrain from selling drugs to non-domestic customers. Manufacturers added these provisions to their sales contracts with distributors in response to the creation of online pharmacies in the province of Manitoba that were selling drugs to U.S. customers in the early 2000s.[18]

The only conceivable scenario in which multinational manufacturers would agree to reimportation is if the reimported drugs were to be used by Floridians who would be unwilling to pay prevailing U.S. prices. Presumably U.S. manufacturers already have ways of lowering prices to such groups if it is in their commercial interest. This likely explains why the U.S. brand drug manufacturer industry association, the Pharmaceutical Research and Manufacturers of America (PhRMA), has also opposed Florida’s drug import plans.[1] [18]

From north of the border, our assessment is that Florida’s plan is unlikely to succeed.  If Florida or other U.S. purchasers want lower drug prices, they will have to address the  structural issues in the way that drug prices are set in the U.S.

Notes

[1] There is nothing more confusing than how list prices for drugs are reported in the U.S. Wholesale Acquisition Costs (WAC) are meant to be the list prices of drugs before rebates and discounts, while Average Manufacturer Price (AMP) is the price after wholesaler discounts such as cash and volume discounts. Medicare separately considers Average Sales Price (ASP) as the actual price in the market for hospital outpatient reimbursement. The Federal Supply Scale (FSS) price is the government price to purchase drugs for programs such as the Department of Defense and the Department of Veterans Affairs.

References

1. What to Know About the FDA’s Recent Decision to Allow Florida to Import Prescription Drugs from Canada | KFF. [cited 20 Feb 2024]. Available: https://www.kff.org/policy-watch/what-to-know-about-the-fdas-recent-decision-to-allow-florida-to-import-prescription-drugs-from-canada/#
2. Castronuovo C. States Eye Drug Imports From Canada After Florida Approval. In: Bloomberg Law [Internet]. 2024 [cited 24 Feb 2024]. Available: https://news.bloomberglaw.com/health-law-and-business/states-eye-drug-imports-from-canada-after-florida-wins-approval
3. Florida Becomes First in the Nation to Have Canadian Drug Importation Program Approved by FDA. [cited 20 Feb 2024]. Available: https://www.flgov.com/2024/01/05/florida-becomes-first-in-the-nation-to-have-canadian-drug-importation-program-approved-by-fda/
4. Patented Medicine Prices Review Board. Annual Reports – Canada.ca. [cited 20 Feb 2024]. Available: https://www.canada.ca/en/patented-medicine-prices-review/services/annual-reports.html
5. Understanding the Medicaid Prescription Drug Rebate Program | KFF. [cited 20 Feb 2024]. Available: https://www.kff.org/medicaid/issue-brief/understanding-the-medicaid-prescription-drug-rebate-program/
6. Medicaid and CHIP Payment and Access Commission. The 340B Drug Pricing Program and Medicaid Drug Rebate Program: How They Interact. [cited 22 Feb 2024]. Available: https://www.macpac.gov/publication/the-340b-drug-pricing-program-and-medicaid-drug-rebate-program-how-they-interact/
7. Patented Medicine Prices Review Board. Annual Report 2022 – Canada.ca. [cited 24 Feb 2024]. Available: https://www.canada.ca/en/patented-medicine-prices-review/services/annual-reports/annual-report-2022.html
8. Parliamentary Budget Officer. Canadian patented drug prices: Gauging the change in reference countries. [cited 24 Feb 2024]. Available: https://www.pbo-dpb.ca/en/publications/RP-2223-008-S–canadian-patented-drug-prices-gauging-change-in-reference-countries–prix-canadiens-medicaments-brevetes-mesurer-importance-modification-dans-pays-reference
9. Patented Medicine Prices Review Board Annual Report 2022 – Canada.ca. [cited 20 Feb 2024]. Available: https://www.canada.ca/en/patented-medicine-prices-review/services/annual-reports/annual-report-2022.html
10. Canadian Agency for Drugs and Technologies in Health. [cited 24 Feb 2024]. Available: https://www.cadth.ca/
11. pan-Canadian Pharmaceutical Alliance. [cited 5 Nov 2023]. Available: https://www.pcpacanada.ca
12. Canada.  Office of the Parliamentary Budget Officer. Cost Estimate of a Single-payer Universal Drug Plan. Ottawa; 2023. Available: https://distribution-a617274656661637473.pbo-dpb.ca/c4201c5cc0c9a162ff5f127e98992b64f3547048bf187de65bca2b399f3b9320
13. Kyle M, Williams H. Is American Health Care Uniquely Inefficient? Evidence from Prescription Drugs. American Economic Review. 2017;107: 486–90. doi:10.1257/AER.P20171086
14. Recent Trends in Medicaid Outpatient Prescription Drug Utilization and Spending | KFF. [cited 20 Feb 2024]. Available: https://www.kff.org/medicaid/issue-brief/recent-trends-in-medicaid-outpatient-prescription-drug-utilization-and-spending/#
15. The Use of Medicines in the U.S. 2023 – IQVIA. [cited 20 Feb 2024]. Available: https://www.iqvia.com/insights/the-iqvia-institute/reports-and-publications/reports/the-use-of-medicines-in-the-us-2023
16. Establishment Licences – Canada.ca. [cited 20 Feb 2024]. Available: https://www.canada.ca/en/health-canada/services/drugs-health-products/compliance-enforcement/establishment-licences.html
17. Guide to distributing drugs intended for the Canadian market for consumption or use outside Canada (GUI-0145) – Canada.ca. [cited 20 Feb 2024]. Available: https://www.canada.ca/en/public-health/services/publications/drugs-health-products/guide-distributing-canadian-market-consumption-outside-canada.html 
18. Whitwham B. Dispute over Canada’s online pharmacies heating up. CMAJ: Canadian Medical Association Journal. 2003;168: 759. Available: /pmc/articles/PMC154941/