Hospitals say insurance denials are spiking, and administrative costs are rising

Hospitals and health systems say they are dealing with higher administrative costs due to what they describe as more burdensome hurdles from insurers.

Hospitals are seeing an increase in the number of claim denials from insurance companies and Medicare Advantage plans, according to a new American Hospital Association report.

Administrative costs now represent more than 40% of the costs for hospitals in caring for patients, according to a new report released Tuesday by the American Hospital Association.

Health systems have long complained about the amount of time they are spending on getting approval from insurers before engaging in treatment plans or prescribing drugs, the process known as prior authorization. Hospitals and doctors have cited delays in securing authorization as a major impediment to patient care, as well as a key contributor to physician burnout.

However, hospitals say they are facing more denials in claims from commercial insurers, and they are seeking a surge in denials from Medicare Advantage plans.

In 2023, care denials from commercial insurers rose 20.2% compared to the previous year, the report states.

The rejection rate from Medicare Advantage plans significantly outpaces other payers. Medicare Advantage denials rose 55.7% percent from 2022 to 2023, according to the report.

Many of those denials are overturned when health systems appeal the rejections, but hospitals contend they are burning a great deal of time and money in fighting for reimbursements.

The hospital association report also points to a leading cause in the spike in denials of claims: artificial intelligence.

The report contends that AI algorithms in reviewing claims are making mistakes, leading to claims wrongfully being denied.

“Poor applications of these technologies can result in automatic denials of care without consideration of a patient’s individual clinical circumstances or review from a clinician or plan medical director as required,” the report states.

The report also cites an unnamed health system as emblematic of the uptick in denials. The system says its denial rate for Medicare Advantage claims ranges from 10.5% to 15.5%. But more than half of those denied claims (56%) were overturned on appeal.

That health system described the surge of prior authorization requirements and denials “as staggering,” and the organization said it’s siphoning money that could be used to invest in the system and recruit and retain doctors.

Insurers are also taking more time to pay hospitals, the AHA report stated. The amount of time to process and pay hospital claims rose by 19.7% in 2023, the report said, citing data from the Vitality Payer Scorecard.

Kevin Holloran, senior director at Fitch Ratings who analyzes the hospital industry, says hospital officials are reporting more difficulties with claim denials. Some hospitals say they would see better margins if they could be reimbursed in a timely manner. And he said more hospitals are struggling with Medicare Advantage denials, with some moving away from those plans.

“People who have been in them for a while are absolutely reporting … ‘We're struggling for our accurate and just payment, so to speak, on services rendered,’” Holloran says.

At the same time, he notes Medicare Advantage plans remain popular with seniors, and other hospitals and health systems are likely to offer Medicare Advantage plans.

“As some people exit, there's a whole lot of people waiting to get in for the first time and try out an MA plan,” he says. “They'll become a larger percentage of the insured pie.”

Most doctors (94%) say prior authorization leads to delays in patient care, while roughly one in four (24%) say authorization delays have led to adverse events for patients, according to an American Medical Association survey released in June. Most doctors (74%) also say that delays in securing approval have led patients to giving up on recommended treatment plans, the AMA survey found.

Earlier this year, Premier released an analysis outlining the denials hospitals and health systems are seeing. In the March 2024 report, Premier found that hospitals nationwide spent $19.7 billion fighting with payers over denials. The Premier report found that over half (54%) of denials from payers were ultimately paid to providers, but often involved considerable time and expense on appeals.

More hospitals and health systems say they are seeing an increase in denials, according to a November 2023 report from Kaufman Hall. Mark Newton, a senior vice president for Kaufman Hall, told Chief Healthcare Executive® last fall that the uptick in Medicare Advantage denials is a growing concern for hospitals.

“One of the big issues almost all our clients are addressing now is Medicare Advantage,” Newton said last fall.

Lawmakers in Congress have sponsored legislation to streamline the approval process in Medicare Advantage plans.

Insurers have said that prior authorization is an important mechanism to control costs in healthcare and avoid unnecessary procedures. Medicare Advantage plans are saving seniors $2,500 annually, according to a June report by AHIP, the advocacy group for insurers.