Utilization Review: Level 1 vs. Level 2

In the world of claims management, from Workers’ Compensation to auto, disability, and group health, Utilization Review (UR) plays a critical role in ensuring claimants receive medically necessary care without unnecessary delays or costs. While UR is especially well-known in Workers’ Compensation due to state mandates, it’s not a one-size-fits-all process. It typically occurs in two levels, and understanding the difference between them can make a big impact on how smoothly claims move through the system.

Level 1 Utilization Review

Almost all routine treatment requests go through Level 1 UR as the initial step. It’s designed to be fast, consistent, and cost-effective.

Level 1 utilization review is conducted by non-physician clinicians, often registered nurses with specialized training in UR and Workers’ Compensation. According to the Federal Employees’ Compensation Program, nurse case managers act as impartial program representatives, efficiently screening treatment requests based on guideline criteria.

Nurse reviewers compare treatment requests against evidence-based clinical guidelines, such as the Official Disability Guidelines. They check parameters such as timing, frequency, and duration to determine whether medical necessity is aligned with standard criteria. Nurses only can approve treatments; they do not have the ability to deny or adjust in Level 1. If they do not approve it, it automatically escalates to Level 2.

Example:

Imagine a claims adjuster receives a request for 10 sessions of physical therapy for a minor knee strain. The nurse reviewer quickly confirms that this falls well within ODG guidelines and approves it at Level 1. The claim progresses smoothly, the patient gets timely treatment, and the insurer avoids unnecessary delays or disputes.

According to a 2023 analysis by Kaiser Family Foundation, fewer than 1 in 200 denied claims for ACA marketplace plans were appealed in 2021, meaning over 99% of denials went unchallenged. This highlights how critical accuracy is at the Level 1 stage, as clean documentation greatly lowers the risk of dispute.

Level 2 Utilization Review

Sometimes the answer isn’t in the guidelines alone, and that’s where Level 2 utilization review becomes essential. Level 2 review involves licensed physicians with relevant specialty credentials stepping in to review complex or poorly documented cases. Physician reviewers have the ability to approve or deny treatment.

When a treatment doesn’t meet Level 1 criteria, typically due to incomplete documentation or clinical complexity, the request moves to Level 2. In Level 2 review, a physician reviewer evaluates the full medical record using clinical judgement, which goes beyond the “checklist” approach that guides Level 1 decisions.

The Level 2 physician may also engage in peer-to-peer discussions with the treating provider to clarify details before making a final decision. This dialogue adds important clinical context and can tip complex cases toward approval.

While Level 2 involves clinical judgment, documentation errors still play a big role in denials. A recent survey by the Association of Clinical Documentation Integrity Specialists revealed that “lack of documentation to support medical necessity”, along with “missing or incorrect patient information”, consistently rank among the top reasons for claim denials. These issues often push cases into more complex and costly review stages unnecessarily.

Example:

Consider a request for spinal surgery after a back injury. The initial nurse review at Level 1 flags that the request lacks sufficient documentation of failed conservative treatments, so it’s escalated. At Level 2, a physician reviewer examines the patient’s full medical history and diagnostic imaging, then calls the treating surgeon to discuss the case. Based on this peer-to-peer review, the physician approves the surgery, recognizing the complexity that the guidelines alone couldn’t fully capture.

What Happens if Treatment is Denied at Level 2?

A denial at Level 2 doesn’t always mean the end of the road. Rather, it means the case is moving into the external review stage.

External review is when an independent, third-party physician, with no connection to the insurer, employer, or treating provider, evaluates the case. Under the Affordable Care Act (ACA), most health plans, including ACA Marketplace plans, employer-sponsored coverage, and many state-regulated workers’ comp programs, are required to offer this option. The goal is to ensure an impartial decision that prioritizes evidence-based medicine.

According to the Centers for Medicare & Medicaid Services, external reviews can overturn denials in a notable percentage of cases, especially when the denial stemmed from insufficient documentation or conflicting medical opinions. For claims management teams, understanding this process is critical—not just to comply with regulations, but to anticipate possible reversals and keep files moving efficiently.

Why Understanding the Difference Between Utilization Review Levels Matters

Knowing what happens at each UR level helps claims teams manage expectations, avoid delays, and improve outcomes. Here’s how:

1. Manage Timelines and Expectations

Claims management teams who understand that Level 1 reviews tend to be quicker, while Level 2 reviews require deeper clinical analysis, can better predict turnaround times and communicate clearly with providers and claimants.

2. Improve Documentation for Faster Approvals

In claims management, it’s important to know that Level 1 nurses rely heavily on guideline alignment. This means claims management teams can coach providers on submitting thorough, guideline-focused documentation upfront. This can reduce unnecessary escalations to Level 2, which take longer and cost more.

3. Prepare for Level 2 Utilization Review Strategically

When a request is likely to escalate, understanding the physician peer review process lets adjusters and claims management teams proactively gather additional medical records and support from treating providers. Facilitating timely peer-to-peer conversations can often sway decisions and avoid formal denials.

Example:

A case manager working on a shoulder injury claim notices a treatment request for surgery might hit a Level 2 review. They reach out to the surgeon’s office early, helping ensure all clinical notes and prior conservative treatments are well-documented. When the Level 2 physician reviewer calls for a peer-to-peer, the treating provider is ready to discuss the full clinical picture, increasing the chance of approval without delays.

Ready to improve your utilization review process? Let’s talk. 

Check out our sources:

American Medical Association. 2023 Prior Authorization (PA) Physician Survey. AMA, 2023, www.ama-assn.org/system/files/prior-authorization-survey.pdf.

Centers for Medicare & Medicaid Services. Understanding the Appeals Process. CMS, 2024, www.cms.gov/medicare/appeals-and-grievances/medicare-appeals/medicare-appeals.

Kaiser Family Foundation. “Marketplace Health Plans: What’s Covered.” KFF, 2024, www.kff.org/health-reform/issue-brief/marketplace-health-plans-whats-covered/.