The Price Of Pain Management - The True Cost Of Compound Medications, Part 1

In the world of Workers' Compensation, medical treatment is provided with traditional methods as well as current medicine trends or "fads." "Reasonable and Necessary" medical treatment afforded under the Labor Code can steer off course when popular/trendy medical treatment and procedures replace time-tested and proven forms of medical care. One such unproven trend are compound medications.

This is the first of a two-part series on pain management and the true cost of compound medications. The second part in the series can be found here.

In the world of Workers' Compensation, medical treatment is provided with traditional methods as well as current medicine trends or "fads." "Reasonable and Necessary" medical treatment afforded under the Labor Code can steer off course when popular/trendy medical treatment and procedures replace time-tested and proven forms of medical care. One such unproven trend are compound medications. Compound medications do have their advantages and can be considered reasonable medical care. However, they have evolved from a useful medication alternative into multiple problems that require expensive and needless litigation. Why? The answer is simple: money.

It is the opinion of the author that compound medications made their entrance on a large scale due to the demise of another trendy medication phenomenon, repackaged generic medications. In 2007, California instituted a change to their fee schedule which largely eliminated differential pricing on repackaged drugs. As a result, repackaged drug prices dropped sharply, resulting in a rapid decline in their use. Shortly thereafter, compound medications began to appear as an alternative to other medications use. Compounds are not a new modality for providing pain management and other needs though their use has exploded in the past few years.

The Overall Cost
Pharmacy and medication treatment already constitute a large percentage of all costs in Workers' Compensation medical care. With the addition of compound medications, the problem has expanded to epic proportions. A recent study by Rand Corp. at the request of the California Commission on Health and Safety and Workers' Compensation (CHSWC) found that payments for these medications accounted for 12% of all drug costs in the first quarter in 2009 alone. Payments from 2006-2009 totaled $29 million over three years. State Compensation Insurance Fund (SCIF) payments in 2009 totaled $28 million.1 Further California Commission on Health and Safety and Workers' Compensation analysis also found that approximately 25% of all treatment liens at all Workers' Compensation Appeals Board offices involve pharmacies and/or dispensed drugs.2 The numbers continue to increase over time. The amount of liens clogging the Workers' Compensation Appeals Board was a large enough problem to force Judge Frank of the Los Angeles Workers' Compensation Appeals Board to hold conferences in late 2010 to address the possible mass consolidation of liens involving these medications, in an attempt to control lien filings and litigation.

The California State Assembly has also become involved in an effort to reign in the rapidly expanding use of these medications and the problems associated with their billing. Assemblyman Jose Solorio (D- Santa Ana) recently introduced AB 378, which has been signed by Governor Brown. AB 378 adds pharmacy goods and compound medications to the list of medical services for which it is unlawful for a physician to refer a patient for treatment if they or immediate family members have a vested financial interest in the facility that receives a referral. The bill also establishes maximum reimbursement amounts for compound medications and would require billing be done at the ingredient level. Further, the bill places limits on reimbursement for physician-dispensed pharmacy goods.

The overall cost of these medications is not limited to the cost of the actual medication. Health risks, issues with billing and distribution and physician compensation make compound medications an expensive and often unreasonable modality of medical care.

Compound Medications Defined
"Compounding" includes combining drug ingredients to meet specific medication needs of patients that may not otherwise be available to them. Compound medications are designed to be customized on a patient-by-patient basis for multiple reasons including specific dosage strength requirements, ease of application, issues with the intake and digestion of pills, and various allergic reactions to other medications. Medications are most common in cream or lotion form due to ease of application and alleged absorption into the skin like regular lotion. Compounds most often use a base "active" medication, and at least one other additive for a cooling or heating sensation. As the active medication(s) may constitute only a small portion of the total ingredient, inert or "inactive" ingredients are also included based on needs and strength. For example, a common lotion known as Amitriptyline T includes Amitriptyline at 4%, Tramadol at 20% and the compound "agent" Pencream.

It is important to note that most medications used in compounds are not recommended for use based on the Medical Treatment Utilization Schedule (MTUS) Chronic Pain Guidelines. For example, Gabapentin and Baclofen do not have peer-reviewed literature to support their use. Capsaicin is only recommended for individuals who have already tried other forms of medication and have not had successful results. Stronger doses of Capsaicin are not proven to be more effective than lower doses. Lidocaine is only recommended for localized, peripheral pain and for use after anti-convulsants or depressants have been tried.3 Many of these medications have origins vastly different than pain management. Gabapentin was originally developed for treatment of epilepsy. Clonidine was developed as an anti-hypertensive drug for treatment of high blood pressure. The "off-label" use of these medications makes them a less than desirable choice for their intended purpose.

Hidden Health Risks
Unlike other drugs, compound medications are not approved by the Food and Drug Administration (FDA). Instead the State pharmacy board oversees and regulates their manufacture and distribution.4 Due to the lack of FDA oversight, compounding pharmacies are able to take advantage of lax regulations and oversight by stocking large quantities of these medications. Although recommendations to alleviate this problem include the introduction of at least one FDA-approved drug into a compound mix, they have not been implemented. Further, the science available does not support the contention that these medications are even effective. The author of this article is not aware of any double-blind testing having been completed on compound medications to document their efficiency in bringing about their alleged benefits. There are also questions as to if ingredients are timely and properly absorbed into the body from application on the skin.

California regulations require pharmacies to ensure that these products are being properly stored, mixed, packaged and labeled. But do we really know if these pharmacies are following through with their monitoring? Do we have any idea who is actually mixing the compounds together, and if they are licensed and trained to do so? These issues have been a concern in the past as information pertaining to the integrity of pharmacy practices is not widely available due to the limited amount of data available.5

Issues With Billing
It is common to see a large invoice attached to a single compound medication prescription. The high price and subsequent denial for payment or reimbursement at a much lower amount is perhaps the biggest reason liens are piling up at the Workers' Compensation Appeals Board. The average wholesale price (AWP), which is the self-reported price by the manufacturer, serves as the base for fee schedule assessment. Unfortunately, multiple providers equal multiple average wholesale prices. Uniformity in average wholesale prices is not found amongst various providers. Fee schedule for compound medications is based on allowances found in the Medi-Cal fee schedule.6 The Medi-Cal fee schedule is limited to companies in their drug rebate program, thus, not all medications appear in the database. Despite recommendations from the Department of Workers Compensation on pricing, their recommendations have not been codified.

Even with a single location for assessment of billing (Medi-Cal fee schedule), the Office Medical Fee Schedule is vulnerable to fraud and excessive payments as the allowances for each compound medication are based on the particular manufacturer. Simply put, when not taking advantage of multi-source pricing to find the lowest average wholesale price, higher figures equal higher payments. Further complicating matters is providing allowances for ingredients not found in the MediCal database. Compounds can include rarely used or uncommon medications, and many of these drugs lack actual National Drug Code (NDC) codes.

Invoices that arrive for review and processing are often largely incomplete. At minimum, the billing should include a breakdown of the compounds used and quantity of each component. NDC codes should be accurate and should be listed for active and inactive ingredients. As discussed above, these medications do not have their bulk pricing listed on invoices. Thus, a medication which would be reimbursed for hundreds of dollars could be processed for a fraction of the price. While billing has improved over time, the issues around bulk pricing and average wholesale price remain unresolved.

1 Lifsher, Mark. "Compounded Drugs bring big profits to California doctors, study finds." Web. 29 January 2011.

2 California Commission of Health and Safety and Workers' Compensation. Liens Report. 5 January 2011. From

3 California Division of Workers' Compensation. Medical treatment utilization schedule regulations. Title 8, California Code of Regulations Sections 9792.20-9792.26. p. 18, 28, 30-34, 40. May 2009. From

4 See search terms "Compound Medications," "California."

5 United States Food and Drug Administration. "The Special Risks of Pharmacy Compounding" Consumer Health Information. May 31, 2007.


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