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January 18, 2015

The Paradox on Drugs in Workers’ Comp

Summary:

States keep passing laws to reduce drug costs -- and costs keep soaring. A study shows that claims administrators possess the solution.

Photo Courtesy of Army Medicine

Pharmaceuticals remain a large component of both total claims and medical costs in treating workers’ compensation injuries and illnesses. On the plus side, pharmaceuticals lower medical costs by decreasing demand on other health resources, improve health outcomes, including treatment safety, and provide earlier opportunities to return to work. On the negative side, prices can be very high.

States have been trying to address that negative through numerous efforts for many years, yet costs keep climbing. A study finds that a solution exists, if claims administrators become aware at the most granular level about the sources of medications and the prices that suppliers charge.

Background

Pharmaceutical pricing in the U.S. is unregulated. Pharmaceuticals are manufactured through two sources, (1) the originator (i.e. the inventor) of the medication and (2) the generic manufacturer. The originator markets the medication through a brand or trademark name and has sole marketing rights for a period. This period varies from country to country, but the norm is from five to 10 years. On expiration, generic pharmaceutical manufacturers are allowed to produce the medication and introduce price competition into the market. Pharmaceutical Research and Manufacturers of America (PhRMA) reports that generic medications account for 80% of dispensed medications in the U.S.

In an effort to control pharmaceutical pricing in California workers’ compensation, a number of legislative changes were introduced.

2002 – Claims administrators could use pharmacy benefit managers (PBMs) and pharmacy benefit networks (PBNs) to establish contract prices below the maximum price established by the legislature and to scrutinize prescribed medications at the time of dispensing. A reduction in pharmaceutical costs was expected, yet a report prepared by the California Workers’ Compensation Institute (CWCI) in October 2014, titled “Report to the Industry: Are Formularies a Viable Solution for Controlling Prescription Drug Utilization and Cost in California Workers’ Compensation?” showed the average pharmacy cost for the first year of treatment for an indemnity claim increased from $390 in 2002 to $430 in 2003 (an increase of more than 10%).

2004 – The pharmacy formulary (i.e. list of medications) established by California’s Medicaid welfare program, called “Medi-Cal,” was introduced into workers’ compensation. The formulary and price schedule are based on the state’s negotiated price with suppliers. By contrast, most other workers’ compensation jurisdictions use schedules based on the supplier’s average wholesale price (AWP), with a plus or minus percentage adjustment to establish the maximum price (e.g., AWP + 10% or AWP – 5%). Both the Medi-Cal price and the AWP are established before any off-invoice discounts, rebates or other incentives are applied by the pharmaceutical supplier. Price differences between Medi-Cal and the AWP can vary significantly. For example, paying the lowest Medi-Cal price of 4 cents per unit for the generic medication Meloxicam 7.5mg tablet, instead of paying the AWP, provides a saving of as much as 98%. Once again, expectations for a significant reduction in pharmaceutical costs were anticipated, but, according to the CWCI, the cost only dropped from $321 in 2004 to $282 in 2005 (a reduction of 12%), before increasing to $352 in 2006 (an increase of almost 25%).

2005 – In an effort to control total medical costs, claims administrators in California were allowed to establish their own medical provider networks (MPN). The intent of this legislation was to curtail the adversarial relationship between the medical profession and claims administrators and also provide an opportunity for establishing contract rates with physicians, below the mandated maximum prices, for both services rendered and medications dispensed. This time, the expectation was to see a reduction in costs for both medical treatments and medications dispensed by a physician. Instead, the CWCI showed an increase from $282 in 2005 to $352 in 2006 (almost 25%) and then to $412 in 2007 (a further increase of 17%).

2007 – Legislation was enacted to require that the maximum price paid for a supplier’s medication that was not listed in the Medi-Cal formulary be equivalent to similar medications listed in the Medi-Cal formulary; the prior practice was to use the supplier’s AWP to calculate the price.

The Medi-Cal formulary includes a number of suppliers providing the same medication. PBMs, PBNs and physicians dispensing medications also have formularies that may have different suppliers to Medi-Cal, especially where a large number of suppliers are involved. For example, Gabapentin is available from more than 55 suppliers, which may include the originator, the generic manufacturers and companies that repackage others’ medications in various package sizes. Hydrocodone-Acetaminophen is available from at least 45 suppliers in different strengths and package sizes.

Again, the legislation was expected to lead to a significant decrease in costs, because a number of physicians were dispensing medications from suppliers that were not listed in the Medi-Cal formulary. The cost, however, increased by almost 7%, from $412 in 2007 to $440 in 2008. This percentage increase is baffling. The National Council on Compensation Insurance (NCCI), in its September 2013 report titled “Workers’ Compensation Drug Study: 2013 Update,” ranked Meloxicam as the highest physician-dispensed medication by dollars paid. By applying the Medi-Cal price, instead of the AWP, cost savings should have been as high as 98%. The savings for Tramadol HCL, the second highest ranked physician dispensed medication by dollars paid, were 89% based on the Medi-Cal price of 9 cents per unit.

So, legislation enacted in California from 2002 through 2007 provided all the means to control and curtail pharmaceutical costs. Yet, according to the CWCI, the average first year pharmaceutical cost per indemnity claim reached $953 in 2012 from $390 in 2002 (an increase of 144%).

The Study — Huge Range in Prices

This paradox initiated an independent study into pricing based on the medications listed in the NCCI report. The study identified that prices offered by manufacturers of generic medications varied significantly, and that a lack of awareness by claims administrators could be a leading factor in the high cost of pharmaceuticals in workers’ compensation. The study excluded repackagers’ prices, which are often associated with physician-dispensing. The report published from this study listed the following medications:

  • Meloxicam 7.5mg tablet — prices ranged from four cents through to $5.73.
  • Gabapentin 300mg capsule — six cents through to $1.75.
  • Lidocaine 5% transdermal patch (30 patches) — $102.98 through to $258.97.
  • Hydrocodone-Acetaminophen (“APAP”) — from 22 cents through to $2.69 per unit, depending on the strength. The price for Acetaminophen with Codeine ranged from 15 cents through to 90 cents per unit.
  • Omeprazole 20mg — from 29 cents through to 65 cents.
  • Cyclobenzaprine HCL 10mg tablet — from four cents through to $1.13.
  • Oxycodone HCL — from 23 cents through to $1.57 depending on strength.
  • OxyContin — a brand name extended release or long acting Oxycodone HCL, only manufactured by Purdue Pharma and currently under a protection period, ranged from $2.27 through to $14.51 per unit based on strength.

The Solution

For claims administrators to influence a downward trend in pharmaceutical costs associated with pricing, consideration should be given to the following initiatives:

  1. Know the suppliers of the medications in the PBM/PBN’s formulary.
  2. Compare the suppliers of the PBM/PBN’s formulary to the Medi-Cal formulary to ensure at least the lower prices available from Medi-Cal suppliers are being paid.
  3. Pay only the “no substitute allowed” price when a prescribed medication is not included in the PBM/PBN’s formulary.
  4. When an MPN’s physician dispenses medications, ensure that (a) the “no substitute allowed” price is not paid and (b) the lowest available price is paid for a medication from a supplier listed in the Medi-Cal formulary, unless a lower contracted rate is already in place within the MPN.
  5. Analyze the paid price for pharmaceuticals on at least a monthly basis to ensure the lowest price for a medication has been paid regardless of supplier and monitor medications most frequently dispensed along with their quantities to ensure PBMs/PBNs and physicians are dispensing the lowest cost medication identified in the Medi-Cal formulary, unless a lower contracted rate is already in place.

A claims administrator’s processes and technologies to manage the pharmacy vendor relationships, pre-authorizations and bill reviews must be seamlessly integrated and be able to capture data at the most granular level, which in the case of pharmaceuticals in the U.S. is the National Drug Code (NDC). Without this detailed integration, pharmaceutical costs associated with pricing will continue to increase, as illustrated in California, regardless of legislation changes enacted in the future.

The report relating to this study is available in PDF format from the website managingdisability.com under the Dialogue tab.

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About the Author

John Bobik has actively participated in establishing disability insurance operations during an insurance career spanning 35 years, with emphasis on workers’ compensation in the U.S., Argentina, Hong Kong, Australia and New Zealand.

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