The Cost and Use of Pharmaceuticals in Workers Compensation: A Guide for Policymakers

Transcription

1 The Cost and Use of Pharmaceuticals in Workers Compensation: A Guide for Policymakers Richard A. Victor Petia Petrova Workers Compensation Research Institute This report is protected under Copyright Law and is subject to the same use restrictions as a work printed on paper.

2 The Cost and Use of Pharmaceuticals in Workers Compensation: A Guide for Policymakers

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4 The Cost and Use of Pharmaceuticals in Workers Compensation: A Guide for Policymakers Richard A. Victor Petia Petrova June 2006 WC Workers Compensation Research Institute Cambridge, Massachusetts

5 copyright 2006 by the workers compensation research institute all rights reserved. no part of this book may be copied or reproduced in any form or by any means without written permission of the workers compensation research institute. Library of Congress Cataloging-in-Publication Data Victor, Richard A. The cost and use of pharmaceuticals in workers compenstion : a guide for policymakers / Richard A. Victor, Petia Petrova. p. cm. Includes bibliographical references. ISBN Workers compensation Government policy United States. 2. Drug utilization United States. 3. Prescription pricing United States. I. Petrova, Petia, 1970 II. Title. HD U6V dc publications of the workers compensation research institute do not necessarily reflect the opinions or policies of the institute s research sponsors.

6 Acknowledgments This study would not have been possible without the contributions of a large number of individuals. Many state officials contributed substantial time and expertise to completing a survey about their state practices and responded to our many queries asking for clarification and validation. We benefited greatly from the expertise and perspectives of some of the leading pharmacy chains, community pharmacies, insurers, workers compensation pharmacy benefit managers, and third-party billers. The ground rules of our discussions ensured their anonymity, so we do not name these individuals or their companies here, but we extend our sincere appreciation. Our colleague, Linda Carrubba, provided expert administrative assistance as well as many organizational and substantive insights to the project. We especially appreciate the thoughtful comments of our technical reviewers, Professor Peter Barth of the University of Connecticut and Dr. Leslie Wilson of the School of Pharmacy at the University of California, San Francisco. Their critiques of an earlier draft of the study raised issues that helped us improve the analysis presented in the report. We also wish to thank Jill McNamee, who managed the review and publication process. We are indebted to Barbara McGowran for editing our prose to improve its readability and precision, and for her thorough review of the manuscript that saved us from ourselves on many occasions. We also thank Jan Cocker for carefully proofreading the final report. Of course, any errors in the study remain our responsibility. Richard A. Victor Petia Petrova Cambridge, MA June 2006 v

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8 Table of Contents List of Tables Executive Summary ix xi 1 Introduction 3 Study Scope / 3 Data and Methods / 4 The Cost and Use of Pharmaceuticals in Workers Compensation and Comparisons with the General Health Care System / 4 2 The Business of Pharmaceuticals in Workers Compensation: Roles, Processes, Incentives, and Leverage Points Retail Pharmacies / 9 case 1: the pharmacy has inadequate information about patient eligibility for workers compensation benefits / 9 case 2: the worker presents the pharmacy with a workers compensation pharmacy benefit identification card / 14 Revenue and Cost Implications / 16 Physician-Dispensed Pharmaceuticals / 18 Hospital-Dispensed Pharmaceuticals / 20 3 Public Policy Tools Used to Regulate the Cost and Use of Pharmaceuticals in Workers Compensation Introduction / 21 objective / 21 scope / 21 data and methods / 21 definitions and organization / 22 Price Regulation / 22 maximum reimbursement rates for pharmaceuticals dispensed at retail pharmacies or mail-order services / 22 reimbursement rules for pharmaceuticals dispensed at doctors offices / 31 reimbursement rules for pharmaceuticals dispensed for hospital outpatients and inpatients / 31 Regulation of Utilization Management / 31 generic substitution / 31 use of formularies, therapeutic interchange, and step therapy / vii

9 viii table of contents Choice of Pharmacy Provider / 32 Copayments for Prescriptions / 38 Use of Pharmacy Benefit Managers / 40 4 Literature Review 41 Introduction / 41 objective / 41 lessons from workers compensation studies / 41 lessons from the non workers compensation studies / 41 scope, organization, and limitations / 42 Workers Compensation Literature / 42 Non Workers Compensation Literature / 43 evidence on the effect of pharmacy copayments / 43 evidence on the effect of formularies / 45 evidence on the effect of generic mandates / 45 evidence on the effect of prior authorization / 45 evidence on the effect of step therapy / 46 evidence on the effect of pharmacy benefit managers / 46 evidence on the effect of reference pricing / 47 impact of cost containment tools on access and quality of care / 47 interrelations between pharmaceutical cost containment and other medical care expenditures / 48 5 Conclusions and Policy Implications 49 Glossary 51 References 55

10 List of Tables A Types of Benchmarks Used in State Pharmacy Fee Schedules / xvi B Illustration of Relationships among Various Price Benchmarks Published by the Academy of Managed Care Pharmacy / xvii 1.1 Most Common Medications Dispensed under Workers Compensation, Ranked by Expenditure / Most Common Medications Dispensed in the U.S. Health Care System in 2003, Ranked by Expenditure / Frequency of Generic Use of Commonly Dispensed Medications in Workers Compensation with Generic Equivalents / Trends in Minnesota Pharmaceutical Cost and Utilization / Estimates of Pharmacy Labor Costs per Prescription / Fee Schedule Amounts for Common Medications Used in Workers Compensation and Dispensed by Pharmacies and by Physicians, January 2005 / Retail Pharmacy Price Regulation / Use of Formulaic Fee Schedule by Dispensing Point / Retail Pharmacy Fee Schedule Formulas / Types of Benchmarks Used in State Pharmacy Fee Schedules / Basic Structure of Fee Schedules Based on Average Wholesale Price (AWP) / Range of Premiums and Discounts to the Average Wholesale Price Benchmark in State Pharmacy Fee Schedules / Illustration of Relationships among Various Price Benchmarks Published by the Academy of Managed Care Pharmacy / Drug Utilization Management and Review / Choice of Pharmacy Provider / Generic Mandates and Copayments / Regulation of Pharmacy Benefit Managers / 39 ix

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12 Executive Summary As in the general health care system, the cost and use of pharmaceuticals in workers compensation have grown rapidly. Over the past decade, policymakers in many states have adopted or modified public policies to regulate the prices or utilization of medical services. However, many policymakers tell us their understanding of leverage points and public policy options is poorer in the area of pharmaceuticals than in any other aspect of medical service. This guide for policymakers fills some important knowledge gaps by providing the following information: What are the cost and use of pharmaceuticals in workers compensation? How are they similar to or different from those in the general health care system? What are the drivers of workers compensation pharmacy costs? How does the business of dispensing prescriptions to injured workers work? What are the core processes? Who are the major players? What are their incentives? What are the main leverage points for public policy intervention? What are the principal public policy tools used in 2005 to regulate the cost and use of pharmaceuticals in workers compensation? Which tools are used most often in each state? What evidence exists from credible research studies about the impact of various public policy interventions? A companion report titled State Policies Affecting the Cost and Use of Pharmaceuticals in Workers Compensation: A National Inventory describes the public policies in effect in each state. This study focuses on the major legislative and regulatory tools used in workers compensation, focusing on those involving reimbursement rules (e.g., fee schedules); stimulating price competition (e.g., rules about pharmacy networks); generic substitution; control of the choice of pharmacy; and utilization management. Overview: Selected Findings Workers compensation has some relatively unique friction points that increase expenses to pharmacies and payors, especially in the case of first-time prescriptions, for which the pharmacy often does not know if it will be reimbursed, by whom, or for how much. These friction points shape both the incentives facing the parties and the leverage points available to public officials. They also make public policymaking about pharmaceuticals in workers compensation more complex than in group health insurance or other government programs. Workers compensation payors typically pay substantially more for identical medications than do group health insurance or government programs. Even when the pharmacy does not know if the patient is eligible, injured workers seldom have to pay up front for prescriptions. Rather pharmacies, especially large chains, tend to assume the risk. That is an important role pharmacies play in ensuring access to care. Policymakers should avoid public policy actions that undermine pharmacies willingness to play that role. Public policies and the business processes of payors that help speed eligibility information to the pharmacies with electronic point-of-service access will reduce these friction costs, allow public officials to lower fee schedules, and enable payors to negotiate larger discounts. Fee schedules set at the level of group health insurance or government programs, without companion public policies that reduce the special friction costs, increase the risk of reducing access to care. For chain pharmacies, any resulting access problem is less likely to be a total denial of care and more likely to manifest as a reduced willingness to asxi

13 xii executive summary sume the risk of nonpayment. The result is more workers required to pay up front and seek reimbursement from workers compensation payors. Community pharmacies are even more likely to reduce their willingness to fill workers compensation prescriptions under some circumstances. Pharmacy benefit managers (PBMs) negotiate discounts with pharmacies and conduct utilization review. Pharmacies have incentives to bill payors directly, rather than going through PBMs, because of the possibility of higher reimbursement rates (e.g., fee schedule rates or the higher cash prices ). Public policies that clarify the circumstances under which direct billing is permissible will reduce pharmacy costs and friction costs for pharmacies and payors. The PBM systems for processing approvals, billing, and payment are relatively efficient and parallel group health insurance processes once the pharmacy knows that a worker is covered by a PBM. Public policies that increase the use of PBMs by payors, workers, and pharmacies should reduce both friction costs and pharmacy costs. PBMs obtain agreements from pharmacies for reimbursements that are below the state fee schedules and cash prices otherwise paid. The size of the discount depends on the relative bargaining power of the pharmacy and the PBM. Typically, the discounts agreed to by pharmacy chains are smaller than those in contracts with community pharmacies. However, the sizes of the discounts could lead some community pharmacies to decline participation in the PBM process. Physician-dispensed pharmaceuticals (known as repackaged drugs) may be increasingly common. Advocates for physician dispensing argue that the practice is more convenient for patients and leads to enhanced compliance with medication regimens. They also point to certain vulnerable populations who may have difficulty accessing retail pharmacies because of distances or language differences. Evidence from California suggests that nearly onethird of prescriptions are dispensed by physicians and that the payments for the prescriptions are much higher than if they were dispensed by retail pharmacies. The structure of the fee schedules in California creates incentives for physicians to dispense pharmaceuticals. Other states should examine their reimbursement policies to ensure that they have not unintentionally created perverse incentives in this area. Workers compensation laws to date require the use of fewer cost containment tools than are typically used by group health insurance. The principal tools used in workers compensation are fee schedules and generic mandates. The most common non workers compensation tool is multi-tier copayments that encourage the patient to use the least costly therapeutically equivalent medication. Copayments are generally prohibited in workers compensation, although a variant on copayments is used in nine states to allow the worker to get around the generic mandate by paying the difference between the brand name and the generic. Twenty-nine of the 46 states in the study have some form of formulaic fee schedule. Most tie the maximum fee level to a benchmark called the Average Wholesale Price (AWP), which is akin to the sticker price on a car in that it is the price posted by manufacturers but is not the price paid by pharmacies after discounts and rebates. Other benchmarks more commonly used outside workers compensation (and by a few state workers compensation systems) are somewhat or much lower than the AWP. Twenty-eight states have generic mandates that require pharmacies to fill prescriptions using generic equivalents unless generics are not available or the physician explicitly indicates not to do so. In nine of these states, the worker can still obtain the brand-name medication if he or she pays the difference between the brand name and the generic. A number of studies outside workers compensation have examined the impact of public policies or insurance plan design on the cost and use of pharmaceuticals. Some researchers have analyzed the impact on patient outcomes. However, few studies have addressed the impact of workers compensation policies. Among the lessons from the non workers compensation literature are these: Mandatory generic substitution reduced costs to the payors. Prior authorization for certain types of medications substantially reduced expenditures on

14 Prescriptions in workers compensation tend to be for medications that manage pain or that counter the side effects of pain medication. By contrast, the most common prescription medications outside workers compensation are antidepressants, antiulcer medications, and cardiovascular-related drugs. According to several studies, prescription drug costs were 7 12 percent of total workers compensation medical costs, depending on the states and years the studies examined and the methods used. Where generic equivalents were available, typically they were used. However, many of the most common prescription drugs in workers compensation did not have generic equivalents. Studies show that prescription drug costs have been growing rapidly. Both rising prices and growing utilization contribute substantially. A Minnesota study found that the average price of a pill grew by nearly 20 percent per year from 1999 to 2001, and that the number of pills per workers compensation case grew by 50 percent during that period (Minnesota Department of Labor and Industry, 2003). In general, workers compensation insurers pay notably higher prices than do other payors for the same medications. A common way to express prices for pharmaceuticals is relative to a widely used benchmark, like the AWP. A study conducted by the National Council on Compensation Insurance, Inc. (NCCI) found that workers compensation insurers paid an average of 125 percent of the AWP compared with 72 percent paid by group health payors. That is, workers compensation insurers paid 74 percent more than did group health payors for the same medications. Another important benchmark is what the federal government pays for medications under health care programs in which the government is the payor or purchaser (e.g., veterans health care or defense department systems). According to a Veterans Affairs official, federal programs pay the AWP minus percent. As discussed later, there are some important reasons why workers compensation payors may need to reimexecutive summary xiii those medications, although the researchers could not tell how much of the savings resulted from appropriate or inappropriate utilization. Several studies found that PBMs reduced drug expenditures in federal programs. Copayments reduced utilization of pharmaceuticals. Copayments combined with formularies (lists of drugs that will be reimbursed) concentrated the payors purchasing power on a smaller number of drugs, realizing larger discounts from manufacturers and wholesalers. As these cost containment tools reduced utilization, concerns arose about adverse effects on patients. Several studies found some evidence to support these concerns. Data and Methods The information in this study comes from three sources. First, we conducted semistructured, open-ended inperson and telephonic interviews with experts in the field, focusing on the business processes and incentives of the major players. Second, we conducted a written survey of states to identify the public policies in each state that affect the cost and utilization of pharmaceuticals in workers compensation. Third, we reviewed the empirical literature on the impacts of the commonly used public policies on costs, use, and patient outcomes. The interviewees were selected for their expertise and were not intended to be a representative sample. We interviewed six representatives of major pharmacy chains, one representative of community pharmacies, three executives for workers compensation PBMs, representatives of three workers compensation payors, and several executives with one leading third-party biller. We also interviewed two public officials who had the primary regulatory authority over medical costs and use in their states. Additionally, we conducted brief in-person interviews with pharmacists in various chain drug stores in the Boston metropolitan area. The perspective of community pharmacies is underrepresented in our analysis. This is potentially important because a survey by Wilson (2004) found that the incentives and views of chain stores differ, on average, from those of community pharmacies on some key issues. We did not interview injured workers about their experiences. The Cost and Use of Pharmaceuticals in Workers Compensation

15 xiv executive summary burse pharmacies at higher rates than do other payors especially when a pharmacy cannot easily determine a worker s eligibility for benefits. The underlying policy question raised is, How much more? The Business of Pharmaceuticals in Workers Compensation: Roles, Processes, Incentives, and Leverage Points Two major findings of this study distinguish workers compensation insurers from other payors. Workers compensation has some relatively unique friction points that increase expenses to pharmacies and payors. These friction points shape both the incentives facing the parties and the leverage points available to public officials. They also make public policymaking and effective program design for pharmaceuticals in workers compensation more complex than in group health insurance. Workers compensation laws to date require the use of fewer cost containment tools than are typically used by group health insurance. In particular, program design in group health insurance and federal programs relies heavily on fee schedules, multi-tier copayments, and formularies to influence patients decisions about utilization. Workers compensation laws generally prohibit copayments and are typically silent about the use of formularies. Instead, workers compensation relies principally on fee schedules that set fees higher than those of other payors. Two key elements drive these findings. The first is eligibility determination. Especially when presented with the first prescription in a case, the pharmacy typically does not know with certainty that the patient and the prescription are covered by workers compensation. It has no assurance of reimbursement. The second is the pharmacy benefit manager. If the pharmacy is aware that the insurer or employer has contracted with a PBM, then the automated PBM process is an efficient one for determining eligibility, submitting the bill, and receiving payment. The worker can obtain prescription medication at various dispensing points. At each dispensing point, different regulatory policies, incentives, and business processes may apply. A dispensing point can be a retail pharmacy, physician s office, hospital outpatient pharmacy, or hospital inpatient stay. The report addresses each dispensing point; however, this summary focuses on prescriptions dispensed at retail pharmacies. There are two cases to consider. In the first case, the pharmacy does not know if the patient is covered by workers compensation. In this situation, often (but not always) for the first prescription in a case, the patient may not yet have a claim number or PBM card, and the payor may not have been notified of the claim or accepted liability. A typical example is when the worker goes to the pharmacy directly from an initial physician visit on the day of the injury. The second case is when the pharmacy knows who the payor is, the case has been accepted, and the worker has a PBM card with an ID number. In the first case, the pharmacy has special expenses that it does not generally have for group health or government payors, or for workers compensation when it has information confirming eligibility and to whom to send the bill. These expenses fall into four groups: 1. Billing: The individual pharmacy and its headquarters invest time to determine whom to bill and to create and mail a bill to the payor. Substantial economies of scale in this process accrue to chain pharmacies but may be less available to community pharmacies, unless they use larger vendors for the tasks. 2. Collection: Headquarters (or the community pharmacist) spends staff time (or vendor expense) to obtain the payment for the billed amount. This may involve follow-up and negotiation. Billing and collection may be outsourced, in part, to a thirdparty biller. 3. Risk of nonpayment: Lacking certainty about whether the worker is covered or how much the payor will pay, the pharmacy incurs the risk that it will be paid less than expected or not paid at all. 4. Forgone interest income from longer payment periods: Workers compensation payments that are

16 executive summary xv not made through PBMs typically take many weeks or months longer than payments from group health insurance or Medicaid. The pharmacy forgoes interest on those revenues during the longer periods before payment is received. When presented with a workers compensation prescription, but without certainty about the eligibility of the patient for coverage, the first decision that the pharmacist (or technician) makes is from whom to seek payment. These are the principal options: From the worker, who would pay the cash price and seek reimbursement from the employer or insurer. Directly from the employer or insurer, without the involvement of a PBM. The billed amount would be for the state-promulgated workers compensation fee schedule price, or in the absence of a fee schedule, the cash price. From the PBM representing the employer or insurer. The PBM would reimburse based on a negotiated contract rate that is typically below both the fee schedule rate and cash price. From billing the group health insurer. Two considerations influence the pharmacist s decision. At the individual pharmacy level, we found that a primary concern is customer satisfaction (retention). At the headquarters of a chain pharmacy, additional profitmaximizing considerations (given higher reimbursement rates for some choices) influence the development of policies and procedures about whom to bill. These policies and procedures are implemented to varying degrees at the individual pharmacy level. Workers are seldom asked by chain pharmacies to pay up front and seek reimbursement from the workers compensation payor. Pharmacies indicated that they are often willing to take the nonpayment risk to retain customers (or acquire new ones). Their motivations are retaining customers over the long haul and obtaining the higher rates that workers compensation typically pays compared with other payors. As to the customer retention motivation, recall that patients make a wide range of purchases in drug stores, not just their workers compensation prescription. Refusal to fill the prescription or making the worker pay up front might jeopardize the profits earned on all current and future business, especially in urban areas where customers have many convenient options. Pharmacies generally earn higher gross profits on workers compensation prescriptions than on those reimbursed by group health insurance or government programs. Recall that pharmacies receive higher payments from workers compensation payors either the fee schedule price; the cash price, if there is no fee schedule; or the lower PBM contract rate, which is often higher than prices negotiated with payors that have more bargaining power (e.g., group health insurance or Medicaid). However, the gross profits are offset in part by the higher expenses that pharmacies incur when the patient s eligibility is not known. Because community pharmacies have less bargaining power with PBMs, the prices they are reimbursed when PBMs are involved are typically lower than for the chains. On balance, pharmacies have incentives to bill the payor directly, not through the PBM, because of the possibility of higher reimbursement rates (e.g., fee schedule rates or the higher cash price ). More cost-effective options are not currently available for pharmacies attempting to fill prescriptions for patients whose eligibility is unknown (usually first prescriptions). For subsequent prescriptions, increased use of a PBM would reduce both friction costs and payments for drugs. Public policies that increase the use of PBMs, encourage or require workers to use their PBM cards, and clarify the circumstances under which pharmacies must bill through PBMs will reduce friction costs for the pharmacies and drug costs and friction costs for payors. State Policies on Pharmaceuticals in Workers Compensation fee schedules Workers compensation laws to date require the use of fewer cost containment tools than are typically used by group health insurers or government programs. The principal tools used in workers compensation are fee schedules and generic mandates. The most common non workers compensation tool, copayments, is used by workers compensation in 9 of the 46 states studied and only to allow the worker to avoid the generic mandate by paying the difference between the brand-name drug and

17 xvi executive summary Table A Types of Benchmarks Used in State Pharmacy Fee Schedules Benchmark Price Jurisdictions Average Wholesale Price (AWP) 28 Maximum Allowable Cost (MAC) 2 Wholesale Acquisition Cost (WAC) 1 Federal Upper Limit (FUL) 2 Medicaid 1 Notes: Policies current as of November 15, The numbers in the table do not sum to 29 because some jurisdictions use the lesser of multiple benchmarks, and because Ohio, which uses a different formula for self-insured employers, is counted twice. the generic equivalent. Other tools commonly used in group health insurance or government programs to manage utilization (e.g., formularies) are explicitly authorized or prohibited for workers compensation in only a handful of states. Thirty-six of the 46 states in the study regulate maximum reimbursement rates for pharmaceuticals dispensed at retail pharmacies. Twenty-nine of those states have formulaic fee schedules, and 7 states set maximum reimbursement rates based on some notion of usual and customary charges for the community. The typical fee schedule formula used to determine the maximum reimbursement rates is based on some benchmark price for the ingredient cost (underlying unit price of the drug), plus a dispensing fee (for professional services). Almost all states with formulaic fee schedules base them on the AWP. The AWP is typically not the actual average wholesale cost, because buyers can negotiate lower prices through rebates and discounts. 1 Not defined by law or regulation, the AWP should not be confused with a pharmacy s actual costs for the medication. Other benchmarks are used in a small number of states (Table A). These other benchmarks are typically below the AWP sometimes much below (Table B). In half of the states that use the AWP, the state fee schedules use the AWP without a discount or premium. However, some states adjust the AWP upward or downward. The range of discounts and premiums to the AWP benchmark is shown in Table B. Those that reduce the AWP do so by up to 12 percent. Those that increase the AWP do so by up to 40 percent. generic substitution In workers compensation, states use two approaches to increase the use of generics when they are available. First, fee schedules in 9 states provide some financial incentives to pharmacies to voluntarily substitute generics. This is often accomplished by increasing the percentage of the AWP added to the reimbursement by 5 16 percentage points for generic drugs over brand-name drugs (in 3 states), or by adding a $1 to $3 higher dispensing fee (in 6 states). Second, 28 states mandate that the pharmacy must fill a prescription using a generic unless no generic drug equivalent is available or the prescribing physician has specifically indicated that a generic cannot be dispensed. If the statute does not prohibit generic substitution, it is left to the discretion of the pharmacist and the injured worker. Pharmacies tend to use generics when available because the profit margins are usually higher. copayments for prescriptions In workers compensation, the payor is typically responsible for the full cost of medical care, including 1 The AWP is reported by drug manufacturers, distributors, and other suppliers to organizations that publish the data, such as Medi-Span, part of Wolters Kluwer Health.

18 executive summary xvii Table B Illustration of Relationships among Various Price Benchmarks Published by the Academy of Managed Care Pharmacy Price Description Percentage of Average Wholesale Price Brand-Name Drug Generic Drug Average Wholesale Price (AWP) 100% 100% Maximum Allowable Cost (MAC) 25% a 50% Federal Upper Limit (FUL) 28% a 56% Usual and customary price 120% 120% Wholesale Acquisition Cost (WAC) 80% 30% a MAC or FUL price would be assigned only if a generic equivalent product to the brand-name drug is available. If no generic drug is available, neither a MAC nor an FUL price would be assigned. Source: Selected measures from Academy of Managed Care Pharmacy, n.d. Names of drugs are not specified by the author. pharmaceuticals. In group health insurance, it is common for patients to make a partial payment for medical care known as a copayment. One goal of the copayment is to encourage the consumer to make cost-effective decisions about utilization. For pharmaceuticals in group health insurance, higher copayments may be required if (1) the patient prefers a brand-name drug when a generic is available; (2) the patient prefers a more expensive drug when a less expensive therapeutically equivalent drug is available (drugs outside the formulary); or (3) if the patient uses a retail pharmacy when the prescription could be filled by a mail-order service. In workers compensation, of the 28 states that mandate generic substitution, 9 states allow the worker to obtain the brand-name drug if he or she pays the difference between the generic and the brand-name drug. This is the closest that workers compensation comes to the group health insurance model of authorizing a copayment to encourage cost-effective decisions by patients. choice of pharmacy provider States typically provide that either the employer or the employee can select the medical provider. Similarly, many (but not all) states do the same for the pharmacy provider. In most states, rules for the pharmacy provider are the same as for other medical providers; in other states, the rules differ because either the more general provider choice rules apply to medical services and pharmaceuticals are deemed to be goods not services, or a pharmacy is not deemed to be a medical provider under the statute. In 21 states, the worker can choose the pharmacy to fill the prescription. The payor can direct the worker to a specific pharmacy in 16 states. In 9 states, statutes are silent with respect to the choice of pharmacy. In 4 states, employers can direct injured workers only for a limited time: in Maine and Michigan in the first 10 days, in New Mexico only for the first 60 days, and in Pennsylvania for the first 90 days after the injury. use of pbms PBMs contract with pharmacies for prices below usual and customary or below state fee schedules. Payors contract with PBMs to take advantage of lower reimbursement rates and other utilization management and data processing services. None of the states in the study certify PBMs. Only a few states report that they have regulatory requirements that a pharmacy must submit bills to a PBM when the pharmacy is aware that the case is covered by the PBM contract. These states are Michigan, Minnesota, North Dakota, and Ohio; note that two of the states, North Dakota and Ohio, have exclusive state funds, and the PBM requirements arise out of business processes of the insurance company rather than the regulatory function of the system.

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20 The Cost and Use of Pharmaceuticals in Workers Compensation: A Guide for Policymakers

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22 1 Introduction The cost and use of pharmaceuticals have been the subjects of much debate at the federal and state levels. This debate has been driven by concerns about rapidly rising costs and recent concerns about the efficacy and safety of certain medications. Although workers compensation makes up a small share of the total prescriptions dispensed annually in the United States, the cost and use of pharmaceuticals have been growing rapidly. According to the National Council on Compensation Insurance, Inc. (NCCI), pharmaceutical costs in workers compensation comprised $1 of every $8 spent on medical care. At a time when medical costs per case have been rising rapidly, pharmaceutical costs have increased even faster. NCCI found that pharmaceutical costs rose from 10 percent of total medical costs in 1998 to 12 percent in 2002, when projected to the final costs of the cases (Llewellyn and Stevens, 2004). According to the California Workers Compensation Institute (CWCI), prescription costs were estimated to grow from 4 percent to 7 percent of workers compensation medical costs between 1996 and 2005, using amounts actually paid but not projected to final costs (Neuhauser et al., 2000). Policymakers in some states increasingly consider interventions to reduce the rate of growth of pharmaceutical costs in workers compensation, usually as part of a larger focus on system cost containment. Policymakers often tell us that they have less information about the use, costs, and regulatory practices regarding pharmaceuticals than about most other areas of workers compensation. As a result, we have created this Guide for Policymakers to provide information that may help answer these questions: What are the cost and use of pharmaceuticals in workers compensation? How are they similar to or different from those in the general health care system? What are the drivers of workers compensation pharmacy costs? (See Chapter 1.) How does the business of dispensing prescriptions to injured workers work? What are the core processes? Who are the major players? What are their incentives? What are the main leverage points for public policy intervention? (See Chapter 2.) What are the principal public policy tools used in 2005 to regulate the cost and use of pharmaceuticals in workers compensation? Which tools are used most often in each state? (See Chapter 3 and the companion report, State Policies Affecting the Cost and Use of Pharmaceuticals in Workers Compensation: A National Inventory, which describes the public policies in effect in each state.) What evidence exists from credible research studies about the impact of various public policy interventions? (See Chapter 4.) The objective of the study is to provide policymakers and system stakeholders with a readily accessible summary of the issues and evidence that will be useful background and reference when legislative or regulatory issues arise regarding pharmaceuticals in workers compensation. Study Scope This study focuses on public policies that are unique to workers compensation legislation and regulation. Pharmaceuticals are regulated by the federal and state governments in contexts ranging from premarket approval of new drugs by the Food and Drug Administration (FDA), 3

23 4 the cost and use of pharmaceuticals in workers compensation to postmarket surveillance by the FDA and the liability system, to regulations about direct-to-consumer advertising, to rules that regulate the prescribing and dispensing of controlled substances (e.g., narcotics), to reimbursement rules for insurance programs in which the federal or state governments are payors (e.g., Medicaid and the Veterans Health Administration). Analyses of these public policy interventions are outside the scope of this study. Policymaking in workers compensation involves the use of several categories of legislative and regulatory tools, including those focusing on reimbursement rules (e.g., fee schedules); stimulating price competition (e.g., rules about pharmacy networks); generic substitution; control of the choice of pharmacy; and utilization management (e.g., authorization for payors to conduct various forms of drug utilization review; specific limitations on the types and amounts of drugs that may be dispensed). These areas of public policy in workers compensation are the subjects of this study. to be a representative sample. Additionally, we conducted brief in-person interviews with pharmacists in various chain drug stores in the Boston metropolitan area. The perspective of community pharmacies is underrepresented in our analysis. Although inevitable because community pharmacies are such a diverse group, this underrepresentation is potentially important because a systematic survey by Wilson (2004) found that the incentives and views of chain stores differ, on average, from those of the community pharmacies on some key issues. Also, we did not interview any injured workers about their experiences. Second, we conducted a written survey of state officials that forms the basis of Chapter 3 and the companion report. The surveys focused on identifying the public policies in each state that affect the cost and utilization of pharmaceuticals in workers compensation. Third, we reviewed the empirical literature on the impacts of the public policies described in Chapter 3. Finally, we examined the literature about public policies in workers compensation, group health insurance, Medicare, and other government-financed health care programs; we report the results of the literature review in Chapter 4. Data and Methods The materials in this study come from three sources. First, we conducted semistructured interviews with a limited number of experts in the field. These in-person and telephone interviews were open ended and lasted from 30 to 90 minutes. The interviews focused on the business processes and incentives of the major players involved in the delivery of and payment for pharmaceuticals in workers compensation. We also elicited their views on and experiences with public policies that affect the cost and utilization of pharmaceuticals in workers compensation. We interviewed six representatives of major pharmacy chains, one representative of community pharmacies, three executives for workers compensation pharmacy benefit managers (PBMs), representatives of three workers compensation payors, and several executives with one leading third-party biller. We also interviewed two public officials who had the primary regulatory authority over medical costs and use in their states. The interviewees were selected for their expertise and were not intended The Cost and Use of Pharmaceuticals in Workers Compensation and Comparisons with the General Health Care System What percentage of medical costs do pharmaceuticals account for in workers compensation? Several studies have measured how much of the total medical bill for injured workers goes to pharmaceuticals. These studies differ from one another in the time frames covered, the states included, and the definitions of cost. A study by NCCI found that prescriptions account for 12 percent of workers compensation medical costs for injuries arising in 2002 (Llewellyn and Stevens, 2004). This study took data from 28 states. It started with the amounts paid and used actuarial methods to project ( develop ) what the medical and prescription costs would be during the future years that claims were receiving services. A California study by Neuhauser et al. (2000) used data through 1999 to project that pharmaceutical payments would be 7 percent of total medical costs by

24 introduction 5 Table 1.1 Most Common Medications Dispensed under Workers Compensation, Ranked by Expenditure Name of Medication Type of Medication California (Neuhauser et al., 2000) Oregon (Hindmarsh, 2000) 28 States (Llewellyn and Stevens, 2004) Minnesota (2004) OxyContin Painkiller Celebrex Anti-inflammatory Vioxx Anti-inflammatory Neurontin Antiseizure Hydrocodone/acetaminophen Painkiller Ultram Painkiller Soma Muscle relaxant Duragesic Painkiller 8 9 Flexeril Muscle relaxant Ambien Sedative 10 9 Prozac Antidepressant 6 Prilosec Antiulcer 7 Relafen Painkiller 8 Naproxen Anti-inflammatory 10 8 Ibuprofen Anti-inflammatory 2 Acetaminophen/codeine Painkiller 6 Propoxyphene (Darvon) Painkiller 7 Cephalexin (Keflex) Anti-infective 10 Source: Emond and Llewellyn, Unlike the NCCI figures, these numbers use actual past payments made, but they are not developed to estimate future payments using actuarial methods. What are the most commonly prescribed drugs in workers compensation? How do they compare with pharmaceuticals commonly paid for by group health insurers? Medications dispensed in workers compensation are often prescribed to manage pain or to manage the adverse side effects of pain and pain management medications. Emond and Llewellyn (2003) found that more than half of the payments (55 percent) for workers compensation prescriptions are for painkillers, 20 percent are for muscle relaxants, and 14 percent for antidepressants. Table 1.1 shows the top medications dispensed in workers compensation according to four studies. By contrast, the most common medications dispensed in the U.S. health care system (all payors) are drugs to treat cardiovascular disorders (18 percent of expenditure), antidepressants (15 percent), and anti-infectives (13 percent; Emond and Llewellyn, 2003). Table 1.2 shows the top medications dispensed in the U.S. health care system. How often are generics dispensed? Generics are typically dispensed when they are available; however, many of the most common medications dispensed in workers compensation had no generic equivalents during the periods studied to date. Llewellyn and Stevens (2004) found that generics were dispensed in 86

25 6 the cost and use of pharmaceuticals in workers compensation Table 1.2 Most Common Medications Dispensed in the U.S. Health Care System in 2003, Ranked by Expenditure Name of Medication Type of Medication Rank Lipitor Cardiovascular 1 Prevacid Antiulcer 2 Zocor Cardiovascular 3 Nexium Antiulcer 4 Zoloft Antidepressant 5 Celebrex Anti-inflammatory 6 Zyprexa Schizophrenia 7 Neurontin Antiseizure 8 Effexor XR Antidepressant 9 Advair Diskus Asthma 10 OxyContin Painkiller 11 Source: Kuschner and Emptage, percent of instances when generic equivalents were available, but 53 percent of workers compensation prescription costs were attributable to brand-name drugs for which no generic equivalent was available. A recent study of California by CWCI (2005) found that 70 percent of 2004 expenditures on pharmaceuticals were for brand names, an increase from 58 percent in In that study, 4 of the top 5 drugs dispensed and 5 of the top 10 drugs dispensed had no generic equivalents. A study by the Minnesota Department of Labor and Industry (2003) found that 68 percent of drugs were dispensed as generics, but those drugs accounted for only 38 percent of payments for pharmaceuticals in workers compensation. Table 1.3 shows examples of commonly used medications with generic equivalents available and how often generics are used rather than brand names. What has been driving the growth in costs price, utilization, or both? Medical costs have been rising rapidly in workers compensation, and pharmacy costs have been rising even faster. According to NCCI (Llewellyn and Stevens, 2004), the costs of prescriptions rose from 10 percent of total workers compensation medical costs in 1997 to 12 percent in 2002 injuries. They report that total prescription costs grew by 15 percent in the most recent year studied, following three years of annual growth of percent. In the most recent year studied, price and utilization were both cost drivers, with price a somewhat larger driver. In the previous three years, utilization was the larger driver. Over the period, the average price grew by about 8 percent per year. In a California study, Neuhauser et al. (2000) found that the price of a typical workers compensation prescription rose 13 percent from 1998 to The Minnesota Department of Labor and Industry (2003) found that both price and utilization drove prescription costs upward starting in As Table 1.4 shows, the average cost of a workers compensation prescription rose rapidly after 1998 (from $218 to $ percent, or 17 percent per year), following a period of relative stability. Utilization of medications also increased significantly after 1998: the percentage of cases with at least one prescription grew from 15 percent to 20 percent, and the number of units (e.g., pills) per claim grew by 52 percent. Price grew even more rapidly 68 percent, or nearly 19 percent per year after starting with There are a number of potential reasons why utilization increased; however, a systematic examination of these is beyond the scope of this study. Among these reasons are growing direct-to-consumer advertising, increased innovation and effectiveness of medications,

26 introduction 7 Table 1.3 Frequency of Generic Use of Commonly Dispensed Medications in Workers Compensation with Generic Equivalents Generic Medication (Brand Name) Percentage of Prescriptions That Were Generics Percentage of Prescriptions That Were Brand Name Amitriptyline (Elavil) 99.0% 1.0% Carisoprodol (Soma) 93.4% 6.6% Cyclobenzaprine (Flexeril) 97.8% 2.2% Diazepam (Valium) 84.3% 15.7% Ibuprofen (Motrin) 97.8% 2.2% Naproxen (Naprosyn) 99.8% 0.2% Source: Minnesota Department of Labor and Industry, Table 1.4 Trends in Minnesota Pharmaceutical Cost and Utilization Year Average Prescription Cost per Claim (claims with at least one prescription) Percentage of Cases with at Least One Prescription Units per Claim (e.g., pills) Price per Unit (e.g., pills) 1996 $225 15% 200 $ $184 15% 200 $ $218 15% 230 $ $276 16% 250 $ $306 18% 280 $ $347 20% 350 $1.48 Source: Minnesota Department of Labor and Industry, changes in medical practice patterns to substitute medications for more time-intensive interventions, and strengthening of utilization controls in other areas that serve to increase the use of medications. How do prices paid in workers compensation compare with those paid by other payors? In general, workers compensation pays notably higher prices than other payors for the same medications. A common way to express prices for pharmaceuticals is relative to a widely used benchmark like the Average Wholesale Price (AWP) for a drug. Emond and Llewellyn (2003) found that workers compensation payors paid an average of 125 percent of the AWP compared with 72 percent paid by group health payors. That is, workers compensation paid 74 percent more than group health payors for the same medications. The Minnesota Department of Labor and Industry study (2003) also found that workers compensation payors typically pay higher prices than other payors. The study found that in 2003, workers compensation paid 100 percent of the AWP for a medication plus a $5.14 fee to the pharmacy for professional services. By contrast, the Minnesota Medicaid rates that applied at the time of the study were 91 percent of the AWP plus a $3.65 professional fee. A national survey of health maintenance organizations (HMOs) cited in the Minnesota study found that HMOs in 2001 averaged 86 percent of the AWP plus a professional fee of $2.21.

27 8 the cost and use of pharmaceuticals in workers compensation Another important benchmark is what the federal government pays for medications under health care programs in which the government is the payor or purchaser for example, health care provided through the Departments of Veterans Affairs (VA) or Defense (DOD). Federal payments are based on the Federal Supply Schedule (FSS). According to Bascetta (2002): VA and DOD have been successful in using a number of purchasing arrangements to obtain substantial discounts on prescription drugs....for the bulk of their pharmaceutical purchases, VA and DOD obtain favorable prices through the Federal Supply Schedule (FSS). By statute, in order to be able to obtain reimbursement for drugs for Medicaid beneficiaries, manufacturers must offer their drugs on the FSS. The FSS schedule prices are intended to be no more than the prices manufacturers charge their most-favored nonfederal customers under comparable terms and conditions. In 1999, about 81 percent of VA and DOD s combined $2.4 billion in drug expenditures was for drugs bought through the FSS for pharmaceuticals (p. 4). Bascetta also found that the FSS averages the AWP minus percent. As discussed in Chapter 2, there are some important reasons why workers compensation payors may need to reimburse pharmacies at higher rates than do other payors especially when a pharmacist cannot easily determine a worker s eligibility for benefits. The underlying policy question raised is, How much more?