Jeffrey Miller: Compound Drugs in California: Panacea or Problem?

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1 CONTENTS Jeffrey Miller: Compound Drugs in California: Panacea or Problem? Paladin Welcomes New Strategic Partners Paladin Introduces New Field Case Management Program Medical Bill Review Case Study: Insurer Achieves Substantial Savings from Paladin Medical Bill Review Paladin Quarterly Newsletter August 2011 Issue Jeffrey Miller: Compound Drugs in California: Panacea or Problem? WorkCompWire June 6, 2011 According to the California Workers Compensation Institute, California employers and insurers have seen a nearly 10% increase in payments for physicianprescribed compound drugs over the past three years, which has substantially increased the overall cost of medications provided as workers compensation benefits. This problem has caught the attention of California State Assemblyman Jose Solorio, who recently proposed legislation to regulate the dispensing of these drugs and their costs. Are these medications cutting-edge treatment, or are they a cash cow for providers? What is driving this increase, and what should done about it? Compound Drugs are customized mixtures of multiple drugs and other remedies intended to better meet the unique needs of the patient. These creations are prescribed by physicians and are prepared by specialty compounding pharmacists and can be dispensed and billed either by the pharmacist or the prescribing physician. Compound drugs may have the same active ingredients found in brand-name and generic prescription drugs, and when legitimately prescribed, are intended to accommodate differing dosage strengths or delivery methods. A variation on this approach is medical foods, defined by the FDA as formulated to be consumed or administered entirely under the supervision of a physician and which (are) intended for the specific dietary management of a disease or condition for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation. Another permutation is the Co-Pack, which is a convenience package that includes a medical food product in a single package with a generic medication, creating a combination that requires a prescription. Compound drugs have their legitimate uses. Occasionally they are medically necessary, such as when the administration of precise dosages is critical and these dosages are otherwise unavailable, or to avoid nonessential ingredients which may be harmful to the patient due to allergies or other conditions. While the original intent of these drug combinations is to provide better medical care to patients, unfortunately they ve become a loophole that s being exploited by a small number of physicians and other providers driving what has become a significant issue, in an effort to maximize revenues without materially improving treatment effectiveness. Compound drugs and their variants present an opportunity to circumvent reimbursement methodologies and charge a higher price for drugs and other remedies than if they were dispensed in standard dosages and portions. One legitimate use was cont d on next page

2 described by the California Workers Compensation Institute (CWCI): In Workers Compensation, compounding drugs are often associated with a means of delivering pain relief through a topical cream. While this use may seem benign enough, in a recent article in the Workers Comp Executive, Assemblyman Solorio provided an example of a pain relief lotion available to the general public for around $30, but when prescribed for workers compensation patients, the same formula from the same company is billed at between $250 and $360 for the same quantity. There are many compound drugs that are prescribed ostensibly for the benefit of the patient that are otherwise readily available to the patient in less expensive and more easily obtained forms. In these instances it is apparent to the lay-person that the prescription version financially benefits the physician. Here are three common examples of compounding: Tramadol 25mg with APAP 50mg (Mild Prescription Pain medicine with Tylenol) Naproxen 250mg with Ranitidine HCL 75mg (Aleve with Zantac) Diphenhydramine 25mg with Melatonin 1.5mg (Benadryl with Melatonin, an over the counter sleep medication) In two of these examples (Naproxen and Diphenhydramine), the medications used in the compounds are readily available over the counter, and also in an inexpensive generic form. As prescribed, these compounds can be billed at multiple times their retail cost because a national drug code may not exist for the combination, and thus the compound in its new composite form may no longer be subject to the limits imposed by the California Official Medical Fee Schedule. Often the constituent ingredients are not identified on the invoice, but when they are, it is time consuming and complicated to match up the fee schedule amounts so that payment can be repriced to the allowable amount. Few insurers, TPAs and self-insured employers will expend the resources to assure that this is done. Another common practice is to compound by including a portion of the standard dosage from bulk ingredients, but charge for the full standard dose. This allows the dispensing physician or pharmacist to essentially charge multiple patients for the same pill, as bulk ingredients are far less expensive than when provided in pill form, and the full standard dose is not being included in the compound. Also, as noted in a recent RAND study, bulk ingredients are not FDA-approved because they are not commercially available finished drug products. In all of these scenarios, compounding usually results in a charge well in excess of what would be appropriate if the fee schedule was applied stringently. An additional concern is safety and efficacy. Whereas brand-name and generic prescriptions are regulated by the Food and Drug Administration (FDA), compound drugs are not, so there are no systematic safeguards to assure that these combinations of medicines are effective for the condition or reasonably free of harmful side effects. As Assemblyman Solario states in the text of his pending bill, AB 378, According to the FDA, compounded drugs carry significant health risks that can lead to permanent injury or death. Research documenting a sharp increase in the use of compound drugs in Workers Compensation would suggest at least some systematic abuse. As noted in a recent CWCI research report, between the first quarter of 2006 and the first quarter of 2009, the percentage of National Drug Codes (NDCs) in California s workers compensation associated with compound drugs, co-packs and medical foods has nearly quadrupled from 1.2 percent to 4.7 percent. This same report goes on to state that over the same three-year span, the total amount charged for these products has grown from 2.2 percent to 12.0 percent of the total dollars billed as medications in the California workers compensation system. Put simply, while the use of compound drugs is increasing at a rate much greater than that of standard drug expenses, the cost of compounds is growing even faster which can lead to the conclusion that billed amounts routinely exceed the fee schedule. Why does anyone care? For self-insured employers, these unnecessary upcharges directly affect the company s bottom line by increasing the cost of risk. For firms that insure their workers compensation exposures, higher claim costs can have a marked effect on insurance costs and in some cases, eligibility for coverage. Loss experience is used by insurers to determine account quality and pricing, and all else being equal, higher loss costs mean higher premiums. Increased claim costs also translate to a higher experience modification factor, which also drives premiums upward. If it becomes California law, Assemblyman Solorio s pending legislation, AB 378, will do much to curtail the abuse of drug compounding. As proposed, this bill will regulate the dispensing of compound drugs, and will prohibit the referral of prescriptions for these drugs to a person or entity with which the prescribing physician or his or her immediate family has a financial interest, essentially banning the practice of physicians providing compound drugs directly to patients. The bill will also establish a fee schedule limiting payments for these drugs until the Division of Workers Compensation is able to officially implement its own fee schedule. Contact your state legislator today and voice your support for this important new law that will bring these escalating drug costs back under control while preserving the legitimate use of compound drugs for those who need them. Adequate controls on prescription and mixed-prescription medications should be augmented by a system that identifies and rewards aboveaverage performance as measured by treatment outcomes and duration of disability. Fair reimbursement coupled with incentives for superior performance will help maintain injured worker access to the best providers and improve the overall quality and effectiveness of treatment results that are good for everyone.

3 Paladin Welcomes New Strategic Partners Paladin proudly announces new strategic partnerships with Align Networks, a network provider of physical therapy services and facilities, MSC, a durable medical equipment and home health services provider, and One Call Medical (OCM), a network provider of diagnostic services and facilities. These new business relationships enable Paladin to further expand its comprehensive suite of managed care services nationally, and offer pricing below the normal fee schedule and usual and customary rates. Now we can offer our self-insured employer, public entity, insurance company, group health, and third-party administrator clients even more ways to achieve better medical outcomes for injured workers, lower their cost of risk and gain greater control of insurance premiums. Nicholas Godellas, Director of Managed Care at Paladin said: We are excited to be working with these solid strategic partners. Each of these new alliances will help Paladin focus even greater attention to various aspects of injured worker rehabilitation and assure excellent care at lower cost. By engaging with these industry-leading firms, Paladin has again demonstrated its ongoing commitment to delivering exceptional results that our clients can count on. About Align Networks Align Networks is a national provider network for exceptional outpatient rehabilitation services. Align focuses on the proactive management of therapy activities via timely visit scheduling, attendance, reporting and communication of outcomes. Align s Clinical Oversight program involves physical therapy peer reviews to optimize the use of clinical services so that all patients receive only high quality care that is appropriate and necessary for the effective treatment of the injury. This facilitates a timely return to work, and reduces medical costs for the employer. To learn more about Align Networks, visit their website at About One Call Medical One Call Medical (OCM) has a smart partner approach in delivering its suite of easy-to-use, efficient, and cost-effective diagnostic services that help claims professionals to achieve superior outcomes. OCM enables injured claimants and insurance payers to get the best quality and value for diagnostic scans and electrodiagnostic testing the building blocks for successful treatment plans and optimal return-to-work results. Through its STOPS subsidiary, the company provides transportation and language services, required by today s increasingly diverse claimant population; and through its Express Dental Care subsidiary, OCM assists with all aspects of the dental claims management process, as well as handling referrals to hearing, eye, and other hard-to-find specialty providers. More information about One Call Medical can be found at About MSC Care Management MSC provides highly effective catastrophic and home health services, equipment and device management, optimal care transportation, and translation service to the workers compensation industry. They collaborate with clients to optimize care for post-injury and post-discharge injured workers. MSC coordinates all necessary services and oversees progress, driving superior quality care and effective cost control. Their focus on unit cost control significantly reduces inappropriate utilization, alleviates clients administrative burden and decreases related expenses. For more about MSC, see their website at

4 Paladin Managed Care Services Introduces New Field Case Management Program Paladin Managed Care Services recently announced the nationwide launch of its new Field Case Management service, to be offered to self-insured employers, public entities, insurance companies, group health, and third-party administrators. Available directly from Paladin Managed Care Services, the new Field Case Management service monitors and guides an injured worker s medical treatment to improve the effectiveness of rehabilitation efforts and maximize prospects for a timely and complete return to work. This benefits the injured worker by providing a faster and more complete recovery, while delivering bottom line medical and indemnity cost savings to Paladin s clients, and better control of premium costs for those that purchase insurance. This new service offering is the latest achievement in the company s ongoing efforts to broaden its comprehensive suite of managed care services, and is built upon the same physician-centric approach that has made Paladin s other products highly successful in achieving superior results for its clients. Paladin s expert medical doctors regularly review and monitor large and complex cases to assure that prescribed rehabilitation services are the most appropriate and effective available for the injury and that progress made meets or exceeds generally accepted industry standards and established return to work goals. Paladin s physicians also consult as needed, with field case managers, giving ready access to advanced medical expertise and facilitating better outcomes. Jeffrey Miller, COO of Paladin, said: Our new Field Case Management capability is an exciting enhancement to our care management product suite, building upon the proven services Paladin provides nationwide. Purchased separately or with our Professional Bill Review, Clinical Bill Review, or Utilization Review services, this new offering further leverages our physician-driven service model. Field Case Management has been shown to improve injured employee return to work, and will further strengthen Paladin s ability to help our clients achieve superior results.

5 Medical Bill Review Case Study: Insurer Achieves Substantial Savings from Paladin Medical Bill Review Customer Profile One of Paladin s largest clients is a specialty workers compensation insurer that provides coverage and service to selected industry niches nationwide. The insurer has a strong reputation for providing high-quality, responsive services that help policyholders achieve improved loss results and greater long-term control of insurance costs. Situation An employee of one of the insurer s policyholders sustained a broken neck as a result of a serious single vehicle automobile accident. Sadly, as a result of the accident, the injured worker is a quadriplegic. The original bill from the first treating hospital totaled approximately $832,000 for services rendered over a two month period in Paladin received this bill on the insurer s behalf, and applied its multi-step review process. Solution Upon receiving the bill, Paladin s Bill Review Analyst compared the requested amount to the appropriate California Fee Schedule. The bill was corrected to reflect the state-indicated charges for the actual medical tests, procedures, and other services provided to the patient. The revised total was just over $99,000, an 88% reduction. The bill was then sent to a Senior Bill Review Analyst who contacted the hospital and explored mutually-beneficial arrangements regarding the promptness and form of payment. In exchange for these arrangements, the hospital agreed to accept approximately $38,000 as full payment, a 95% overall reduction from the original bill. The Bottom Line In this case, the patient s injuries are healed, but he is left with a severe impairment that will require long term care. He has been provided a custom wheelchair which will help family members and care givers transport him more comfortably, and Paladin is making arrangements for specialized care in a facility near family members. For the initial, acute phase of treatment this patient received, the hospital agreed to reduce its bill after the fact by 95% for a total savings of $794,000 as a result of fee schedule correction and the negotiation of payment terms. While the client s cost for Paladin s medical bill service is based on a percentage of savings and is affected by the volume of bills, number of open claims and the client s historical trend, the outstanding result in this case yielded an ROI of $ for every dollar spent on bill review. These substantial savings decreased the medical expense for the claim without compromising treatment quality and effectiveness, producing a better loss ratio for our insurance carrier client and its policyholder, who will benefit further from a lower experience modifier and greater control of insurance costs. Although this case deals with a very serious injury and costly course of treatment, Paladin s medical bill review service works for all provider bills, big and small, ensuring that only the appropriate amount is paid every time and delivering proven results for all of our clients. The Paladin Managed Care team constantly works to improve our review process and introduces new methods that capture even greater savings opportunities for our customers. Paladin also employs a built-in quality assurance tool that tests the integrity and validity of bill coding decisions, fee schedules and PPO network discounts, ensuring they are applied correctly to all bills. As with all of our services, Paladin s medical bill review helps our clients receive high-quality, effective treatment for their injured workers while vigilantly monitoring and controlling costs. Paladin Managed Care Services 1901 East Alton Avenue, Suite 200, Santa Ana, CA (800) [email protected] Sales and Marketing Department (949) [email protected]