Pharmacy Cost Control

Addressing the Physician Dispensing Challenge

Dispensers are using loopholes to circumvent reforms. But PBMs and payers are pushing back.
By: | August 24, 2017 • 9 min read

Although many states have enacted regulations to curb physician dispensing, doctors are finding ways to get around restrictions — driving up costs for workers’ compensation systems.

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That’s a key conclusion of the recent report, “A Multistate Perspective on Physician Dispensing, 2011—2014,” by Cambridge, Mass.-based Workers Compensation Research Institute.

WCRI analyzed the prevalence and costs of physician dispensing across 26 state workers’ comp systems, comparing post-reform states with the states where no reforms were made, or where there were reforms but the data reflect pre-reform experiences.

The study found that, in post-reform states, the average price per pill for existing drugs decreased after reforms. However, physicians are bypassing the reimbursement rules that specifically target repackaged drugs by dispensing newer, higher-priced drugs.

That has offset the cost savings of reforms, actually driving up the average price per physician-dispensed pill in some states — particularly in California, Florida, and Illinois.

Prior to reforms, physicians often sold repackaged drugs, the average wholesale prices of which are typically higher than the original drug as packaged by the manufacturer.

Repackaged drugs are not addressed in pharmacy fee schedules — which are based on average wholesale prices of the drugs dispensed. So physicians who dispense repackaged drugs are paid higher prices than those who dispense the drug as originally packaged.

Dongchun Wang, economist, WCRI

Reforms capped the maximum reimbursement amount for repackaged drugs to the average wholesale price of the original.

“Facing a substantial price reduction, some physician dispensers might have tried to find a way to maintain the income they had from dispensing repackaged drugs prior to the reforms,” said Dongchun Wang, an economist at WCRI and author of the report.

“Those higher-priced new strength drug products provided a means for them to do so.”

WCRI said while some physicians dispensing the new strengths may have been motivated by the desire to provide benefits for their patients, “we are not aware of any scientific studies that support this,” said Wang.

“Our data show that the higher-priced new strengths were chosen by physicians who dispense drugs, not by those who write prescriptions and send their patients to a retail pharmacy. We rarely see these new strength products in pharmacy-dispensed prescriptions.”

The report cites evidence that other physician dispensing reforms in Florida, Indiana, Kentucky, and Tennessee might have some impact on these concerns.

“These more recent reforms either limit physicians’ ability to dispense certain drugs or limit the timeframe over which physicians are allowed to be reimbursed for drugs they dispense,” Wang said. “This may be one area to look into to gain additional insights.”

Dr. Robert L. Goldberg, chief medical officer for Tampa-based Healthesystems, said there is still a very limited role for physician dispensing as it serves patient convenience and access to medications during an initial visit for an injury.

“Employers enjoy the benefits of patients being able to come back to work after that visit instead of having to wait an hour or two at the pharmacy,” Goldberg said.

“Unfortunately, for many physicians, dispensing has become a revenue enhancer. That’s a problem as it’s become a big cost to the workers’ comp system — to employers and payers — because there’s a whole industry growing around physician dispensing to take advantage of the opportunity.”

Safety at Risk

There are other issues in addition to the cost — first and foremost, patient safety, Goldberg said. Early on, the treating physician may not necessarily have the full medical history of patients, and the patient doesn’t always know the name of the other medications he or she may also be taking.

“Drug interactions are common and are often unrecognized, but when patients go to the same pharmacist, that pharmacist should have their medication history and is responsible for checking to see whether there may be any potential drug interactions,” Goldberg said.

“And even if a physician has access to a patient’s full medical history, unfortunately some are not always up-to-date on drug interactions — but most pharmacists are.”

There’s also the issue of utilization of medication when it goes out the door of the physician’s office or clinic — “in essence, no one is keeping an eye on the dosage, the quantity and the duration,” he said.

“They could also be taking an off-the-shelf topical and making it higher strength and turning it into a faux prescription — changing the cost from $7.50 a tube to $750 a tube.” — Dr. Robert L. Goldberg, chief medical officer, Healthesystems

However, if the prescription is being processed by a PBM that is serving the interests of the payer and employer, that PBM will develop transaction and medication histories, as well as be familiar with state and payer formularies, Goldberg said.

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Those formularies may have edits, step therapy, and certain quantity, duration and dosage limits — which can answer the question of whether a patient needs to go out the door with 30 or 60 days’ worth of medication, or whether it should be five or seven days’ worth or none at all.

“These checks on dosage, quantity, duration and drug interactions are important, particularly in a workers’ comp environment where there are no copays and deductibles for patients,” he said.

“If they are injured or ill and just handed bottles of medication, they are going to take it no matter what the doctor is giving them.”

Numerous Loopholes

Data published by Healthesystems shows that when physicians are dispensing medications, claim costs, medical costs and indemnity costs go up, Goldberg said.

“Physicians who dispense often are prolonging the use of the medical model by continuing to have patients take the medications longer than they might really need to for their injury — and if opioids are given, it really increases the total costs,” he said.

Doctors are finding a number of ways get around the physician dispensing reforms, Goldberg said. First, there’s “new, not novel” medications. An example would be a medication that’s typically in a 5 mg or 10 mg pill, approved by the FDA and authorized for treatment. But then a manufacturer produces a 7.5 mg pill that is not recognized by any system, with no average wholesale price, and it can then be priced at “whatever.”

“The older pill might cost $1 a pill, but the new, not novel pill — with the same chemicals but different dosage — can be selling for $10 or $100 a pill,” he said. “There’s no way to actually stop that from happening unless it ends up on a formulary or state-approved fee schedule.”

Dr. Robert L. Goldberg, chief medical officer, Healthesystems

Compounding is another way to get around the reforms, Goldberg said. Drugs are put in some concoction, and the impacts of the dosage form or combination can be unknown and outside of any cost-control mechanism.

The latest phenomenon is private-label topicals, he said. A drug that in and of itself is known to be useful or effective at a certain dosage strength may be perfectly safe, but then its manufacturer makes it a unique product by converting it into a topical that is not well known — and which costs more.

“They could also be taking an off-the-shelf topical and making it higher strength and turning it into a faux prescription — changing the cost from $7.50 a tube to $750 a tube,” Goldberg said.

Formulary adoption usually says what can and can’t be used, but depending on how specific those state formularies become, these items could potentially still get through, he said. Formularies now have to become even more specific, such as banning specific compounds and private-label topicals, and new definitions of “new, not novel.”

Formularies that say drugs at certain dosages such as 5 and 10 mg are acceptable, should also specifically exclude those drugs at 7.5 mg.

“California’s formulary is getting ready to be adopted.  It has an approved, or exempt, list of medications, but even that does not address new, not novel drugs until the state includes the dosages,” Goldberg said.

“California’s formulary also states that compounds need to be pre-authorized — they can’t just go out the door and have people trying to catch up with them later.”

A number of states (those cited in WCRI’s report), are also now requiring doctors as well as workers’ comp systems to limit the quantities of all medications and limit the timeframe they can be given.

“California’s proposal for physician dispensing is limited to initial treatment, and only one fill for the first seven days of injury,” Goldberg said. “That alone would knock out most physician dispensing or unsafe dispensing, and reduce a lot of the problems.”

Brigette Nelson, senior vice president, Workers’ Compensation Clinical Management at Express Scripts in Scottsdale, Az., said that physician dispensing continues to be a problem in workers’ comp.

“The costs of medications are significantly higher, but the other thing to be concerned about is that physicians doing this often don’t have the full prescribing history from other physicians, so drug interaction screening and safety screening is missed,” Nelson said.

Regulations are “all over the board” in post-reform states, ranging from prohibiting dispensing of certain types of medications, limiting quantities, or establishing fee schedule caps, she said.

The battle against problems stemming from continued dispensing by physicians should really be about continuing to “put more teeth” in regulations.

“From our perspective at Express Scripts, even in states where there are fee schedule caps, we can still see issues,” Nelson said.

“The quickest way is to prohibit it. But if it’s not prohibited, states should try to encourage injured workers to use a retail pharmacy which can perform the appropriate patient safety screening.”

As part of its physician dispensing solution, Express Scripts sends a letter to patients, providing them with information on the potential safety issues, and letting them know how expensive physician dispensing can be and “to do their part to keep costs down.”

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“Perhaps more important, when we get a claim with physician-dispensed medications, we bounce it up against the plan design with formulary edits that had to come through a retail pharmacist — the same ones that would have been in place at the retail pharmacy,” she said.

“We look at safety issues, and we make a determination to cut the fee schedule or not pay if the state says the practice is prohibited.”

Using its physician dispensing solution, Express Scripts can bring the physician-dispensed medication back into the retail or mail order network.

“We give the payer the information they need, to not let this go through physician dispensing the next time there is a prescription,” Nelson said.

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Alternative Energy

A Shift in the Wind

As warranties run out on wind turbines, underwriters gain insight into their long-term costs.
By: | September 12, 2017 • 6 min read

Wind energy is all grown up. It is no longer an alternative, but in some wholesale markets has set the incremental cost of generation.

As the industry has grown, turbine towers have as well. And as the older ones roll out of their warranty periods, there are more claims.

This is a bit of a pinch in a soft market, but it gives underwriters new insight into performance over time — insight not available while manufacturers were repairing or replacing components.

Charles Long, area SVP, renewable energy, Arthur J. Gallagher

“There is a lot of capacity in the wind market,” said Charles Long, area senior vice president for renewable energy at broker Arthur J. Gallagher.

“The segment is still very soft. What we are not seeing is any major change in forms from the major underwriters. They still have 280-page forms. The specialty underwriters have a 48-page form. The larger carriers need to get away from a standard form with multiple endorsements and move to a form designed for wind, or solar, or storage. It is starting to become apparent to the clients that the firms have not kept up with construction or operations,” at renewable energy facilities, he said.

Third-party liability also remains competitive, Long noted.

“The traditional markets are doing liability very well. There are opportunities for us to market to multiple carriers. There is a lot of generation out there, but the bulk of the writing is by a handful of insurers.”

Broadly the market is “still softish,” said Jatin Sharma, head of business development for specialty underwriter G-Cube.

“There has been an increase in some distressed areas, but there has also been some regional firming. Our focus is very much on the technical underwriting. We are also emphasizing standardization, clean contracts. That extends to business interruption, marine transit, and other covers.”

The Blade Problem

“Gear-box maintenance has been a significant issue for a long time, and now with bigger and bigger blades, leading-edge erosion has become a big topic,” said Sharma. “Others include cracking and lightning and even catastrophic blade loss.”

Long, at Gallagher, noted that operationally, gear boxes have been getting significantly better. “Now it is blades that have become a concern,” he said. “Problems include cracking, fraying, splitting.

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“In response, operators are using more sophisticated inspection techniques, including flying drones. Those reduce the amount of climbing necessary, reducing risk to personnel as well.”

Underwriters certainly like that, and it is a huge cost saver to the owners, however, “we are not yet seeing that credited in the underwriting,” said Long.

He added that insurance is playing an important role in the development of renewable energy beyond the traditional property, casualty, and liability coverages.

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine. Weather risk coverage can be done in multiple ways, or there can be an actual put, up to a fixed portion of capacity, plus or minus 20 percent, like a collar; a straight over/under.”

As useful as those financial instruments are, the first priority is to get power into the grid. And for that, Long anticipates “aggressive forward moves around storage. Spikes into the system are not good. Grid storage is not just a way of providing power when the wind is not blowing; it also acts as a shock absorber for times when the wind blows too hard. There are ebbs and flows in wind and solar so we really need that surge capacity.”

Long noted that there are some companies that are storage only.

“That is really what the utilities are seeking. The storage company becomes, in effect, just another generator. It has its own [power purchase agreement] and its own interconnect.”

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine.”  —Charles Long, area senior vice president for renewable energy, Arthur J. Gallagher

Another trend is co-location, with wind and solar, as well as grid-storage or auxiliary generation, on the same site.

“Investors like it because it boosts internal rates of return on the equity side,” said Sharma. “But while it increases revenue, it also increases exposure. … You may have a $400 million wind farm, plus a $150 million solar array on the same substation.”

In the beginning, wind turbines did not generate much power, explained Rob Battenfield, senior vice president and head of downstream at JLT Specialty USA.

“As turbines developed, they got higher and higher, with bigger blades. They became more economically viable. There are still subsidies, and at present those subsidies drive the investment decisions.”

For example, some non-tax paying utilities are not eligible for the tax credits, so they don’t invest in new wind power. But once smaller companies or private investors have made use of the credits, the big utilities are likely to provide a ready secondary market for the builders to recoup their capital.

That structure also affects insurance. More PPAs mandate grid storage for intermittent generators such as wind and solar. State of the art for such storage is lithium-ion batteries, which have been prone to fires if damaged or if they malfunction.

“Grid storage is getting larger,” said Battenfield. “If you have variable generation you need to balance that. Most underwriters insure generation and storage together. Project leaders may need to have that because of non-recourse debt financing. On the other side, insurers may be syndicating the battery risk, but to the insured it is all together.”

“Grid storage is getting larger. If you have variable generation you need to balance that.” — Rob Battenfield, senior vice president, head of downstream, JLT Specialty USA

There has also been a mechanical and maintenance evolution along the way. “The early-generation short turbines were throwing gears all the time,” said Battenfield.

But now, he said, with fewer manufacturers in play, “the blades, gears, nacelles, and generators are much more mechanically sound and much more standardized. Carriers are more willing to write that risk.”

There is also more operational and maintenance data now as warranties roll off. Battenfield suggested that the door started to open on that data three or four years ago, but it won’t stay open forever.

“When the equipment was under warranty, it would just be repaired or replaced by the manufacturer,” he said.

“Now there’s more equipment out of warranty, there are more claims. However, if the big utilities start to aggregate wind farms, claims are likely to drop again. That is because the utilities have large retentions, often about $5 million. Claims and premiums are likely to go down for wind equipment.”

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Repair costs are also dropping, said Battenfield.

“An out-of-warranty blade set replacement can cost $300,000. But if it is repairable by a third party, it could cost as little as $30,000 to have a specialist in fiberglass do it in a few days.”

As that approach becomes more prevalent, business interruption (BI) coverage comes to the fore. Battenfield stressed that it is important for owners to understand their PPA obligations, as well as BI triggers and waiting periods.

“The BI challenge can be bigger than the property loss,” said Battenfield. “It is important that coverage dovetails into the operator’s contractual obligations.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]