A 2013 study by the National Council on Compensation Insurance (NCCI) showed that pharmacy spend accounts for 19 percent of all workers’ compensation medical costs, and has been slowly creeping up over the past several years.

The biggest perpetrators are increased utilization and inflated prices of compound and specialty medications, continued physician dispensing and rising prices for generic drugs.

Generics’ Supply/Demand Problem

While generic medications still offer cost savings over brand names, their prices have seen an increase amidst manufacturer consolidation and schedule changes for key medications.

“Generic cost drivers for average wholesale price (AWP) used to remain relatively flat,” said Brian Carpenter, senior vice president of pharmacy product development and clinical management, Healthcare Solutions.

“But all of a sudden in the past year or so, they’re hitting double-digit marks. That’s causing an increase in spending that was unforeseen for all payers.”

Heavy consolidation among manufacturers has created a more limited supply of some generics and pushed out competition, enabling those producers still around to hike up prices.

“There’s been a narrowing of the number of players in the market in terms of the companies that make generic drugs,” said Mark Riley, immediate past president of the National Community Pharmacists Association (NCPA) and the executive vice president and CEO of the Arkansas Pharmacists Association.

“There’s also very little crossover in the products that each manufacturer produces. So before, where you might see 20 companies making a drug, now there’s only one to three making it.”

The problem has been exacerbated by schedule changes to certain hydrocodone/acetamenophin products — an attempt to tamp down opioid overuse. A generic version of Vicodin, for example, was redesignated to the more restrictive classification of a Schedule II drug, from a Schedule III classification.

“Also, along the way the FDA required lower levels of acetaminophen content. Both of those drivers caused about a 22 percent increase in AWP literally overnight,” Carpenter said. “And that’s been repeated quarter over quarter for these products.”

According to Express Scripts’ 2014 “Drug Trend Report,” hydrocodone/acetaminophen products for workers’ compensation saw an increase of 9.6 percent in average cost per prescription. Other painkillers also grew more expensive: Ibuprofen saw a 21.4 percent increase, and oxycodone/acetaminophen drugs jumped by 51 percent.

Specialty and Compound Drugs Drive up Costs

Utilization of compound and specialty medications has also increased, which could be due in part to a decreased supply of some generics, a desire to move away from the documented dangers of opioids and the emergence of new, cutting-edge drugs.

According to the Express Scripts report, “The [cost] trend for specialty medications was 30.4 percent between 2013 and 2014, driven by an increase in both the average cost per prescription (19.8 percent) and utilization (8.8 percent).”

In that time, a new set of oral medications for hepatitis C — proven to be more effective and generally better-tolerated than existing treatments — entered the market at a cost of anywhere from $80,000 to $200,000 for a 12-week regimen.

“Payers have to understand the cost and benefits of using these new, powerful medications versus using a more traditional drug for the specific conditions being treated,” Carpenter said.

The use of compound drugs has also become a significant cost driver, with utilization increasing by five times over the past five years, according to a 2013 study by the California Workers’ Compensation Institute. Express Scripts reported the 2014 cost trend for compounded medications at 45 percent, but called it “moderate compared to the 2013 trend of 125.6 percent.”

Because they contain multiple ingredients, one medication alone can run thousands of dollars, without any proof of safety or efficacy. Unregulated by the FDA, compounds are not subject to double-blind, controlled studies and can vary in composition from batch to batch.

In workers’ comp, many compounds are topical creams meant to treat pain.

“The base ingredient of a topical compound is most typically petroleum jelly, used as both a mixing agent and a lubricant to rub the compounded ingredients on the skin,” said Matt Engels, vice president of network solutions for CorVel.

“Compounding pharmacies often mix the petroleum jelly with non-active agents in order to create a unique base to which they can attach a new, much higher, price.”

Jennifer Kaburick
senior vice president, workers’ compensation product management and strategic initiatives, Express Scripts

Compounders can, for example, add things like cayenne pepper to emit heat, or menthol to create a cooling effect — and can set their own price because no National Drug Code (NDC) exists for their particular mixture.

Employers should question the efficacy of the base as well as the other ingredients, which could lead to the elimination of unnecessary and expensive ingredients, Engels said.

Increased compound utilization could be due to the fact that physicians are trying to steer away from prescribing oral painkillers, which have garnered so much attention for their addictive properties. Hospitals also may use compound medications when traditional supplies are not available, an issue exacerbated by the narrowing number of generics manufacturers.

“Compounders have stepped up and supplied the market with drugs that aren’t readily available,” Riley said. “I’ve had hospitals tell me that without compounders, they’d have to shut down their operating rooms.”

High prices and utilization are just one part of the threat to payers. Compounds also pose a challenge because they can more easily escape the scrutiny of bill reviewers. If each ingredient of a compound is listed separately on a bill, and especially if those ingredients are all generics, it may not trigger a red flag.

There’s also the fact that some physicians mix and dispense compounds from their own offices, or prescribe them through specialty pharmacies outside of an employer’s PBM network, skirting the PBM’s bill review process and any point-of-sale intervention programs.

Those bills, then, typically arrive at the employer’s door in paper form, and paper bills get processed and charged at the fee schedule rate, not at the discounted rate offered by the PBM. Dispensing compounds in this way not only robs an employer of lower rates, but also undercuts its ability to deny a compound prescription and suggest a cheaper and safer form of treatment.

“Once Florida passed drug repackaging legislation in 2013, a number of states followed suit.” — Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America

Employers can better manage their compound spend through prospective management, which requires a statement of medical necessity from the prescriber, or uses a point-of-sale program to flag costly drugs and get consensus from the payer before the prescription is automatically dispensed.

“It all comes back to the ability to hold a contracted provider and any assigned third party accountable for their obligations,” CorVel’s Engels said.

“Employers need 100 percent capture of all pharmacy transactions and transparency on how these transactions were dispensed in order to trigger the applicable obligations.”

Legislative measures can also keep compounding in check, such as restrictions on the number of ingredients that can be used.

The Drug Quality and Security Act, passed in 2013, also established an optional registry for compound pharmacists. Those who register must complete a detailed profile and are subject to biannual audits, which assures prescribers that their facilities are clean and their pharmacists reputable.

“I think like anything else, there are good players and bad players, and people have to be diligent about who they buy [compounds] from,” said Riley of NCPA.

Physician Dispensing

Physician dispensing remains a big cost driver. Not only are repackaged, physician-dispensed drugs more expensive than their counterparts distributed at retail pharmacies (the average cost of a physician-dispensed medication in 2014 was $173.75, compared to $111.68 for a pharmacy-dispensed medication), but the convenience offered to patients also drives up utilization.

According to a 2012 CorVel report, “Focus on Pharmacy Management: Physician Dispensing,” physician distributing of repackaged drugs made up 19 percent of all workers’ comp drug costs. And the practice has grown increasingly more common since 2007.

According to the NCCI’s “Workers’ Compensation Prescription Drug Study: 2013 Update,” physician-dispensed repackaged drug costs as a share of total workers’ comp drug costs have increased 140 percent, from 5 percent in 2007 to 12 percent in 2011.

“Combat” is the key word. Costs can truly be controlled only through proactive management and the use of services like bill and utilization review.

Additionally, physician-dispensed prescriptions’ average cost per claim grew by about 25 percent in 2008, from $24 to $30, and doubled over the next three years. By comparison, prescription cost per claim for drugs dispensed by pharmacies had a steady growth of about 5 percent per year during the same period.

“In the last few years, we’ve seen an increase in use of physician dispensing, but there is also a growing sense that there are opportunities to taper it,” said Jennifer Kaburick, senior vice president, workers’ compensation product management and strategic initiatives, Express Scripts.

“Once Florida passed drug repackaging legislation in 2013, a number of states followed suit,” said Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America. That law caps the amount doctors can charge for drugs they dispense to 12.5 percent over the average wholesale price. Other states limit the amount or types of drugs that physicians can dispense, enforce a separate fee schedule for physician-dispensed drugs, or require physicians to price their medications based on the NDC of the original manufacturer.

“I think this will be less of a problem going forward as the other states pass similar legislation,” Holden said.

Containing Costs

While these trends have collided to result in overall high pharmacy costs for workers’ comp payers, the climb may not continue for long. Little can be done about the effects of manufacturer consolidation on generics pricing, but payers can gain control over compound and specialty drug utilization, while regulatory and legislative efforts help to rein in physician dispensing.

“I think these trends have reached their apex, as employers and carriers have chosen to combat the rising costs,” Holden said.

“The battle is far from over, but I truly believe we are on our way.”

“Combat” is the key word. Costs can truly be controlled only through proactive management and the use of services like bill and utilization review.

“PBMs can also take a stance in the market for fairer drug pricing — especially for costly medications like specialty drugs — which improves access,” said Rochelle Henderson, senior director of research for Express Scripts.

Kaburick and Henderson pointed out that, despite an 11.5 percent increase in average cost per prescription for narcotics in 2014, an 11 percent decrease in utilization among Express Scripts’ clients allowed their overall trend to remain flat.

“In an unmanaged program, these trends will not go away by themselves,” Kaburick said. “But if employers aggressively manage their pharmacy spend, they can keep costs down despite trends in the market.”

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Part I: The Pharmacy Cost Creep

Spending on prescription drugs accounts for a large share of workers’ comp medical costs, but utilization can be controlled.

Part II: Data Key for Claims Controls

Sophisticated pharmacy data allows workers’ comp payers to spot utilization red flags.

Part III: The PBM Evolution

Pharmacy benefit managers are becoming a greater force in clinical case management, adapting to higher customer expectations.