I. Introduction

II. Data

III. Growing Cost of Prescription Drugs

Chart 1: Total California Workers’ Compensation Pharmacy Costs

IV. Sources of Increases in Rx Costs

A. Increase in underlying wholesale drug costs

Table 1: Percent Change in Billed and Paid Amounts

Table 2: Percent Change in Average AWP Unit Price

B. Changing formulary

C. Trends in prescription costs versus the level of average drug cost

V. Drugs in Health Care

Table 3: Comparison: Health Care System to Workers’ Compensation

By main purpose of Top 150 drugs prescribed

VI. Current Fee Schedules

A. California

B. Other States’ Workers’ Compensation Pharmaceutical Fee Schedules

C. Federal Government Workers’ Compensation System

D. Private sector negotiation within workers’ compensation

E. Pharmaceutical Fee Schedules Outside Workers’ Compensation

F. Private Sector Health Benefit

VII. Evaluating Pharmaceutical Reimbursement Under California’s OMFS

A. Comparison of Different States’ Workers’ Compensation Pharmacy Fee Schedules

Chart 2: Comparing California OMFS to Other States

B. Comparing Workers’ Compensation to Other Fee Schedules

Chart 3: Comparing California OMFS to Medi-Cal

Chart 4: Comparing California’s OMFS to Employer Health Plans

Chart 5: Comparing California OMFS to WSIA Negotiated Agreement

Table 5: Cost of Other Systems Relative to California Workers’ Compensation

VIII. Brand v. Generic

Table 6: Brand v. Generic in California Workers’ Compensation

Table 7: Percent Generic Substitution Achieved When Generic Available

IX. Potential Cost Savings

Chart 6: Estimated Excess Cost of Pharmaceuticals

X. Access

Table 7: Average Distance from Injured Workers’ Home Address to Pharmacy in Workers’ Compensation Sample

XI. Transaction Costs

XII. Discussion

XIII. Recommendations


Appendix I—Average Wholesale Pricing

Price Declines and Balance Sheets

Appendix II - Responses to comments on the draft report



Commission on Health and Safety and Workers’ Compensation

Study of the Cost of Pharmaceuticals in Workers’ Compensation

Frank Neuhauser, MPP, Survey Research Center, University of California at Berkeley
Alex Swedlow, Applied Outcomes Research
Laura B. Gardner, MD, MPH, PhD., Axiomedics Research, Inc.
Ed Edelstein, Special Consultant on Pharmacy Pricing



I. Introduction

This report is in response to a request from the Commission on Health and Safety and Workers’ Compensation for a study of the potential savings from modifications to California’s current approach to regulating pharmaceutical costs under workers’ compensation.

The Commission raised concerns given that pharmaceutical costs are the fastest rising component of benefits paid out by the workers’ compensation system. Pharmaceutical costs are controlled by the Official Medical Fee Schedule (OMFS). Reimbursement under the OMFS is higher than limits imposed by many other states’ workers’ compensation systems. In addition, other regulatory systems (Medicare, Federal Workers’ Compensation), and many private payers’ negotiated contracts (HMOs, non-occupational insurance) reimburse at rates significantly below the average state workers’ compensation system.

High cost for prescriptions in workers’ compensation is consistent with recent research which suggested that medical treatment costs in workers’ compensation were 50% to 100% higher than medical treatment delivered on the employers’ health benefit side for similar conditions. However, this previous research did not examine with pharmaceutical costs, relied on "billed amounts" rather than actual paid amounts, and did not focus on California. Consequently, the Commission asked UC Berkeley to review the pricing of drugs dispensed in workers’ compensation relative to other states and systems, and to make recommendations for controlling employers’ costs while protecting worker’s right to medical care.

II. Data

Several datasets were available that allowed this project to estimate the potential savings under alternative fee schedule arrangements. These datasets focus on: 1) patterns of prescription drug purchases within workers’ compensation, 2) current reimbursement as paid by workers’ compensation insurers, 3) patterns of payment for similar drugs outside the workers’ compensation system and 4) data on pharmacies that accept workers’ compensation reimbursements.

Data from the Workers’ Compensation Insurance Rating Bureau (WCIRB) was used to estimate total pharmaceutical costs and to project future costs based on this study’s estimates of growth trends.

For all other analyses presented here, the research team relied on transaction level data. Approximately a 20% sample of pharmaceutical transactions was obtained through the California Workers’ Compensation Institute (CWCI) covering transactions in 1998 and 1999. These records (approximately 600,000) identify the date of service, billed amount, paid amount, dispensing agent, drug dispensed, and quantity dispensed. The drug information is based on NDC numbers at the 11-digit level. The 11-digit NDC number identifies the manufacturer, drug dispensed, strength of the drug, and the wholesale package size.

A dataset was obtained from HCIA/SACHS, a healthcare data management and consulting firm that included data on approximately 13 million pharmaceutical transactions from employer supplied health plans. The elements of this data set were similar to the CWCI dataset, but did not include identifiers for the dispensing agent.

For purposes of pricing these drugs relative to other fee schedules, data on all necessary baseline pricing were obtained from First Data Bank of San Mateo. These data include 11-digit NDC, Generic Sequence Number (which allows identification of all equivalent drugs, ether brand or generic), information on the pricing of the particular drug (brand or generic), and the effective dates of all price changes. Pricing available was the Average Whole Sale Price, Baseline Price, and Federal Upper Limit Price.

Finally, to study the issue of access to pharmacies an additional database was obtained from the State of California Bureau of Consumer Affairs that identified all pharmacies licensed to do business in California, including name, address, and effective licensing date.

These datasets allowed the research team to perform a number of analyses that highlight potential cost savings using different approaches to regulating the prescription drug portion of the workers’ compensation benefit.


III. Growing Cost of Prescription Drugs

Drug costs in workers’ compensation are rising rapidly, both in absolute dollars and as a percentage of medical costs. These estimates are based on Workers’ Compensation Insurance Rating Bureau annual report data on paid costs for insured policyholders during the calendar year. These WCIRB data were adjusted to reflect the changing distribution of covered employment between insured and self-insured employers. Based on these data, projections were made for pharmacy costs and total medical costs through the year 2005. These estimates are based on this study’s findings of a 12% growth rate in the underlying costs for drugs prescribed in workers’ compensation (see below) and an annual rate of growth of 7% for overall workers’ compensation medical costs.

In 1996, the cost of prescription drugs in workers’ compensation for all California employers was $114 million. Based on the research team’s projections, pharmaceutical costs in workers’ compensation will be $212 million in 2000 rising to $374 million in the year 2005. Because pharmaceutical costs are rising more rapidly than overall medical costs, the percentage of medical costs represented by prescription drugs is also increasing. In 1996, pharmacy costs accounted for 3.8% of medical costs. In 2000, pharmaceuticals are estimated to represent 5.8% of medical costs and by 2005, pharmacy costs will comprise 7.3% of the medical benefit expenditures.

Chart 1: Total California Workers’ Compensation Pharmacy Costs

Cost of Pharmaceuticals in California Workers’ Compensation (Insured and Self-insured Employers)























% of all medical











Two other estimates are offered. These can be thought to represent upper and lower bounds on the estimate used in this study. Some reviewers of the draft of this report were concerned that WCIRB estimates of medical benefits included medical management costs. This is likely the case, because regulation allows medical management costs to be classified as part of the medical benefit for accounting and reporting purposes. Later in this report, estimates are made of potential savings to the system. Excluding the medical management costs is appropriate if one thinks that medical management costs are independent of the level of direct medical benefits paid on a claim. If however, one believes that claims with higher medical costs lead to the application of more medical management, then savings on these costs should not be excluded. Using data medical management costs in California, we estimate that these costs represent 3.3% of the medical benefit. Consequently, estimated costs in 2000 would be $205 million instead of $212 Million. In 2005, cost would be an estimated $362 million instead of $374 million.

The upper bound represents the expected impact of increases in the utilization of pharmaceuticals. Increased utilization occurs when drugs are prescribed more often, or higher quantities of drugs are prescribed for the same conditions. This study did not review this issue because individual claims and conditions were not identified in these datasets and there were no studies that have reviewed this issue within workers’ compensation. For the upper limit which includes expected growth in utilization, we rely on estimates from the full health care system that place utilization increases at 6% per year. If one feels that utilization changes in workers’ compensation will approximate those in the full healthcare system, the upper bound estimate would be a more accurate estimate of total pharmaceutical costs in workers’ compensation. In 2000 the estimate including utilization would be $225 million and in 2005, $396 million.

Using any of these estimates, growth in pharmacy costs can be expected to far outstrip the growth in any other area of workers’ compensation benefits. We will discuss below some of the reasons that cost control measures in this area are less effective than elsewhere in the workers’ compensation system.


IV. Sources of Increases in Rx Costs

Numerous factors can drive increases in pharmaceutical costs. The following outlines potential cost drivers.

Increases in workers and claims: As the economy expands, more workers are hired and consequently are exposed to the possibility of occupational injury. The workforce in California has been expanding rapidly, especially since 1995. However, despite this increase in employment, the number of occupational injury claims has declined. The reasons for this are not clear and could be the result of a change in occupation and industry mix, workplace safety efforts, and/or reporting of injuries.

Increased treatment with drugs: Doctors may be choosing to treat conditions more often with drug therapy instead of or in conjunction with other forms of therapy, such as surgery or chiropractic treatment. Or, doctors may be prescribing longer regimes of drug treatment and/or higher dosages.

Increases in underlying wholesale drug costs: Workers’ compensation fee schedules and most negotiated agreements on the health benefit side base pharmacy reimbursement on underlying benchmark measures that are meant to approximate wholesale drug costs. As manufacturers’ wholesale prices increase, fee schedules and contractual agreements pegged to this measure will rise proportionally.

Changing formulary: New drugs and new uses for older drugs evolve in the medical profession. New drugs are nearly always more expensive and tend to drive up average costs. As will be seen below, the types of drugs prescribed in workers’ compensation are in a narrow range dominated by more traditional therapies. These changes in treatment patterns may or may not translate into improved outcomes.

As indicated above, complete data on increases in the use of drugs in treatment are not yet available. Analysis of this potential cost driver requires data covering a large population over an extended period. Such data are being developed and an analysis of this issue could be done in the near future.

A. Increase in underlying wholesale drug costs

It is clear from the data available at the time of this project that the price of drugs prescribed in workers’ compensation is increasing. Looking at both "Billed" amounts (what pharmacies billed employers) and "Paid" amounts (what was authorized for payment in the bill review process), the average price of prescriptions written increased by 10.9% and 12.2% for billed and paid amounts respectively, with no change in the average quantity dispensed.

Table 1: Percent Change in Billed and Paid Amounts

Changes between 1998 and 1999 in average Billed and Paid amounts for prescriptions written in workers’ compensation






It is possible to estimate the impact of rises in the underlying wholesale pricing of pharmaceuticals. The research team calculated the change in the Average Wholesale Price (AWP) for the drugs prescribed in workers compensation during the years 1998 and 1999. That is, using the AWP for each drug, and weighting by the number of individual units (usually the number of pills) prescribed, we calculated the average unit price, including dispensing fee, for drugs prescribed in workers’ compensation for both years. This price underlies the Fee Schedule, and also is a determinant of the retail pricing of pharmacies whose "usual and customary price" is less than the fee schedule maximum.

Table 2: Percent Change in Average AWP Unit Price

Average AWP Unit Price for prescriptions written in workers’ compensation

Average Unit Price







The California OMFS for pharmaceuticals is based on a benchmark price called the Average Wholesale Price. This price is set by the drug manufacturer and reflects a number of marketing and profit considerations, but is not the actual wholesale price charged the average pharmacy. Consequently, the price can fluctuate significantly and since the OMFS is benchmarked to this price, the cost of drugs in workers’ compensation will tend to fluctuate with the benchmark. This measure is further detailed in appendix 1.

The underlying average AWP Unit Price for pharmaceuticals dispensed in workers’ compensation increased by 12.8% between 1998 and 1999. In fact, when evaluated month-by-month, the average AWP unit price increased over 25% from January 1998 to December of 1999.

B. Changing formulary

Increases in the average unit price of drugs dispensed can be caused by increases in the average wholesale price of the drugs dispensed and can be driven by changing patterns of prescriptions that shift treatment to newer, more expensive drugs. The research team analyzed the data for 1998 and 1999 on this issue.

Of the 12.8% increase in average AWP unit price approximately 2/3rds was the result of underlying inflation in AWP. That is, the weighted average cost of drugs prescribed in 1998, cost on average 8.5% more when dispensed in 1999. About 1/3rd of the cost increase was due to changes in the types of drugs dispensed. The changing distribution of drugs accounted for a 4.3% increase in average unit cost.

In the health benefit arena these two cost drivers are of equal importance. The most reliable estimates on the health side find that drug costs were increasing about 18% per year during this period and attribute 6% to each of three causes, price inflation, shifts to newer more expensive drugs, and utilization increases.

C. Trends in prescription costs versus the level of average drug cost

Rising cost by itself is not necessarily an issue. More frequent use of pharmaceuticals or the use of newer, more expensive pharmaceuticals can represent better treatment methods. Changes in treatment can mean lower costs overall by reducing the use of other, more expensive interventions and/or the length of disability. In addition, newer or different drug therapies may be more expensive but result in better outcomes for workers.

In addition, the trends in pharmaceutical pricing are driven by forces that are generally outside the control of the workers’ compensation system. Manufactures wholesale pricing is a subject that will be dealt with at the national level. Treatment patterns and utilization involving decisions between a worker and her/his medical provider are not subject to limitation by regulation. No one has suggested that these decisions by health care providers about the best course of therapy involving drug treatment should be limited or controlled.

The important issue for this analysis is the level of prescription drug costs and the fact that pharmaceuticals are a large and increasingly important fraction of the workers’ compensation medical benefit. Controls on pharmaceutical costs have traditionally been dictated by the Official Medical Fee Schedule. The fee schedule is meant to set reasonable reimbursement rates. Since the OMFS acts as the primary limiting factor on payment amounts, if the fee schedule is set too high, employers will face excessive costs. And if the price (the level) of pharmaceutical is set too high, then as these costs increase (the trend), the excess cost faced by employers also increases.

However, in the past there has been little data, either about the workers’ compensation system or about other comparable systems -- for example, other states’ workers’ compensation systems, Medi-Cal or the employer health benefit -- upon which to base a reasonable fee schedule. Consequently, this study developed such data. In addition, other approaches to controlling these costs could be put into place. Some of these approaches will be discussed below.

V. Drugs in Health Care

During the study period, pharmacies had available for purchase 40,000 different combinations of drug, labeler (the manufacturer or packager), and package size (wholesale package size available to the pharmacist). Each of these three dimensions (drug, labeler, package size) can affect the retail/fee schedule price.

Many of these drugs were generically equivalent. That is the drugs were considered therapeutically similar, but were manufactured or simply packaged by different labelers. Pharmacies are able to shop among the different labelers for the best wholesale price.

Ignoring the distinction of the labeler; that is, the manufacturer and/or packager; and the distinctions between generic and brand name equivalents, 6,600 different drugs were dispensed by pharmacies during the study period.

What drugs are dispensed in workers’ compensation and how do they compare to those dispensed under purchased group health benefit plans? Within workers’ compensation health care, the range of drugs is more limited. In workers’ compensation, 18 drugs (at the level of generic equivalency) account for 50% of the prescriptions written. Eighty drugs account for 75% of prescriptions and 240 drugs account for 90% of prescriptions.

The group health sector provides coverage for a wide range of illness and chronic conditions and the list of drugs is consequently dominated by prescriptions written for these conditions. For example, the number one prescription drug in the United States is a drug prescribed for estrogen replacement therapy.

Drugs dispensed under group health plans also include a wide range of new and/or often expensive experimental drugs, that are designed for specific diseases, and rarely or never found in workers’ compensation. For example, among the most common prescriptions are treatments for hypertension, stroke, diabetes, and asthma.

Workers’ compensation coverage is almost entirely dominated by injury-related treatments rather than disease-related treatments. These injuries are predominantly musculoskeletal injuries involving treatment of inflammation and pain. Consequently, the range of prescriptions dispensed under workers’ compensation is very narrow relative to the group health sector.

As indicated on the following table, approximately 90% of workers’ compensation prescriptions are written for non-steroidal anti-inflammatory drugs (NSAID) or pain medications (both narcotic and non-narcotic). These two groups of drugs account for only 17% of the prescriptions written under group health.

Table 3: Comparison: Health Care System to Workers’ Compensation
By main purpose of Top 150 drugs prescribed

Percent of Health Care System

Percent of Workers’ Compensation

angina/high blood pressure






Heart failure/irreg. Heart beat


high blood pressure


low potassium














birth control








muscle relaxant



NSAID (non-steroidal anti-inflammatory)






analgesic (non narcotic)



pain medication--Class III



pain medication--Class IV



Sedative--Class IV



seizure/panic--Class IV
























hormone therapy







yeast infection


urinary infections













menstrual cramps/disorders










VI. Current Fee Schedules

Fee schedules affect costs in four ways. First, they set the underlying unit price of the drug, called the "ingredient cost" relative to one or more standards. Common ingredient costs are discussed in the appendix on terminology. Second, fee schedules often allow for and set a limit on ‘professional services’ or ‘dispensing’ fees in addition to the ingredient cost. Third, schedules often attempt to influence the pharmacist to dispense generics instead of brand-name equivalents by offering a premium for dispensing generics. This premium can be a higher dispensing fee, a higher price relative to the ingredient cost, or both. Finally, fee schedules or related regulations can impose a requirement that a generic be dispensed, when available, instead of a more expensive brand-name equivalent.

A. California

Under the current California Official Medical Fee Schedule (OMFS) pharmacies are allowed to charge the lower of 1) their customary charge or 2) the maximum under the OMFS. The OMFS imposes the following maximums:

(1) Brand-name Pharmaceutical Formula:

                Average Wholesale Price (AWP) * Quantity * 1.1

plus a $4.00 dispensing fee

(2) Generic Pharmaceutical Formula:

                Average Wholesale Price (AWP) * Quantity * 1.4

                plus a $7.50 dispensing fee

Both of these limits (the multiple to the AWP) for the brand and generic and the dispensing fees represent substantial premiums over the limits found in regulated and negotiated agreements in other systems. For example, the Federal government’s workers’ compensation schedule pays the AWP without a multiplier. The AWP is also usually the highest of the several available benchmarks. Medicare imposes additional restrictions, such as the Maximum Allowable Ingredient Cost (MAIC), that result in lower payment levels than the AWP. Within the group health sector, HMOs and large insurers generally negotiate rates that are a discount against (rather than premium to) the AWP, especially for generic drugs. The private sector’s negotiated agreements customarily allow lower dispensing fees than those dictated by the OMFS.

B. Other States’ Workers’ Compensation Pharmaceutical Fee Schedules

The research team evaluated a number of other states’ approaches to setting fee schedules for workers’ compensation drug prescriptions. The following table gives the pharmacy fee structures used in a number of states’ workers’ compensation systems.

Table 4: California & Other States—Workers’ Compensation Pharmacy Fee Schedules


Pharmacy Provider

% of CA


Drugs: Use NDC in the fee schedule: Fee x QT if NDC not found use average retail pricing database at 90%

Arizona Drugs: (AWP x QT) + 15%
Supplies: (AWP x QT) + 15%
California Drugs: Brand Name: (AWP x QT) x 1.1 +$4.00
Generic: (AWP x QT) x 1.4 + $7.50
OTC: Brand Name: (AWP x QT) x 1.1
Generic: (AWP x QT) x 1.4
Colorado Drugs: (AWP x QT) + $6.00
Supplies: Cost + 20% (cost includes shipping and handling).
Florida Drugs: (AWP x QT x 1.2) + 4.18 97%
Hawaii Drugs: (AWP x QT) + 40%
Supplies: (AWP x QT) + 40%
Idaho Drugs: (AWP x QT) + 20%
Supplies: (AWP x QT) + 20%
Kansas Drugs: (AWP x QT) + $6.00
Supplies: Cost + 25% or Cost = $15.00, which ever is less
Louisiana Drugs: Brand Name: (AWP x QT) + 10%
Generic: (AWP x QT) + 40%
Both formulas plus a dispensing fee equal to Medicaid dispensing fee set by state of Louisiana.
Montana Drugs: (AWP x QT) + $5.50
Supplies: $30.00 or (AWP x QT) + 30% which ever is less
Michigan Drugs: (AWP x QT) + $4.00 87%
Nevada Drugs: (AWP x QT) + $6.00
Supplies: (AWP x QT) + $6.00
New Mexico Drugs: Brand Name: (AWP x QT) x 1.04 + $6.50
Generic: (AWP x QT) x 1.04 + $8.06
Supplies: Cost + 25% plus tax, shipping and handling.
Oregon Drugs: (95% of AWP x QT) + 7.00
Supplies: 85% of manufacturer’s suggested retail price
Pennsylvania Drugs: (AWP x QT x 1.1) 87%
Utah Drugs: (AWP x QT) + 15%
Supplies: (AWP x QT) + 15%
Texas Drugs: Brand Name: (AWP x QT x 1.09) + $4.00
Generic: (AWP x QT x 1.38) + $7.50
Washington Drugs: Generics and brand-name with generic equivalents – (Base Line Price) or (AWP-10%) which ever is less x QT + $4.50

Sole-source or multi-sources brand name drugs = AWP less 10% x QT + $4.50

Generic is dispensed unless the MD indicates "Dispense as written."

Over-the-counter are to be priced on 40% margin

Wyoming Drugs: Brand Name: (AWP x QT) + $5.00
Generic: (AWP x QT) + $5.00



C. Federal Government Workers’ Compensation System

The Office of Workers’ Compensation Programs (OWCP), the unit that oversees the Federal government’s workers’ compensation program, instituted a Fee Schedule for pharmaceuticals in 1998 that reduced costs in California by 25-30%. The OWCP fee schedule pays the AWP without a multiplier and with a dispensing fee of 20% of the prescription cost (minimum dispensing fee = $2.50, maximum = $15.00). This fee schedule applies, in California, to all federal workers’ occupational injury claims.

D. Private sector negotiation within workers’ compensation

There is a growing effort to negotiate pharmacy networks within workers’ compensation and to negotiate pharmaceutical reimbursement rates that would more closely mirror those found in the larger health care sector. While these are making some headway, they are constrained by one major limitation. Large health care providers are able to control where plan participants purchase drugs. Consequently, the health care provider can direct business to or exclude business from pharmacies depending on their willingness to agree to negotiated rates. In the California workers’ compensation system, the worker is allowed to choose any pharmacy that is willing to accept reimbursement at or below the OMFS. Therefore, a workers’ compensation provider can encourage a worker to use participating pharmacists, but cannot otherwise restrict a worker’s choice.

We did not have negotiated rates available for workers’ compensation providers in California, but an example of negotiated pharmacy agreement was available from Washington State. The Washington Self Insurance Association (WSIA) negotiated an agreement with a pharmacy benefit manager (PBM) that handled a large network of pharmacies covering the state. While they could not limit the workers to these pharmacies, employers were able to negotiate substantial discounts to the Washington official fee schedule. These rates are shown below:

Generic—MAIC price or AWP – 10%, whichever was less


Dispensing fee of $2.25.

E. Pharmaceutical Fee Schedules Outside Workers’ Compensation

One of the most important payors and consequently most important fee schedules is the Medicaid system (Medi-Cal in California). Medicaid imposes a fee schedule on pharmaceuticals that is more strict than that imposed by any workers’ compensation system reviewed. Medicaid imposes several different restrictions and reimbursement is based on the lowest of the several prices computed. These calculations are as follows:

1. Maximum Allowable Ingredient Cost (MAIC) plus current professional fee ($4.05 in California) minus $.50.

2. Federal Allowable Cost (FAC) plus current professional fee ($4.05) - $.50.

3. Estimated Acquisition Cost (EAC) {this is approximately equal to AWP * .95} plus current professional fee ($4.05) - $.50.

4. Charge to the general public - $.50.

The most restrictive of these conditions is the MAIC pricing which is calculated as a multiple of the lowest published price. MAIC prices are generally the lowest pricing benchmark, but several other conditions apply to MAIC pricing which limit the coverage to a subset of all drugs.

F. Private Sector Health Benefit

Within the private sector, HMOs and large insurers generally negotiate rates with pharmacy networks that are a discount against (rather than a premium to) the AWP, especially for generic drugs. While these arrangements are usually confidential, the most often quoted figures are that large private benefit plans negotiate discounts to AWP of around 55%. The private sector also negotiates lower dispensing fees than are commonly applied in the workers’ compensation system or even Medicaid with dispensing fees averaging $2.35-$2.40.


VII. Evaluating Pharmaceutical Reimbursement Under California’s OMFS

A. Comparison of Different States’ Workers’ Compensation Pharmacy Fee Schedules

The research team evaluated the effect of pricing a sample of California workers’ compensation pharmacy transactions under the fee schedules used in other states. For this portion of the study, a large sample of pharmacy transactions paid under workers’ compensation, with dates of service in 1998 and 1999, was obtained from a major bill review company. These transactions represented in excess of 15% of all pharmacy billings in terms of dollars and included both commercially insured and self-insured employers. Total transactions exceeded 800,000. Using this data set, each transaction was repriced under the various alternative fee schedules. These transactions were then totaled and compared to the aggregate cost from the actual paid data under the fee schedule. Details of this process are included in the technical appendix.

It should be noted that this portion of the analysis did not incorporate any potential changes to the distribution of drugs between generic and brand-name, or changes in package sizes or prescription quantities that could be the result of changes in the incentives inherent in different schedules. If a different fee schedule would shift the distribution from generics to brand-name prescriptions, the cost of prescriptions under the alternative schedule would be underestimated. If another state’s fee schedule would increase the use of generics, the cost under that fee schedule relative to the California OMFS would be overestimated. This issue of generic substitution will be addressed in a later section.

As indicated in the following chart, California has one of the highest fee schedules among the states evaluated. Idaho and Hawaii are similarly high but most other states’ schedules lead to reimbursement rates at about 90% of those under the OMFS. In this group of states, Washington is the exception with a reimbursement rate schedule equal to 77% of that under California’s OMFS. These figures are also contained in column 3 of Table 5.

Chart 2: Comparing California OMFS to Other States



B. Comparing Workers’ Compensation to Other Fee Schedules

In the following charts we compare three states, California (high fee schedule), Arizona (medium fee schedule) and Washington (low fee schedule) to other fee schedules. In this case we use the Medi-Cal fee schedule under which California reimburses Medicaid recipients’ prescriptions.

Chart 3: Comparing California OMFS to Medi-Cal



Medi-Cal reimbursements are approximately 2/3rds as high relative to reimbursements in workers’ compensation in California. Again, this comparison is based on a set of transactions from the workers’ compensation system and consequently represents the percent reduction in cost that would result if the more restrictive reimbursement schedule used by Medi-Cal was applied to workers’ compensation.

We also evaluated the negotiated rates representative of rates agreed to by pharmacists for large employer health benefit plans. We obtained a national database of employer benefit pharmacy transactions, including billed and allowed amounts. The data set included information on the total reimbursement to the pharmacists including any co-pay and deductible amounts that were the responsibility of the purchasers. These national data were adjusted to reflect the higher average cost of pharmaceutical purchases in California. (California average prices were 5.3% higher than the national average, nearly all of which was accounted for by higher average dispensing fees.)

The following chart shows that the reimbursement levels in the health benefit arena are 71% of the workers’ compensation reimbursement rates.

It should be noted that the comparison to Medi-Cal and to the health benefit arena substantially over estimate the payors’ costs, especially in the health benefit arena. Large payors, including employers’ health plans, Medicaid and Pharmacy Benefit Managers (PBMs) receive rebates directly from drug manufactures. The Federal government has estimated that these rebates reduce the payors’ costs by 5% to 35% depending on the particular manufacturer, whether it is a generic priced or brand-priced drug, and the negotiating strength of the payor. These rebates, which can reduce payors cost up to 1/3rd are not included in the estimates presented here because these data are not available for analysis. If included, they would have the effect of substantially reducing the cost of the Health Benefit and Medi-Cal relative to Workers’ Compensation.

Chart 4: Comparing California’s OMFS to Employer Health Plans


As a final comparison, the reimbursement rates negotiated by WSIA were evaluated against the pharmacy transactions in the California workers’ compensation data. These negotiated rates, agreed to by both pharmacy and employer, result in the lowest expected average reimbursement rates of any system reviewed.

Chart 5: Comparing California OMFS to WSIA Negotiated Agreement



The following table illustrates the potential savings that could result, all other things equal, if alternative fee schedules of alternative negotiated arrangements were adopted. The "all other things equal" is an important qualifier. One reason that the California OMFS is high, is because the state uses the very high reimbursement rates for generic drugs as an incentive for pharmacists to steer injured workers to less expensive generic equivalents of brand-name drugs. The next section addresses the issue of generic substitution and less expensive alternatives to the large premium paid pharmacists under the current schedule.

Table 5: Cost of Other Systems Relative to California Workers’ Compensation


Cost as a % of California Fee Schedule

California OMFS


(Fee Schedule)


Employer Health Benefit (Negotiated)


(Fee Schedule)


Wash. Self Insurer Assoc.


Given that the Washington Self-Insured Association (WSIA) agreement involves a PBM, WSIA is likely receiving much of the benefit rebates experienced by employer health plans. On the other hand, WSIA does not control the choice of pharmacy and consequently does not have the strong bargaining position characteristic of group health. Consequently, employer health plans, when the impact of rebates are included, probably experience actual costs at a discount to WSIA’s 64% level.

VIII. Brand v. Generic

The level of pharmaceutical costs is partially driven by the utilization of generic drugs in place of the more expensive brand-name equivalents. Brand-name drugs are substantially more expensive then generic equivalents. Consequently, programs attempt to increase the use of generic equivalents and reduce reliance on brand-name drugs.

There are three classes of mechanisms that are used to accomplish this incentive. First, private health insurers use client co-pays and deductibles to give the purchaser a direct incentive to buy the less expensive generic equivalent. Second, pharmacists are sometimes paid a premium for dispensing generics, giving them an incentive to encourage the purchaser to choose the cheaper alternative. Finally, some systems in effect mandate the choice of generics. For example, the Medicaid system reimburses only at the generic price. A purchaser may choose the brand-name drug but has to pay the difference.

Under workers’ compensation, states have traditionally been restricted to the second of these options - offering incentives to the pharmacists. Co-pays are usually prohibited and legislators have been unwilling to impose a requirement to use generics.

Generic substitutes are not available for all drugs. Consequently the ability to encourage generic substitution is limited by the distribution of the pharmaceuticals prescribed. The following chart shows the distribution of prescriptions in the California workers’ compensation system based on a sample of transactions that occurred in 1998 and 1999.

Table 6: Brand v. Generic in California Workers’ Compensation

Pharmacy Prescriptions in Workers’ Compensation by Type of Drug


Percent of Prescriptions Written

Percent of Total Dollars




Brand w/ generic equivalent



Brand, no generic equivalent




How does this compare to the distribution under group health? Within similar therapeutic categories there are higher rates of generic substitution under group health coverage. Of course, for those drugs with no generic equivalents, there is no substitution. However, the following table shows the distribution between brand and generic for those drugs with generic equivalents. The analysis is limited to those drugs that were dispensed in the available workers’ compensation data, weighted to reflect the distribution of those drugs within the workers’ compensation sample.

Table 7: Percent Generic Substitution Achieved When Generic Available

Distribution between Brand and Generic for Drugs with Generic Equivalents

California Workers’ Compensation

Employer Health Benefit

Washington State Workers’ Compensation










The level of generic usage in the California workers’ compensation system (when a generic equivalent is available), while high, is still lower than that of employer health plans. This suggests that more generic substitution is possible. However, because generic substitution is common in California, increasing the level of generic substitution would not greatly reduce the average cost. Increasing generic substitution ten percentage points, to 93% of possible situations, would reduce costs approximately 2.5%.

However, California employers pay a very high premium in order to create the current incentive for pharmacists. Washington state’s system, by imposing the requirement through policy, saves 40% of the dispensing fee and 36% of the ingredient cost. In addition, Washington obtains higher rates of substitution. Washington state figures indicate that generic equivalents are used 90% of the time when they are available.

IX. Potential Cost Savings

California pharmaceutical prices in workers’ compensation are high relative to other states’ workers’ compensation systems. More important, virtually all workers’ compensation systems pay much higher prices than other regulated systems that impose fee schedules or agreements negotiated between the parties, such as WSIA or the health benefit arena. These high prices impose unnecessary costs on employers and have the potential to reduce employment and wages for workers.

Chart 6: Estimated Excess Cost of Pharmaceuticals















To estimate potential savings, we use the average reimbursement in the several examples above that have imposed stricter controls over costs or negotiated lower rates (WSIA, Washington State, Medi-Cal, Health Benefit). Even ignoring the substantial rebates paid by manufacturers to some of these systems, we obtain an estimate that these other systems pay on average 70% of the reimbursement paid by California’s workers’ compensation system under the current Official Medical Fee Schedule.

Chart 6 shows graphically the estimated extent of excess cost. For the current year, the excess costs are estimated at $64 million in the current year. Excess costs are estimated to rise to $112 million in the year 2005. In 2005, the excess cost alone will be equal to the entire cost of pharmaceuticals in 1996, just a decade earlier.


X. Access

At an early advisory committee meeting, several participants claimed that injured workers had a great deal of difficulty in locating a pharmacy willing to dispense drugs. They claimed that because the workers’ compensation system was so cumbersome and payments were often late or not made at all by insurers, the fee schedule reimbursement rate made it unprofitable to fill injured workers’ prescriptions. A representative of a major pharmacy association suggested that none, or at least very few, of its members filled workers’ compensation prescriptions.

This is a serious issue and the research team went to extensive lengths to evaluate these claims. We obtained the identity of each pharmacy in our sample and contacted many of the major chains to determine their policies towards dispensing under workers’ compensation. We found no support for this claim.

In the study’s sample, that represented approximately 15% of the transactions in workers’ compensation, 60% of all the pharmacies in the state were represented, or approximately 3,500 of the state’s 5,100 pharmacies. This is after excluding a large number of individual doctors, hospitals and clinics that also dispensed prescriptions to patients they treated.

Table 7: Average Distance from Injured Workers’ Home Address to Pharmacy in Workers’ Compensation Sample

Number of Pharmacies Within Distance






Average Distance







With the help of the State Compensation Insurance Fund (SCIF), the research team examined whether there might be an issue of distribution. That is, in areas of the state with a greater incidence of workers’ compensation claims, or with fewer pharmacies, are there problems with access? The accompanying simulation shows that in fact, the travel time to at least one pharmacy that dispenses is quite low and access to multiple pharmacies is also very reasonable.

This simulation just examines travel to pharmacies in our sample. We also examined travel distances that would result if every pharmacy were dispensing. That is, how much less would the average distance be on each measure if every pharmacy in the state participated. This had the effect of reducing average distance by about 0.3 miles in each category.

We received several comments on the issue of access. One claim was that it was difficult for injured workers to find a pharmacy that was willing to dispense drugs on a lien basis when claim is delayed or denied. This is a different issue and possibly the one that other commentators mistook for the issue of access. It is not surprising that pharmacists are often not willing to take the risk on reimbursement when claims have been delayed or denied. We address this issue in the following two sections and again in the recommendation section.

A second issue raised was that even if access is not a problem under the current schedule, reducing the schedule will have serious impacts on workers’ access. However, discussions with representatives of pharmacy chains that operate multiple states could not identify any examples of chains that had left the workers’ compensation market in any state, even those like Washington that have substantially lower fee schedules than California.


XI. Transaction Costs

Lower reimbursement rates for the health benefit side and for some regulated systems such as Medicare and Washington State workers’ compensation, may be due in part to more efficient transactions between the pharmacy and the payor because of point of sale (POS) automatic adjudication systems. Customary in the group health sector, these systems are electronic interfaces between the pharmacy and the payor that automatically establish that the customer is covered by a particular system or insurer and the price the insurer will reimburse for the prescription. The systems then guarantees payment to the pharmacist, and in many cases, automate the payment to the pharmacist’s account.

Automatic adjudication systems are not yet common for California workers’ compensation transactions. Consequently, transaction costs, billing problems, and delays in payment are all complaints raised by pharmacists about the California system. Reducing these costs may be a necessary component of moving to lower fee schedule arrangements. However, despite repeated requests to pharmacists, pharmacists’ associations, pharmacy transaction middlemen, and doctors’ associations and lawyers lobbying on behalf of pharmacists, no hard data have been presented to confirm the contention that these additional transaction costs are substantial and justify higher reimbursements within workers’ compensation.

When Washington state introduced the new pharmacy fee schedule in 1996, it was after substantial negotiations over improving the transaction process between the pharmacies and the payor (in this case, with a monopoly state fund, there is a single insurer). The Washington Self Insurance Association (WSIA), in negotiating even lower reimbursements for network pharmacists, added an additional incentive -- guaranteed payment even for new claims that had not been processed or accepted.

More efficient arrangements can be facilitated by incentives or regulation. However, the optimum method for moving towards a more efficient and less expensive system may rely in part on the development of negotiated pharmacy networks. The ability to negotiate networks may in turn be improved if the legislature acts to make some changes such as allowing employers some control over which pharmacy network(s) will dispense prescriptions for covered claims.


XII. Discussion

Workers’ compensation systems appear to have high reimbursement rates relative to other systems such as Medicaid and the employer health benefits. Within workers’ compensation, California’s pharmaceutical reimbursement rates are near the highest among the various states reviewed.

As indicated above, one reason for the high reimbursement rates under the OMFS is the premium used as an incentive for pharmacists to dispense generic equivalents in place of brand name drugs. The group health sector obtains higher rates of substitution by imposing an expense on the purchaser in the form of co-pays and/or deductibles. Washington state achieves an even higher rate of substitution by imposing a requirement that generics be dispensed in the absence of specific instructions from the physician. From the worker’s point of view, these three incentives have essentially the same outcome, generic equivalents are substituted between 83% and 90% of the time.

The main difference is that employers in California pay pharmacists a substantial premium to steer workers to generic substitutes. Assuming that the difference in the multiple of AWP (1.4 v. 1.1) paid for generics over brands and the difference in dispensing fees ($7.50 v. $4.00) represents the generic incentive to pharmacists, employers are paying approximately a 37% premium on each generic prescription to pharmacists when the fee schedule was the controlling factor on paid amounts.

Ignoring the premium paid for generic incentives, California’s fee schedule still represents a substantial premium to other workers’ compensation fee schedules, especially Washington’s. The OMFS represents an even larger premium to prices paid outside workers’ compensation. Across all states reviewed, workers’ compensation pays substantially more for the same drugs than the employer health benefit system. And among workers’ compensation systems, California pays substantially more than most other states.

The effect of these high reimbursement rates is to raise the cost to employers without necessarily offering any benefit to workers. If the fee schedule was reconstructed to achieve approximately the average of the reimbursement rates accepted by pharmacists in four of the systems studied (Washington’s fee schedule, Washington Self Insured Association negotiated rates, Medi-Cal, and the group health sector), employers would pay approximately 70% of the current cost in California’s workers’ compensation system. Put another way, employers are paying 40-45% more than appears necessary because of the generosity of the California OMFS. This translates into $64 million in extra costs for pharmaceuticals in the current year, which will rise to an estimated $112 million in the year 2005. Of these excess costs, 17% is a result of paid incentives to dispense generics, approximately $12 million in 2000 and $21 million in 2005. The rest is due to the choice of the AWP, which is the most generous benchmark price, and because California pays a multiple of the AWP where other systems pay a fraction of AWP.

High dispensing fees in workers’ compensation may not be without justification. Many pharmacists have commented on the extra transaction costs associated with workers’ compensation claims. Most of the issues involve two areas. First, some pharmacists are willing to fill prescriptions on disputed claims without charging the worker, hoping to recover later if the claim is accepted. This can result in a loss when the insurer/employer successfully disputes the claim. However, this risk appears to be small. According to the largest workers’ compensation pharmacy transaction agent, handling approximately � of California’s pharmacy transactions, over 98% of all claims submitted by pharmacists within their group are paid by insurers and/or employers.

Second, workers’ compensation has been slow to introduce ‘point of sale—online adjudication’ (POS) which is virtually universal on the health benefit side. POS refers to the electronic interface between the pharmacy and the insurer or an intermediate pharmacy benefit manager. The pharmacy contacts the insurer and identifies the purchaser. The insurer acknowledges that the purchaser is covered and specifies the conditions of reimbursement, the amount the insurer will pay and any co-pay by the purchaser and any restrictions on particular drugs or quantity. If the pharmacist accepts the conditions, the transaction is complete and the pharmacist is guaranteed payment, usually within 20 days.

An important reason for the lack of employer-pharmacy negotiated agreements in workers’ compensation is that, unlike the group health sector, employers do not have control over which pharmacies injured workers use. In the group health sector, large employers, insurers and health plans negotiate agreements with pharmacy networks. A health plans is able to negotiate attractive rates because if the pharmacy network agrees to participate, the network will get the health plan’s members. If the pharmacy network cannot reach an agreement with the health plan, plan members will go to a competing pharmacy or pharmacy network. The ability of the employer or plan to negotiate an attractive rate depends in part on the control that the employer or plan exerts over where its business will be directed.

Employer control over where injured workers get prescriptions filled has not been a part of the workers’ compensation system in California. Extending control in some manner to employers could encourage the development of pharmacy networks and arrangements that would reduce or even eliminate the need for a fee schedule. Negotiated contracts would also likely speed the adoption of other efficiency improvements such as point of sale on-line adjudication.

XIII. Recommendations

Based on the results of our analyses and evaluation of the processes currently in place under the California workers’ compensation system, we offer the following recommendations for improving the efficiency of the system and thereby constraining the increasing cost of pharmaceuticals:

1. The simplest option for reducing the cost of pharmaceuticals is to give insurers/employers control over the dispensing of pharmaceuticals for the life of the claim. Choice of pharmacy, unlike choice of treating physician, involves a commodity transaction that should be identical across pharmacies. Giving employers control will allow insurer/employer groups negotiate rates with the pharmacy groups that would be a substantial discount to current rates. Both parties would have the incentive to negotiate efficiency improvements to that transaction process. They may also choose to negotiate guarantees for payment on disputed claims, new injuries that have not been set-up in the claims process, or claims where acceptance is still under review. Several insurers and employer groups are already experimenting with negotiated agreements with pharmacy benefit networks that have resulted in savings, while in some cases offering guaranteed payment to the pharmacist. This process could be enhanced and the savings increased if employers were given greater control. This might virtually eliminate the need for a fee schedule in most cases, limiting its use to denied claims later determined to be compensable, out-of-state transactions, or situations where the worker did not have access to a network pharmacy.

2. Even with employer control, a fee schedule will remain a component of cost control. The fee schedule should be revised to bring it more in line with group health plans, Medi-Cal and/or states such as Washington. This would include lower reimbursement rates for the drug and lower dispensing fees for dispensing generics. A relationship in pricing between generic and brand-name drugs and the AWP could be developed using the data resources identified in this study.

3. Adopt a rule requiring a generic, when available, except when the medical provider specifies "dispense as written." All parties that participated in the CHSWC’s Pharmacy Technical Working Groups agreed that a statutory or regulatory provision that pharmacists dispense the generic equivalent, when available, unless the medical provider specifies "dispense as written" would improve the system. In practice, this generics are already dispensed in nearly about 90% of situations where they might be used. However, this is accomplished in California’s workers’ compensation system through the use of expensive premium incentives to pharmacists that would be unnecessary if the "dispense as written" provision was adopted.

4. Create incentives to encourage insurers/employers to approve limited first fill of prescriptions even if the claim has not been accepted. Arrangements to guarantee payment are likely to derive from negotiated agreements between employer/insurers and PBMs, but the state may be able to encourage these efforts if it adopted language protecting insurers and claims administrators against liability if they fill prescriptions on claims that are ultimately denied or held non-compensable by the Board. Note that this may not be an expensive of difficult option to include. 98% of all prescriptions submitted are already paid, which is only one-half to one and one-half percentage points higher than is found in group health. In addition, 75% of the workforce is covered by group health from which an employer of insurer could recover. Consequently, insurers or self-insured employers are at risk for only a very small percentage of possible transactions.

If these provisions are adopted, the system could expect to save at least the costs that were earlier identified as excess costs and may even create savings that are substantially greater.

5. Earlier studies found that medical treatment costs were higher in workers’ compensation than for similar conditions treated in the health benefit arena. These studies found that both costs for similar services and the level of services were higher. Estimates of the higher overall costs in workers’ compensation ranged from 50% to 100% over group health. As discussed in the introduction, these studies were subject to question because they relied on billed amounts rather than paid amounts. Higher costs per prescription at approximately a 40-45% premium to group health, found in this study of pharmaceuticals using paid data give confirmation to these earlier estimates of treatment costs. Data is now available to do an analysis of paid data comparing medical treatment costs in workers’ compensation, under the fee schedule, to medical treatment costs in group health for similar conditions. Given that treatment costs are by far the largest component of the medical benefit, the Commission should consider undertaking such a study at some future date. This would especially useful in establishing fair reimbursement levels if the DWC ultimately moves to an RVRBS methodology for establishing the relative values between services.





This work would not have been possible without the support and assistance of the Commission on Health and Safety and Workers’ Compensation and especially the Commission’s Executive Officer, Christine Baker. The Commission offers employers and labor a forum in which to raise issues and have the issues and solutions addressed through rigorous research. The Commission Advisory Committee Process also assures that stakeholder groups and interested individuals throughout the workers’ compensation community have an opportunity to have their positions heard and concerns addressed.

We wish to thank the following individuals for their comments and assistance.

We also wish to acknowledge the following organizations whose data were used.

* HCIA-Sachs leads the health care industry in providing payors, providers, employers, and pharmaceutical companies with a strategic consumer and patient intelligence. Armed with the largest health care information databases, HCIA-Sachs supplies clients with effective and innovative products and services for planning, marketing, quality improvement, and cost control. HCIA-Sachs solutions include relationship marketing, data warehousing, benchmarking and Internet-based information systems that streamline business decision-making.


Pharmacy Advisory Committee

Harry Abrunn
Burlingame, CA

Teri Banholzer
State Farm
P.O. Box 420807
San Francisco, CA 94142-0807

Carlyle Brakensiek
1000 "Q" Street, Suite 201
Sacramento, CA 95814-6518
916-446-4199  Fax: 916-43-6719

Rea Crane
California Workers’ Compensation Institution
1111 Broadway, Suite 2350
Oakland, CA 94607
510-63-1063  Fax: 510-663-1064

Nancy Fox
Directors Office
1121 L Street Suite 307
Sacramento, CA 95814

Richard Gannon
California Division of Workers’ Compensation
455 Golden Gate Avenue, 9th Floor
San Francisco, CA 94102
415-703-4600  Fax: 415-703-4664

Mark Gerlach
190 Foothill Drive
Sutter Creek, CA 95685
916-441-5050  Fax: 916-441-5859

Peter Kellison
California Advocates, Inc.
925 L Street, Suite 350
Sacramento, CA 95814

David Leonard
Law Office of David Leonard
2934 � Beverly Glen Circle, #360
Los Angeles, CA 90077

Dr. Philip Lippe
c/o California Medical Association
18640 Vista De Almaden
San Jose, CA 95120
408-927-0802  Fax: 408-927-0803

Jean Long
Fireman’s Fund Insurance Company
777 San Marin Drive
Novato, CA 94998

Allan MacKenzie
Industrial Medical Council
395 Oyster Point Blvd., Suite 102
So. San Francisco, CA 94080
650-737-2700  Fax: 650-737-2989

Tom McCauley
1547 Palos Verdes Mall, Suite #274
Walnut Creek, CA 94596

Diane Przepiorski
California Orthopedics Association
5380 Elvas Avenue, Suite 221
Sacramento, CA 95819
916-454-9884  Fax: 916-454-9882

Brenda Ramirez
State Compensation Insurance Fund
1275 Market Street
San Francisco, CA 9410-3-1410
415-703-7770  Fax: 415-703-7737

Dr. Linda Rudolph
Division of Workers’ Compensation
455 Golden Gate Avenue, 9th Floor
San Francisco, CA 94102
415-703-4600  Fax: 415-703-4664

Anne Searcy
395 Oyster Point Boulevard Suite 102
So. San Francisco, CA 94080
650-737-2006  Fax: 650-737-2637

Marie Wardell
6114 La Salle Avenue, Suite #515
Oakland, CA 94611
510-597-1775  Fax: 510-597-1952

Edward Woodward
California Workers’ Compensation Institute
1111 Broadway, Suite 2350
Oakland, CA 94607
510-663-1063  Fax: 510-663-1064


Appendix I—Average Wholesale Pricing

"Understanding AWP"

Ed Edelstein, Monthly Interest, September 1991

Average Wholesale Price (AWP) is perhaps the most misunderstood concept in the pharmaceutical industry. The purpose of this article is to describe what is meant by AWP and to explain some of the underlying concepts involved in the acquisition, determination and maintenance of First DataBank’s AWP.

AWP represents an average price which a wholesaler would charge a pharmacy for a particular product. The operative word is average. AWP never means that every purchase of that product will be exactly at that price. There are many factors involved in pricing at the wholesale level which can modify the prices charged even among a group of customers from the same wholesaler AWP was developed because there had to be some price which all parties could agree upon if machine processing was to be possible.

At First DataBank, all pricing information is received in hard copy from the manufacturers. Catalogs, price updates, and other information reach us by fax, Federal Express, or U.S. mail. In the past two years, fax transmission has streamlined the acquisition of data to a large extent.

First DataBank has established specific contact people within each major drug manufacturer/labeler’s organization. When pricing or other questions arise, we know who to ask for reliable information. Knowing who to talk to prevents misinformation and keeps problems to a minimum. Usually it is our contact people who send information to us when there are price changes or other product changes. We make sure that we are placed on the priority mailing list so that we receive the information before the trade. Because personnel movement within a corporation is the norm, we continually work to keep our contact list current.

Once the information is received, we often have to interpret what the data represents. There can be confusing or contradictory factors, not to mention hard to read fax’s and typographical errors. Our data entry experts have experience as pharmacy technicians or in related fields. With their knowledge and proficiency, potential errors are detected before they become part of the database. As an example, occasionally a manufacturer which normally sends us wholesale net pricing will inadvertently send direct or suggested list prices. It is up to the staff to recognize the error and ask the manufacturer to send the correct information.

The pricing information which we receive can be in the form of wholesale net, direct, or suggested wholesale prices. It is our task to convert these prices into AWP. There are several ways in which AWP’s are derived. Large manufacturers such as Merck have one price policy for all purchasers whether wholesale or direct. They supply their published direct prices to which we must determine a markup factor and arrive at an AWP. Others supply wholesale net prices only. IN order to determine an appropriate markup, it is necessary to survey wholesalers. The accompanying sidebar describes this process in detail. Wholesaler surveys are an important part of what First DataBank does to establish AWP pricing. Some manufacturers do not sell products through wholesalers but supply a suggested wholesale price, which is regarded as the AWP. Others apply different markup factors to each product or type of product and supply suggested wholesale prices which wholesalers use as their AWP. Many generic suppliers fall into this category.

Maintenance of pricing is perhaps the most challenging task of all. It is necessary to constantly remind manufacturers that their pricing data must be supplied on time. With the advent of on-line claims processing, pricing must be there when the update occurs. Some manufacturers do not release their price updates until the effective date so that purchasers cannot take the opportunity of purchasing at the old price just before the increase. We have made an all-out effort to apprise the manufacturers of our deadlines so that they do nor miss the monthly schedule. We are beginning to see results in this effort.

Data acquisition is difficult, an exacting task which requires constant vigilance. Reporting AWP is an important function of First DataBank and we take this responsibility seriously.

Price Declines and Balance Sheets

Although the expected movement of AWP’s is upward, there is an occasional decline without a corresponding change in wholesale net or direct prices. Such an occurrence usually results when two companies merge into a single entity. Seeking to merge two pricing methods into a unified whole, some products exhibit an AWP drop.

Pharmacies holding inventories of these products had expected to sell their inventory based on current or future AWP. Consequently, when billing third parties at AWP, the stock on hand will produce less profit than expected.

The accounting method most commonly used is to carry inventory at the lower of cost or market vale. The selling price does not enter into the picture until the product is actually sold. If the selling price decreases below actual cost, then the carrying value drops correspondingly. Conversely, if the selling price does not decrease below actual cost, then the carrying value does not drop, but the effects are felt in future cash flow and profitability. As long as mergers and acquisitions continue in the pharmaceutical industry, we can expect occasional AWP decreases.



Appendix II: Responses to comments on the draft report

There were a number of comments on the draft report that were incorporate into the final draft. Some issues were not incorporated because they were not reasonable analytically, or were found on investigation to be unsupported or not germane to the analysis. These issues are listed here.

Issue Response
Use of WCIRB data








SRC’s projections do not reflect the actual amount paid for pharmaceutical treatment. The "cost of pharmaceuticals" includes the payors" cost of doing business. As a result, the actual amount spent on pharmaceuticals has been grossly inflated by the inclusion of outside factors.






The project’s analysis comparing various arrangements such as other workers’ compensation systems, MediCal and employer health benefit costs rely solely on transaction level data on several million individual pharmaceutical transactions These are not from WCIRB. The transactions include only dates of service in 1998 and 1999.

The trends in medical costs are estimated using transaction level medical payment data that does not include medical management costs. However, translating these trends to future costs does make use of WCIRB information to estimate total system costs. We agreed with comments raised by reviewers that the overall medical cost estimates by the WCIRB may contain medical management costs. Consequently for the final report we are adjusting our estimates to reflect a lower bound on our estimate that removes estimated medical management costs. This reduces the lower bound level by 3.3% but does not affect the growth trend.


Concern that data is "contaminated" with data from claims with dates of injury prior to 1994. The OFMS is applied based on the date of service, regardless of the date of injury. Although there is a claim by CSIMS that the OMFS does not apply to pharmaceuticals dispensed on pre-1994 injuries, the researchers surveyed a number of payors and can find no one who agrees with CSIMS position or actually treats claims in this manner.


Request for Review of Public Records Request for raw data are inconsistent with University policies that protect confidentiality of data used in research. Also, the data were obtained from outside sources under non-disclosure agreements. For these reasons, the University is not required to and cannot comply with request for raw data. The data are commercially available. If CSIMS or another group wishes to acquire the data and evaluate pharmaceutical costs in workers’ compensation, the project researchers have offered to assist them in interpreting these complex data.

University policy also does not require researchers to comply with requests for release of computer programs, notes and memoranda.

In comparing the different fee schedules among states, the report did not address high cost states’ pharmaceutical fee schedules. The project looked at the fee schedules in a number of states, including most of those that are the Western Region of the US, like California. We are continuing to compare fee schedules from additional states as they are obtained. Some states have schedules similar to California; most have schedules that are substantially lower. Overall, workers’ compensation schedules in general appear to lead to much higher costs to the payors than non-occupational systems or negotiated arrangements in workers’ compensation, regardless of the state.


Why are paid amounts increasing faster than billed amounts? Billed and paid amounts are not expected to increase by the same percent. Example: An increase in the wholesale price leads to a $10 increase in the billed and paid amounts. This might move the billed amount from $100 to $110 (10% increase) and the paid amount (after the application of the OMFS) from $80 to $90 (12% increase)
Reducing reimbursements will decrease access to pharmacy services to injured workers because:

a)transaction costs are already too high

b)some doctors already having trouble finding pharmacies that will dispense to injured workers

Despite claims that by some that almost no pharmacies accept workers’ comp, the research team found no evidence that there was any access issue, with the vast majority of pharmacies handling workers’ comp prescriptions.

Lower reimbursement rates in other systems have not affected access to pharmacies. For example, there is no indication that Medi-Cal reimbursements rates have led to less access than workers’ comp. In addition, there has been no evidence that reductions in the fee schedules by Washington state or the Federal Government workers’ compensation system (as applied in California) have led to reduced access.

It may be true that transaction costs are higher for workers’ compensation prescriptions. This is the reason that the report recommends approaches to reducing transaction costs. CHSWC has also undertaken a series of technical meetings to explore with the stakeholders where there are friction costs and how to streamline transactions.

Comparisons of medical and other systems with WC system not valid, because of high transaction costs in WC system See last comment above.




1. Baker, Laurence C., and Krueger, Alan B., " Medical costs in workers’ compensation insurance." Journal of Health Economics, 14 (1995) 531-549.

2. Commission on Health and Safety and Workers’ Compensation, "Workers’ Compensation and the California Economy." April 2000.

3. Ed Edelstein, "Understanding AWP", Monthly Interest, September 1991.

4. Fox, Sharon E. and Nells, Tara L., "Benchmarking the Performance of Workers' Compensation Systems: Compscope Measures for California." Workers’ Compensation Research Institute, December 1999.

5. Freudenheim, Milt, "Medicare: focus on drug plans." San Francisco Examiner, May 7, 2000.

6. Medi-Cal Pharmacy Provider Manual, October 1999

7. Office of Management and Budget, "Prescription Drug Coverage, Spending, Utilization, and Prices." OMB, 2000.

8. Swedlow, A., Johnson, G., Smithline, N., and Milstein, A., "Increased costs and rates of use in the California workers’ compensation system as a result of self-referral by physicians." New England Journal of Medicine, 321(21), 1502-06.

9. Workers’ Compensation Insurance Rating Bureau, Annual Reports, 1997-1999.

10. Zaidman, B., "Industrial strength medicine: a comparison of workers’ compensation and Blue Cross health care in Minnesota." Minnesota Department of Labor and Industry. 1990.