Executive Summary of the Study of the Cost of Pharmaceuticals in Workers’ Compensation

Frank Neuhauser, MPP, Survey Research Center, University of California at Berkeley
Alex Swedlow, CWCIApplied Outcomes Research
Dr. Laura Gardner, MD, Ph.D., Axiomatics
Ed Edelstein, Special Consultant on Pharmacy Pricing


Executive Summary

This report is in response to a request from the Commission on Health and Safety and Workers' Compensation and the Department of Industrial Relations for a study of the potential savings from modifications to California's current approach to regulating pharmaceutical costs under workers' compensation. The study was funded by the Commission.

The major findings of this study are as follows:

Under the current California Official Medical Fee Schedule (OFMSOMFS) pharmacies are allowed to charge the lower of their customary charge or the maximum under the OFMSOMFS. The OFMSOfficial Medical Fee Schedule (OMFS) maximums are significantly higher than limits imposed by other states’ workers’ compensation systems, other regulatory systems (Medicare, Federal Workers' Compensation) and private negotiated contracts (HMOs, non-occupational insurance).

Workers’ compensation systems 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.

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.

California pays a large premium to pharmacists to encourage dispensing of generic drugs in place of equivalent brand-name drugs. Other states and other systems avoid this premium by requiring that generics be dispensed except when the doctor specifies "dispensed as written" on the prescription.

As a consequence of high reimbursement rates and rapidly rising pharmaceutical costs, the excess cost that results from the high level of reimbursements set in the OMFS lead to rapidly rising excess costs to employers. The following chart demonstrates estimated reasonable costs and the portion current total cost that could be saved if several important changes were adopted.














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.

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 other systems reviewed, employers would pay approximately 70% of the current cost. This translates into $64 million in savings on pharmaceuticals in the current year, which will rise to an estimated $112 million savings in the year 2005. Of these excess costs, 17% is a result of premiums paid for 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 baseline, and because California pays a multiple of the AWP where other systems pay a fraction of AWP. The Department of Industrial Relations/Division of Workers’ Compensation should consider resetting the fee schedule to reflect this lower pricing.

Several interest groups contended that the high cost of prescriptions in workers’ compensation was justified because it guaranteed access for injured workers to pharmacists willing to dispense under the fee schedule. While these interest groups claimed that most pharmacies were unwilling to fill workers’ compensation prescriptions, the research team, after extensive analysis found no access problems. A large majority of pharmacies are filling workers’ prescriptions. In addition, we could find no indication from pharmacy representatives that access had been reduced in states with lower reimbursement rates.

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.



Transaction costs maybe higher for California pharmacists seeking reimbursement for workers’ compensation prescriptions. In considering reducing the fee schedule reimbursements, consideration thought should be given to improving the efficiency of the process. This could be accomplished by increasing employers’ ability to negotiate network agreements with pharmacies. In addition, insurers and employers should consider guaranteeing payment for at least the initial prescription when the doctor indicates that the injury arose out of work.