The good news is that drug cost inflation in workers'compensation has moderated considerably in recent years. The badnews is that this moderation is not industry-wide, but ratherfavors those payers who have worked long and hard to rein in drugcosts. The reward has been considerable: the best performers –those who focused on managing utilization – actually saw their drugcosts decline over the past year.

For five consecutive years, Health Strategy Associates, LLC hasconducted an annual survey of executives and senior management atworkers' compensation payers on prescription drug management.During that time, we have seen pharmacy costs grow even faster thanmedical expenses, and they now account for 14.5 percent of workers'compensation medical expenses (more than $4 billion).

The survey draws responses from decision-makers and operationsstaff at carriers, TPAs, large employers, and managed-care firms.With 2007 drug expenses ranging from $1 million to $147 million,respondents' total prescription expenditure amounted to $777million, or 18.5 percent of total estimated workers' compensationdrug spending.

Increases Slow Down

The new data shows that total drug costs increased 4.9 percentfrom 2006 to 2007. For the fourth year in a row, respondentsreported their pharmacy inflation rate was less than the prioryear's trend. By way of comparison, in 2006 the inflation rate was6.5 percent; in 2005, drug costs increased 10 percent over theprior year; rates rose 12 percent in 2004 and increased 18 percentin 2003.

Similar to last year, the lowest increase occurred atsophisticated payers, defined as those with detailed knowledge oftheir company's drug costs, a deep understanding of industryprocesses and issues, and operating advanced drug managementprograms and initiatives. Somewhat different from last year, manyof the smaller payers (defined arbitrarily as those with less than$10 million in spending) enjoyed results ranging from a decrease of>10 percent to increases in the mid-single digits.

There was little difference between larger and smaller payers'inflation rates. This is a marked difference from the 2007 report,which indicated larger payers experienced lower inflation. (Thesurvey attempted to control for declines in claim volume byaddressing cost per claim.)

For those payers experiencing higher costs, inflation wasattributed to:

Higher utilization.

Higher cost medications and higher priced drugs.

Physician prescribing patterns.

More claimants getting more drugs.

There were significant industry-wide drug price increases afterimplementation of Medicare's Part D program in January of 2006. In2007, national figures — across all pharmaceutical payers, not justworkers' compensation — indicate drug price increases were almostnegligible at one percent (Source: U.S. Department of LaborSeptember 2007 report), led by decreases in prices for genericdrugs. While the workers' compensation drug “formulary” is notdirectly comparable to the broader pharmaceutical industry, clearlydrug price inflation has moderated considerably.

The reality of the market provides an interesting contrast torespondents' views of pricing. It also illustrates the'disconnectedness' of some payers, and the tendency of many in theworkers' compensation world to ignore or at best pay scantattention to external forces and factors.

New News and Changes

This year's survey took a deeper look at generic fill andgeneric efficiency. For our purposes, “generic fill” is thatpercentage of scripts that are filled with generics. “Genericefficiency” is estimated by calculating the percentage of the totalnumber of scripts that could be filled with generics that actuallywere filled with generics. I would note that different payers usesomewhat different definitions and formulas, and therefore thesenumbers may not be entirely consistent. With that caveat, acrossall respondents, the generic fill rate was 71.7 percent. Thegeneric efficiency rate averaged 90.6 percent.

One of the advantages of conducting a survey over several yearsis the insight it provides into market evolution. This year's studymarked a key change: the focus on utilization — addressing thevolume and types of drugs used by claimants — is now almostuniversal, with almost all respondents voicing concern over ordiscussing programs to address utilization.

Price is less of an issue this year. Respondents, when asked torate (1-5) the factors that one might consider when selecting aPharmacy Benefit Administrator (PBM), rated discounts a 3.7,somewhat less than last year's 4.0. The payer community isnotoriously price sensitive, with substantial anecdotal evidenceindicating price is an important, if not key, issue in vendorselection. Therefore, respondents' rating of price as not tooimportant should be viewed skeptically.

There is a greater emphasis on using home delivery/mail order,with respondents averaging 4.8 percent of scripts delivered viathis method, an increase of a full percentage point over lastyear.

Last year, payers were more demanding of their PBMs than everbefore, and the pressure continues to ratchet up. Increasingly,payers are asking their PBMs to provide insights and newinformation about trends in workers' compensation prescriptions, totake the lead in dealing with third-party billers, and to providemore clinical drug management services.

WC Drug-Cost Drivers

Survey respondents cited a long list of factors as directlyaffecting a payer's total drug costs:

States without fee schedules.

Per-unit price increases.

Volume of scripts per visit compared to past trends.

Compound medications.

Lack of real resolution on repackaging issues in California.

Societal implications not necessarily specific to workers'compensation.

Advertising in specific and pharmaceutical companies ingeneral.

Use of medications to deal with chronic pain and the closelyrelated desire on part of patients to want to feel their best rightaway.

The most significant cost driver remains utilization: the sheernumber of scripts and the type of scripts dispensed. Continuing atrend from the last two surveys, many respondents had a deeperunderstanding of the underlying forces impacting utilization.

Controlling Drug Costs

Respondents are employing multiple tools, techniques, andapproaches to manage the number of scripts and the type of scriptsdispensed to claimants. Comments from respondents include:

“Closely monitor utilization and challenge docs who use highcost drugs and drugs off-label. We truly monitor providerutilization and challenge them.”

“Formularies, both injury-specific and claimant-specific.”

“Looking at and tracking what drugs [claimants] are using,implementing some step therapy, and so forth. Not relying on statesto do that, but relying on controls they are implementing.”

“Certain meds appropriate for certain conditions; looking atclinical approaches to refine their approach to manage costs.”

Utilization control merits special mention. Again, when askedwhat needed to be done to manage costs, most respondents mentionedsome method to control utilization. For 2008 and beyond, steptherapy seems to be the hot topic among early adopters. “Steptherapy” is the practice of beginning drug therapy for a medicalcondition with the most cost-effective and safest drug therapy andprogressing to other more costly or risky therapy, only ifnecessary. The aims are to control costs and minimize risks. Thisalso is called “step protocol.” Those payers setting a moredeliberate pace will tend to work on adding analytical capabilitiesand refining formularies (as some of their faster-movingcompetitors did last year).

The message here is simple, even if the situation is anythingbut. To control costs, payers must control drugs, and to controldrugs requires considerable understanding, thought, communication,and effort.

How About Those PBMs?

In what might some describe as a wake-up call for workers'compensation PBMs, no PBM was rated higher than a 3.2 on a scale of1-5 (with 5 being excellent). On the positive side, none was ratedlower than a 2.3. Notably, the third-party billers were both ratedbelow the lowest PBM.

Clearly there is a significant opportunity for PBMs todifferentiate in this market. No PBM is so far behind, and none areso far ahead, as to make it difficult, or even expensive, for oneto break away from the pack.

This leads to perhaps the most interesting data, at least fromthe point of view of those PBMs seeking to differentiate. One ofthe key questions was a rather simple one: “What makes a vendorsuccessful in managing drug costs?” Respondents noted the need forPBMs to demonstrate effective communication, clinical managementexpertise, and a proactive approach. Payers want their PBMs to cometo them with solutions to problems, perhaps even before the payerhas identified that the problem exists.

Conclusions

For payers committed to attacking drug costs, the rewards areobvious — significant cost reductions. For those payers unable,unwilling, or just unaware, the costs are also obvious — highercosts and more claimants on more expensive drugs that likelycontribute to longer disability. Prescription drug management hasproven itself an effective tool in reducing loss costs, but only ifthe payer is actively and assertively involved.