Solving The Workers Comp Pharmacy Cost Mystery

The reason is simple. Pharmacy expenses are increasing at an annual rate of 15-19 percent and now approach 10 percent of the workers comp medical dollar. If the trend continues, pharmacy costs will surpass the cost of inpatient hospital, physical medicine and radiology by the end of the decade.

What are the major drivers of prescription drug cost inflation?

According to a study by SMG Marketing Group Inc. published in the Journal of Managed Care Pharmacy in July 2001, the number of prescriptions used by commercial health maintenance organization members per year grew from 4.9 in 1988 to 7.1 in 1999. The cost of each prescription went from $11.50 to $28.35 over the same period.

Some of the reasons behind this rise include: an increase in the prevalence and incidence rate of chronic conditions; an increase in the diagnosis and treatment of chronic conditions by physicians; highly effective advertising directed at consumers by pharmaceutical manufacturers; and benefit programs that, until recently, covered most if not all the cost of prescription drugs.

While some factors, notably the increase in chronic conditions, are not directly related to workers comp, there are significant carry-over effects from the behavior of patients who demand certain drugs, and physicians who do the prescribing.

For example, doctors accustomed to writing a lot of prescriptions for patients in group health plans are likely to do the same for their workers comp patients.

What is a workers comp payer to do? They cannot increase co-payments or deductibles or restrict drugs to a formulary as they can in some states for group health plans. (A formulary is a list of drugs approved for use in advance by the payer.) So payers must rely on vendors known as pharmacy benefit management companies.

PBMs provide comprehensive prescription drug management, including bill processing, networks of independent and chain pharmacies that function much like a medical preferred provider organization with reporting, and drug utilization review.

Drug utilization review is a process for managing drug utilization designed to prevent overuse or inappropriate use of drugs, switching patients to generics and/or mail order.

A word of caution here. Be wary because pharmacy benefit management can vary.

The most common type of PBM is the large group-health oriented network that is accessed for workers comp.

On its face, the large group health pharmacy benefit management company is attractive. It has every pharmacy known to man and delivers deep discounts.

But beauty is skin deep. Most of their pharmacy contracts do not address workers comp; they are either group health specific or "all payer all product."

More importantly, most pharmacies do not allow processing of workers comp prescriptions under either a group health or "all payer all product" contract.

Most prescriptions processed through these arrangements would not be if the pharmacist knew it was workers comp. Therefore, while pharmacy benefit managers are attractive on the surface, beware of large networks and deep discounts because, without a workers comp contract, your program will find itself on the rocks.

A second form of pharmacy benefit manager is the workers comp-specific PBM. These companies tout their strong expertise in workers comp and their ability to control costs through drug utilization review.

But their challenge is market share. Unlike large group health-oriented PBMs, these are contracted specifically for workers comp. And considering the value of purchasing power, they may not achieve savings.

According to the National Institute for Health Care Managements Prescription Drug Expenditures Report, total drug spending will approach $200 billion this year. A pharmacy is unlikely to provide significant discounts, agree to special handling or even recognize the name of a PBM that will deliver half-of-one-percent of its business. So, while the comp-specific approach sounds great, the limitations are significant.

Finally, there is the "hybrid"–the least common PBM. This type of organization has a large network of pharmacies that is contracted for group health and workers comp and provides a workers comp-specific drug utilization review program.

The hybrid has the name recognition and negotiating power of the group health business, coupled with a workers comp-specific contract. This results in discounts that can exceed 20 percent below fee schedule/R&C (Reasonable and Customary) coupled with highly effective, comp-specific formularies and drug utilization review.

There are many subtleties to understanding the capabilities and limitations of workers comp PBMs. Market share is one.

As with any PPO arrangement, the golden rule applies: He who has the gold rules. In a rapidly maturing market, consolidation is occurring among pharmacies and PBMs alike. The big will get bigger and capture all the benefits of size, while the small will likely lose negotiating power, market share and ultimately customers as they become less able to deliver discounts and name recognition.

Next, consider the impact of drug utilization review, which delivers "soft savings." Like traditional medical pre-certification, you cannot bank dollars from a procedure, or in this case a prescription, that is avoided. Also, internal and external customers are increasingly skeptical of soft savings. While workers comp-specific PBMs sound good, hybrids have similar drug utilization review capabilities and can deliver significant savings below fee schedule.

Finally, consider the workers comp contracts. Most pharmacies make little money from prescription drugs sold through large PBMs. Rather they use the PBM relationship to draw in customers who buy necessities. But they do make money from workers comp prescriptions and are reluctant to give up the margin.

Pharmacy chains and independents are becoming much more aware of workers comp as a revenue source and are scrutinizing PBM contracts and customers to be sure they only provide discounts where they absolutely have to.

So beware of the PBM without comp contracts, as claimants may find their prescriptions rejected and forced to pay full price out of pocket.

Pharmacy costs are perhaps one of the only means left where workers comp payers can significantly, and quickly, reduce medical loss. Understanding the environment is well worth the investment.

Joe Paduda is a principal and managed care workers compensation consultant with Health Strategy Associates, Madison, Conn.

Reproduced from National Underwriter Edition, May 12, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.