Pharmacy costs in California work comp – time to reform the reform

In 2004, California implemented a set of far-reaching reforms to its workers comp system, including several specifically aimed at cutting medical costs. One of the more drastic changes changed the pharmacy fee schedule from one based on a significant multiple of AWP to one tied directly to the Medi-Cal fee schedule (California’s name for the state Medicaid program). Medi-Cal’s fee schedule is actually lower than most comp PBMs’ contracted rates with retail pharmacy chains; as a result most PBMs are ‘under water’ on their business in California or are at best at break-even.
While medical costs have come down dramatically after reform, especially in physical medicine, that has not been the case for pharmaceutical expenses.
In fact, costs increased significantly, driven by significant increases in both the average number of prescriptions per claim and the average payments per claim for prescriptions. In addition, payments for Schedule II narcotics, categorized as having a high potential for abuse and addiction, increased nine-fold after reform. Schedule II drugs are also strongly associated with extended disability duration, driving up both medical and indemnity costs.
According to the California Workers Compensation Institute, the average number of first-year prescriptions per claim increased 25 percent after the implementation of the Medi-Cal link, while the average drug cost per claim went up 37 percent. (Changes in Pharmaceutical Utilization and Reimbursement in the California Workers’ Compensation System, September 2009)
The problem with physician repackaging/dispensing has largely been addressed, yet costs continue to escalate. From conversations with PBMs that dominate the state, it is clear that California’s reimbursement levels don’t allow them to invest in utilization management and clinical programs, both of which are keys to controlling total drug cost. Studies conducted by NCCI clearly indicate the primary importance of utilization as the driver of comp drug costs; surveys conducted by my firm have confirmed this as well, as those payers focused on managing utilization have seen their drug costs drop while payers without strong utilization controls consistently see drug cost inflation rates well above average.
Clearly, the linkage to Medi-Cal has not reduced drug costs for California’s employers.
What does this mean for you?
If California doesn’t rethink its approach to drug fee schedules, expect your costs to continue to increase.