Katie Siegel

Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at [email protected]

Pharmacy Management

The Pharmacy Cost Creep

Spending on prescription drugs accounts for a large share of workers’ comp medical costs, but utilization can be controlled.
By: | October 1, 2015 • 8 min read

A 2013 study by the National Council on Compensation Insurance (NCCI) showed that pharmacy spend accounts for 19 percent of all workers’ compensation medical costs, and has been slowly creeping up over the past several years.

The biggest perpetrators are increased utilization and inflated prices of compound and specialty medications, continued physician dispensing and rising prices for generic drugs.

Generics’ Supply/Demand Problem

While generic medications still offer cost savings over brand names, their prices have seen an increase amidst manufacturer consolidation and schedule changes for key medications.


“Generic cost drivers for average wholesale price (AWP) used to remain relatively flat,” said Brian Carpenter, senior vice president of pharmacy product development and clinical management, Healthcare Solutions.

“But all of a sudden in the past year or so, they’re hitting double-digit marks. That’s causing an increase in spending that was unforeseen for all payers.”

Heavy consolidation among manufacturers has created a more limited supply of some generics and pushed out competition, enabling those producers still around to hike up prices.

“There’s been a narrowing of the number of players in the market in terms of the companies that make generic drugs,” said Mark Riley, immediate past president of the National Community Pharmacists Association (NCPA) and the executive vice president and CEO of the Arkansas Pharmacists Association.

“There’s also very little crossover in the products that each manufacturer produces. So before, where you might see 20 companies making a drug, now there’s only one to three making it.”

The problem has been exacerbated by schedule changes to certain hydrocodone/acetamenophin products — an attempt to tamp down opioid overuse. A generic version of Vicodin, for example, was redesignated to the more restrictive classification of a Schedule II drug, from a Schedule III classification.


“Also, along the way the FDA required lower levels of acetaminophen content. Both of those drivers caused about a 22 percent increase in AWP literally overnight,” Carpenter said. “And that’s been repeated quarter over quarter for these products.”

According to Express Scripts’ 2014 “Drug Trend Report,” hydrocodone/acetaminophen products for workers’ compensation saw an increase of 9.6 percent in average cost per prescription. Other painkillers also grew more expensive: Ibuprofen saw a 21.4 percent increase, and oxycodone/acetaminophen drugs jumped by 51 percent.

Specialty and Compound Drugs Drive up Costs

Utilization of compound and specialty medications has also increased, which could be due in part to a decreased supply of some generics, a desire to move away from the documented dangers of opioids and the emergence of new, cutting-edge drugs.

According to the Express Scripts report, “The [cost] trend for specialty medications was 30.4 percent between 2013 and 2014, driven by an increase in both the average cost per prescription (19.8 percent) and utilization (8.8 percent).”

In that time, a new set of oral medications for hepatitis C — proven to be more effective and generally better-tolerated than existing treatments — entered the market at a cost of anywhere from $80,000 to $200,000 for a 12-week regimen.

“Payers have to understand the cost and benefits of using these new, powerful medications versus using a more traditional drug for the specific conditions being treated,” Carpenter said.

The use of compound drugs has also become a significant cost driver, with utilization increasing by five times over the past five years, according to a 2013 study by the California Workers’ Compensation Institute. Express Scripts reported the 2014 cost trend for compounded medications at 45 percent, but called it “moderate compared to the 2013 trend of 125.6 percent.”

Because they contain multiple ingredients, one medication alone can run thousands of dollars, without any proof of safety or efficacy. Unregulated by the FDA, compounds are not subject to double-blind, controlled studies and can vary in composition from batch to batch.

In workers’ comp, many compounds are topical creams meant to treat pain.

“The base ingredient of a topical compound is most typically petroleum jelly, used as both a mixing agent and a lubricant to rub the compounded ingredients on the skin,” said Matt Engels, vice president of network solutions for CorVel.

“Compounding pharmacies often mix the petroleum jelly with non-active agents in order to create a unique base to which they can attach a new, much higher, price.”

Jennifer Kaburick senior vice president, workers’ compensation product management and strategic initiatives, Express Scripts

Jennifer Kaburick
senior vice president, workers’ compensation product management and strategic initiatives, Express Scripts

Compounders can, for example, add things like cayenne pepper to emit heat, or menthol to create a cooling effect — and can set their own price because no National Drug Code (NDC) exists for their particular mixture.

Employers should question the efficacy of the base as well as the other ingredients, which could lead to the elimination of unnecessary and expensive ingredients, Engels said.

Increased compound utilization could be due to the fact that physicians are trying to steer away from prescribing oral painkillers, which have garnered so much attention for their addictive properties. Hospitals also may use compound medications when traditional supplies are not available, an issue exacerbated by the narrowing number of generics manufacturers.

“Compounders have stepped up and supplied the market with drugs that aren’t readily available,” Riley said. “I’ve had hospitals tell me that without compounders, they’d have to shut down their operating rooms.”

High prices and utilization are just one part of the threat to payers. Compounds also pose a challenge because they can more easily escape the scrutiny of bill reviewers. If each ingredient of a compound is listed separately on a bill, and especially if those ingredients are all generics, it may not trigger a red flag.


There’s also the fact that some physicians mix and dispense compounds from their own offices, or prescribe them through specialty pharmacies outside of an employer’s PBM network, skirting the PBM’s bill review process and any point-of-sale intervention programs.

Those bills, then, typically arrive at the employer’s door in paper form, and paper bills get processed and charged at the fee schedule rate, not at the discounted rate offered by the PBM. Dispensing compounds in this way not only robs an employer of lower rates, but also undercuts its ability to deny a compound prescription and suggest a cheaper and safer form of treatment.

“Once Florida passed drug repackaging legislation in 2013, a number of states followed suit.” — Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America

Employers can better manage their compound spend through prospective management, which requires a statement of medical necessity from the prescriber, or uses a point-of-sale program to flag costly drugs and get consensus from the payer before the prescription is automatically dispensed.

“It all comes back to the ability to hold a contracted provider and any assigned third party accountable for their obligations,” CorVel’s Engels said.

“Employers need 100 percent capture of all pharmacy transactions and transparency on how these transactions were dispensed in order to trigger the applicable obligations.”

Legislative measures can also keep compounding in check, such as restrictions on the number of ingredients that can be used.

The Drug Quality and Security Act, passed in 2013, also established an optional registry for compound pharmacists. Those who register must complete a detailed profile and are subject to biannual audits, which assures prescribers that their facilities are clean and their pharmacists reputable.

“I think like anything else, there are good players and bad players, and people have to be diligent about who they buy [compounds] from,” said Riley of NCPA.

Physician Dispensing

Physician dispensing remains a big cost driver. Not only are repackaged, physician-dispensed drugs more expensive than their counterparts distributed at retail pharmacies (the average cost of a physician-dispensed medication in 2014 was $173.75, compared to $111.68 for a pharmacy-dispensed medication), but the convenience offered to patients also drives up utilization.

According to a 2012 CorVel report, “Focus on Pharmacy Management: Physician Dispensing,” physician distributing of repackaged drugs made up 19 percent of all workers’ comp drug costs. And the practice has grown increasingly more common since 2007.

According to the NCCI’s “Workers’ Compensation Prescription Drug Study: 2013 Update,” physician-dispensed repackaged drug costs as a share of total workers’ comp drug costs have increased 140 percent, from 5 percent in 2007 to 12 percent in 2011.

“Combat” is the key word. Costs can truly be controlled only through proactive management and the use of services like bill and utilization review.

Additionally, physician-dispensed prescriptions’ average cost per claim grew by about 25 percent in 2008, from $24 to $30, and doubled over the next three years. By comparison, prescription cost per claim for drugs dispensed by pharmacies had a steady growth of about 5 percent per year during the same period.

“In the last few years, we’ve seen an increase in use of physician dispensing, but there is also a growing sense that there are opportunities to taper it,” said Jennifer Kaburick, senior vice president, workers’ compensation product management and strategic initiatives, Express Scripts.

“Once Florida passed drug repackaging legislation in 2013, a number of states followed suit,” said Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America. That law caps the amount doctors can charge for drugs they dispense to 12.5 percent over the average wholesale price. Other states limit the amount or types of drugs that physicians can dispense, enforce a separate fee schedule for physician-dispensed drugs, or require physicians to price their medications based on the NDC of the original manufacturer.

“I think this will be less of a problem going forward as the other states pass similar legislation,” Holden said.

Containing Costs

While these trends have collided to result in overall high pharmacy costs for workers’ comp payers, the climb may not continue for long. Little can be done about the effects of manufacturer consolidation on generics pricing, but payers can gain control over compound and specialty drug utilization, while regulatory and legislative efforts help to rein in physician dispensing.

“I think these trends have reached their apex, as employers and carriers have chosen to combat the rising costs,” Holden said.


“The battle is far from over, but I truly believe we are on our way.”

“Combat” is the key word. Costs can truly be controlled only through proactive management and the use of services like bill and utilization review.

“PBMs can also take a stance in the market for fairer drug pricing — especially for costly medications like specialty drugs — which improves access,” said Rochelle Henderson, senior director of research for Express Scripts.

Kaburick and Henderson pointed out that, despite an 11.5 percent increase in average cost per prescription for narcotics in 2014, an 11 percent decrease in utilization among Express Scripts’ clients allowed their overall trend to remain flat.

“In an unmanaged program, these trends will not go away by themselves,” Kaburick said. “But if employers aggressively manage their pharmacy spend, they can keep costs down despite trends in the market.”

Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at [email protected]
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Data Diving to Improve Comp

More companies are harnessing industry data to cut down claim duration and overall cost.
By: | September 14, 2015 • 7 min read

Predictive analytics in the workers’ compensation space is having an evolutionary moment.

Dean Foods, a food and beverage company, first developed an analytical model for its return-to-work program back in 2010.

“The model was very simple at that time. It was basically an indicator of lost time or no lost time,” said Kevin Lutzke, director of risk management at Dean Foods.


The company’s TPA uploaded daily updates to a data warehouse, where return-to-work coordinators could see which claims were indicated as possible lost-time claims and required their attention.

That early model, built in-house by a company actuary, yielded an 80 percent accuracy rate, and “moved the needle” on the company’s transitional duty program, getting more injured workers back in the game faster.

“It got to a point where everybody was so good at identifying which claims were going to be lost time or not, and the RTW coordinators were able to facilitate transitional duty so well, that we actually changed our culture at Dean,” Lutzke said. “The attitude used to be, ‘They’re not coming back until they’re 100 percent.’ Now we always try to keep people working with transitional duty.”

Three years later, Dean Foods implemented an updated version with third party administrator Helmsman Management Services, which factors in a wider variety of details about each case, including the worker’s age, type of injury, classification as surgical or non-surgical, and comorbidities.

“The attitude used to be, ‘They’re not coming back until they’re 100 percent.’ Now we always try to keep people working with transitional duty.” — Kevin Lutzke, director of risk management, Dean Foods

It also asks for input on social factors, such as the worker’s family situation, personal finances, and the status of his or her relationship with the employer.

Those elements may indicate tendencies to depression and isolation, which would prolong recovery, or that the worker might purposely lengthen the time away from work.

“Those details are kept confidential, to protect the employee’s privacy,” Lutzke said. “We don’t see that information as the end user, but we receive an overall score from the TPA.”

The more detailed model also allows Dean Foods to expand its applications from a simple lost time indicator. The company now uses its output to measure reserve levels against what it typically spends on a claim of a particular severity — a figure based on Helmsman’s database and book of business.

“We’re only seven or eight months into this, so we don’t have enough information yet,” Lutzke said. “We’ll have to wait a few more months to see if we’re focusing on the right things.”

The evolution of the food company’s predictive model and its applications reflects an industrywide trend. Less than a decade ago, modeling programs for workers’ comp simply spit out a score on a scale of one to 10, ranking a claim’s likelihood of becoming long-term and expensive based on a few factors specific to the injury in question. Standard metrics have traditionally included type of injury, body part injured, age of the worker, gender and comorbidities.

But models include a much wider scope of demographic variables that can impact an injured worker’s path to full recovery, such as the worker’s ZIP code, the average income of that area and the level of access to health care institutions.

Some models also incorporate information about prescribers — what type of pain medication they dispense, their general prescribing patterns and who refers patients to that prescriber.

Companies can adapt a predictive model’s various functions to address more specific areas of interest and pinpoint trouble spots.

For some, a model might highlight chronic overspend on pharmacy costs, while for others it might indicate a need for a better way to triage claims up-front and get the right resources on the case more quickly. Models exist to determine which claims would benefit from nurse case management and which might be subject to subrogation.

Clinical Applications

Helios, for example, launched a pilot predictive analytics program in 2011 that identified claims likely to result in high pharmacy costs, which would then be targeted with specific interventions. Measured against a control group that received no interventions, the pilot group saw a 26 percent total cost reduction, as well as a shorter duration of pharmacy utilization.

Joe Anderson, director of analytics, Helios

Joe Anderson, director of analytics, Helios

“We know there are some prescribers who, if an injured worker with a higher level of severity goes to see them, there’s a correlation with higher long term pharmacy costs and longer claim duration,” said Joe Anderson, director of analytics at Helios.

In a situation where an injured worker has several prescriptions for opioids, Helios launches a fairly non-invasive intervention: sending a letter to the prescribers to alert them of possible drug abuse.

“It can go all the way to medication review, or peer-to-peer intervention,” Anderson said. “Sometimes the doctor will talk to the treating prescriber and figure out how to change the regimen.”


That model has also been enhanced several times.

“Over the past few years, we’ve had an expanded data set with more customers, which gives us opportunities to fill in gaps of information and measure things we weren’t previously able to measure,” Anderson said.

Other models help detect fraud, said Scott Henck, senior vice president and actuary, claim actuarial and advanced analytics, at Chubb Insurance.

Some claims are flagged for potential “soft fraud” if there are indicators that the worker is malingering and simply not progressing at the rate the model predicts he or she should.

Medical codes on the claim bill can also tip off an adjuster when a worker may be taking advantage of workers’ comp care to get treatment for a separate, unrelated injury or illness.

“Codes for significant but unrelated conditions might give us reason to investigate further,” Henck said.

Chubb’s original model hit the market in 2008, and has since undergone several updates. Currently, the insurer sees average cost savings in the 5 percent to 10 percent range, which stems from identifying fraud early as well as more effectively directing the right resources toward potentially risky claims.

“Sometimes it’s very obvious which claims are high or low severity. It’s more about identifying which claims are likely to develop in their severity and address it early to mitigate the exposure,” Henck said.

Developing targeted strategies early in the claim life cycle is a key benefit, said Stephen Allen, managing director of commercial insurance services at Crystal & Company.

“The strength of modeling is that you know early on that a claim has the potential to be dangerous, and can get a senior adjuster involved to make sure more resources are used for high risk, high severity claims,” Allen said.

“Any time you can get earlier involvement, there’s a much higher likelihood you get a worker back to work quickly,” he said.

Data Depth and Detail

Of course, a model is only as good as the data fed into it. The length and richness of claim history varies from provider to provider, but larger TPAs and insurers with developed tools typically have a large data set with 10 to 15 years’ worth of history.

“The customization and client-specificity are very important in determining what’s predictive and relevant,” said Chris Flatt, leader of Marsh’s workers’ compensation center of excellence.

Origami Risk’s analytics combine data sets from multiple sources: its own aggregate data, the client’s data including claims history, and third-party information such as evidence-based disability guidelines, said Aaron Shapiro, executive vice president of Origami Risk.

Henck said that data sources could even expand to include information gleaned from social media.

Expansion of data sources “should be able to increase the depth and precision of solutions as well as open up possibilities for new solutions,” he said.


One challenge that remains in predictive analytical models is making the data output easily consumable and actionable by a broad-spectrum consumer base comprising claims adjusters, insurers, data scientists and risk managers.

“We present metrics on the individual claim that indicate how quickly a particular injured worker should be back to work,” Shapiro said. “We also produce trend lines based on an aggregate of claims so that an individual case can be compared to the average claim duration and cost for a particular injury.” That allows users to identify outliers and intervention opportunities.

“We present metrics on the individual claim that indicate how quickly a particular injured worker should be back to work.” — Aaron Shapiro, executive vice president of Origami Risk.

Interventions implemented based on a model’s output might involve deciding who would benefit from nurse case management, sending a letter or otherwise intervening in the treatment plan set forth by a prescriber, or adjusting reserve levels.


“Analytics is still a very complex subject and there’s still a lot of confusion in the marketplace, due to different terms being used in different ways,” Helios’ Anderson said.

The varied availability of data and many ways analytics can be used likely add to the confusion. Savings can also be hard to determine because that involves estimating costs that are never actually incurred.

But given the pace at which companies have developed analytical programs, the role of predictive analytics in workers’ comp seems bound to grow.

Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at [email protected]
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DMEC Conference

Demographics, Regulations Pose Challenge for Absence Management

Attendees of the 2015 DMEC Annual Conference reviewed both obstacles and progress in absence management.
By: | August 11, 2015 • 4 min read

2015 DMEC panel discussion on Amazon’s leave policy. Photo courtesy of DMEC.

Discussions at last week’s meeting of the Disability Management Employer Coalition in San Francisco focused on the impact of shifting workforce demographics amid current challenges and potential innovative solutions to disability management.


With people continuing to work later in life, four different generations now make up the American workforce, and each has different priorities when it comes to employer benefits and how they are delivered.

This, combined with changes in the regulatory and health care landscape, presents unique challenges for employers and absence management providers. Below are some of the major themes discussed at the annual conference:

Regulatory Challenges

The pace of regulatory change remains a constant hurdle for employers. Absences in accordance with the Family and Medical Leave Act, in particular, have left employers vulnerable to compliance risk.

Prior to June’s Supreme Court decision to legalize same-sex marriage nationwide, employers had to cope with a definition of “spouse” that fluctuated among the growing number of states that had legalized gay marriage.

Initially, couples that lived in states where same-sex marriages were recognized were viewed as spouses under FMLA. Now, there are no location restrictions on the definition of “spouse.”

That is just one example of how quickly regulations can change, challenging employers to keep their policies up-to-date and ensure there is no infringement of employees’ rights.

Employers also consistently struggle with FMLA compliance by miscategorizing leave under regular sick time, or by punishing employees for FMLA-protected absence by discontinuing health insurance coverage or failing to restore him or her to their former position when the leave ends. Some simply fail to educate employees about their rights under the FMLA.

Federal investigations are also intensifying, with the Department of Labor increasingly requesting information on leave use and conducting more on-site visits, according to Jeff Nowak, a partner at Franczek Radelet, PC, and author of the blog “FMLA Insights.”

Companies can strengthen FMLA compliance and reduce their exposure by conducting more self-audits of their policies and implementing internal protocols to make sure requests for leave are properly designated.

While the Department of Labor is working on an FMLA guide for employers, companies can strengthen compliance and reduce their exposure by conducting more self-audits of their FMLA policies and implementing internal protocols to make sure requests for leave are properly designated.

One upcoming regulatory changes to watch is an update to the Genetic Information Non-Discrimination Act and Section 501 of the Rehabilitation Act.


New legislation is also pending concerning accommodations for pregnant workers, following clashes between the Equal Employment Opportunity Commission and several companies over the treatment of pregnancy and related conditions as disabilities.

Managing Chronic Conditions

Addressing chronic conditions was a topic touched upon in several sessions. Studies from Liberty Mutual’s Research Institute for Safety show that chronic conditions affect 40 percent of the U.S. workforce.

An aging workforce and high rates of obesity and diabetes will only make chronic conditions more prevalent.

Chronic conditions pose problems because few surefire methods have emerged to manage them. Pre-placement exams can’t predict how a condition will develop over time, and the provision of wellness programs and behavioral therapy has shown no real impact in decreasing absence related to chronic conditions.

Sutter Health was able to cut lost days down by 8,632 in one year using a system that integrated leave management and return-to-work accommodations. The estimated savings impact was $2.75 million.

Training supervisors to facilitate return-to-work and oversee ergonomics improvements was one method that did make a material difference in decreasing lost time days due to chronic issues.

Research from Liberty Mutual showed that a supervisor training program resulted in a 27 percent decrease in lost time.

Providing on-site peer support to arrange care and accommodations for minor complaints also led to a 25 percent decrease in lost time.

Several speakers advocated seeking out methods of care that would address a worker’s injury or condition within the scope of their work environment.

Overall, hastening employees’ return-to-work by focusing more on “whole person care” emerged as a big shift for employers.

Zoning in on a specific injury without considering a worker as a whole ignores the unique interactions between the worker’s personal and occupational health risks, and his or her relationship with the workplace in general.

PG&E presented results from a new health plan built around the concept of treating the whole person, and found that focusing on preventive and primary care over specialty care reduced the number of ER visits and lost work days — saving about $1,918 in medical costs per employee in 2014.

Integrated Disability and Absence Management

While integrating disability and absence management, health and safety initiatives, and return-to-work programs remains a hot topic, most experts concede that widespread integration of those programs remains far off.

The complexity of the different pieces — FMLA, the Americans with Disabilities Act and workers’ comp — make coordination difficult.


Those who succeed at streamlining these resources, though, stand to significantly reduce absences and reap savings.

Sutter Health, a nonprofit health system in Northern California, for example, was able to cut lost days down by 8,632 in one year using a system that integrated leave management and return-to-work accommodations. Over the course of that year, the savings impact was estimated at $2.75 million.

Future DMEC conferences will surely feature more employer success stories and pave the way for best practices for marshaling the data, resources and executive support to create integrated programs.

Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at [email protected]
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