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]
Share this article:

Workers' Comp Legislation

California Closed Formulary Legislation Heads to Governor

With California’s closed drug formulary nearly a done deal, other states including Tennessee and Louisiana are exploring the idea.
By: | September 28, 2015 • 4 min read
Capitol lit by setting sun

California is the latest state to adopt a closed drug formulary for its workers’ comp system. A bill passed in the waning moments of the legislative session would require state regulators to create an evidence-based closed drug formulary by July 1, 2017.


If the legislation becomes law, California would join a handful of states with closed drug formularies aimed at getting the right medications to injured workers and holding down costs. A.B. 1124 was passed by both chambers after meetings with a small working group in recent months.

“Overall I think the idea of bringing all the interests together to air our concerns or share ideas during the summer did a lot to get people focused on ‘where can we go with this,’ instead of fighting against it,” said Brian Allen, vice president of government affairs for Helios and part of the working group.

“It forced us to sit and talk about how to make it right and good. Those ideas will help the rulemaking process. We all have a stake in the game.”

In establishing the drug formulary as part of the medical treatment utilization schedule for medications prescribed in the California workers’ comp system, the legislation requires the Division of Workers’ Compensation to:

  • Publish at least two interim reports describing the status of the creation of the formulary, beginning July 1, 2016.
  • Update the formulary at least on a quarterly basis to allow for the provision of all appropriate medications, including those new to the market.
  • Establish an independent pharmacy and therapeutics committee to review and consult with the administrative director in connection with updating the formulary. The formulary must include guidance regarding how an injured worker may access off-label use of prescription drugs when evidence-based and medically necessary.

“The way the rules ultimately will be crafted there will be a set of guidelines saying ‘if you follow [the guidelines] it’s assumed you are doing the right thing,’” Allen

Brian Allen, VP of government affairs, Helios

Brian Allen, VP of government affairs, Helios

said. “If there is a unique need or use of a [particular] medication that needs to occur, a treating physician will probably have to demonstrate some level of medical necessity for going down a path that is anomalous to what the guidelines say. … It’s important that the guidelines be reviewed and followed but there are always exceptions to the rule and we must allow for them in a clinical and appropriate way.”

Allen said the group looked at the formularies in other states such as Texas. Experts say formularies can be effective when appropriately designed and implemented.

“As good as that is, please do not make the all-too-common mistake of declaring victory and moving on,” wrote Joseph Paduda, principal of Health Strategy Associates in his ManagedCareMatters blog. “The formulary bill is just the first step.”

“It’s important that the guidelines be reviewed and followed but there are always exceptions to the rule and we must allow for them in a clinical and appropriate way.” — Brian Allen, vice president of government affairs, Helios

Making a formulary effective, according to Paduda, requires binding utilization review processes and rules that require compliance, flexibility to allow payers and PBMs to use rule-based processes and procedures to ensure injured workers get appropriate medications, specificity in the formulary for the particular disease/condition/injury, timing of new claims vs. legacy claims, and assessment techniques to identify potential irregularities in prescribing and dispensing.

“I believe the move to a state formulary is a very good idea, and hopefully we see this happening in more states,” said Sherri Hickey, director of medical management for Safety National.

Two key factors “are having a well-developed implementation plan as well as a well-defined enforcement procedure. How well you communicate to your users and how well you enforce it and address requests for exceptions and off-label use will determine how valuable the formulary will be,” she said.

With California likely to adopt a closed drug formulary, other states are also considering the idea. Tennessee and Louisiana are among the latest looking into it.

According to pharmacy benefit manager myMatrixx, a Tennessee proposal includes differences in terms of the drugs requiring pre-authorization, depending on the rule provision. So-called “N” drugs are those requiring pre-authorization based on the Work Loss Data Institute’s Official Disability Guidelines.

“For example, one provision required pre-authorization for all compounds and topical medications while another required pre-authorization only for compounds with an ingredient identified with an ‘N’ status in ODG’s formulary,” the PBM said. “myMatrixx recommended that the department require pre-authorization for all drugs identified with the status of ‘N’ in the current edition of ODG/Appendix A and all compound drugs, including compound topical medications.”


The PBM has also asked the Department of Labor and Workforce Development to clarify the requirements for initial prescriptions and retrospective review.

A proposed formulary for Louisiana noted that workers are prescribed more narcotics than most states. That proposal is also based on the ODG though it would allow some modification. The formulary would be effective Jan. 1, 2016, for injuries on or after that date, and Jan. 1, 2017, for injuries occurring prior to 2016.

Nancy Grover is the president of NMG Consulting and the Editor of Workers' Compensation Report, a publication of our parent company, LRP Publications. She can be reached at [email protected]
Share this article:

Sponsored Content by Helios

It’s all in the Code: Five Essential Characteristics of HCPCS that Influence Outcomes

Keep in mind these five critical elements of HCPCS that can impact payers and claimants alike.
By: | October 1, 2015 • 5 min read

Payers are no stranger to codes. Claim and policy administration systems are filled with them. Moreover, whether designating claim type, feature, branch office, policy term, type of injury, or another classification, their use facilitates consistency and understanding. Codes also guide clinical and financial decision-making. At the foundation of medical cost management are three code sets. The International Statistical Classification of Diseases and Related Health Problems (ICD) diagnostic and procedure codes, ICD-10-CM and ICD-10-PCS respectively, are used to classify diseases, disorders, injuries, infections, and symptoms. National Drug Codes (NDCs) help ensure claimants received the correct strength, dosage form, and type of medication. Their use also helps pharmacists recognize the difference between products that may look or sound alike. Yet another useful code set is the Healthcare Common Procedure Coding System (HCPCS) created to identify services, products, and procedures rendered for the condition. It is on this code set we will focus.

When processing ancillary benefits in workers’ compensation and auto no-fault, HCPCS can determine whether the item is considered medically necessary and therefore, available to the claimant and otherwise related to the compensable condition. Codes can also affect the reimbursement amount. Thus, if a coding error is made, there can be significant adverse impacts to payers and claimants alike. For example, the vendor could stop supplying the item based on insufficient reimbursement, or the payer could deny the product or service completely. Both are detrimental to the claimant or overall claim outcomes. Coding errors may also result in claim leakage if applied incorrectly or misunderstood in the review process. It is therefore essential that payers be mindful of five essential characteristics of HCPCS.

#1 – HCPCS are generic

Like pharmaceuticals, there are many different providers and manufacturers of similar durable medical equipment (DME) items. However, HCPCS are not specific to brand and usually hundreds of different products can fall under the same HCPCS. In addition, some codes include certain services, such as evaluations and fitting fees, whereas some codes do not. For example, some health HCPCS rarely indicate the actual services being provided in the home, such as wound care or home infusion, but instead simply indicate an RN or LPN visit.

#2 – Unit of measure influences coding

Some supply codes have very specific units of measure, which can result in HCPCS quantities that are not whole numbers and can result in mathematical errors or rounding. For example, HCPCS code A4450 has a unit of measure of ‘per 18 square inches’ and is assigned to a roll of tape that is 2 inches by 5.4 yards, equaling 388.8 square inches. The quantity for this HCPCS code would therefore be 21.6. Additionally, some HCPCS codes specify ‘per pair’ or ‘each,’ so understanding the actual supply is important to determine the appropriate quantity.

# 3 – Sometimes, there is not a specific code

Centers for Medicare and Medicaid Services (CMS) has created a number of miscellaneous codes that have generic definitions and can be used when no other CPT or HCPCS code matches the description of the product or service provided. Miscellaneous codes can be easily abused either unintentionally due to lack of time and knowledge, or intentionally by a provider seeking a higher reimbursement rate. This is because miscellaneous codes typically do not carry a fee schedule due to their versatility and, therefore, may be reimbursed at higher amounts than a non-miscellaneous code. For example, K0108 defines a ‘wheelchair component or accessory, not otherwise specified;’ however, most wheelchair parts have a specific code outside of this one which could be more appropriate while also carrying a lower allowable amount.

#4 – Supplemental modifiers are useful

A supplemental modifier or identifier is a billing value that further clarifies the HCPCS/CPT code by telling the payer more about the billed product or service. Their application influences reimbursement because fee schedules largely differ depending on which modifier is reported. A rental (RR) for example, does not warrant the same reimbursement as a purchase (NU) yet both a purchase and rental of the same product carry the same HCPCS. Consider the following codes, K0001 = ‘STANDARD WHEELCHAIR’, K0001 RR = ‘STANDARD WHEELCHAIR’ that has been rented, and K0001 NU = ‘STANDARD WHEELCHAIR’ that has been purchased. Depending on the fee schedule, reimbursement could be $45 or $500.

Modifiers are also useful because they can define the unit of measure. By default, a HCPCS with a modifier of ‘RR’ is a rental per month. However, in some cases a provider may bill for a device daily and therefore interpret the fee schedule as daily rather than monthly. In this scenario, the provider may bill with a daily unit of measure, billing a quantity of 30 instead of the allowable amount of one. For devices that are rented daily, such as a negative pressure wound therapy device or continuous passive motion device, it is important to understand the unit of measure being used (monthly or daily) and be mindful that the daily billing exceeds the monthly allowable.


# 5 – The diagnosis influences allowable amounts

Some HCPCS change based on the diagnosis of the injured person and therefore, the allowable amount may fluctuate. For example, depth-inlay shoes are coded as an Orthotic (L – code) if the patient does not have a diabetic diagnosis and is using the shoes for orthopedic reasons. The same depth-inlay shoe may be used for a diabetic patient, but it would warrant an A-code, which can have a higher reimbursement level.

Influencing outcomes

The use of coding assists claims professionals in compensability decisions, guides clinical decision-making, informs point-of-sale utilization controls, influences claim handling policies and procedures, and provides a valuable data point in statistical and analytics models. Moreover, their use facilitates better clinical and financial claim management in terms of payments that are more accurate, greater processing efficiency and consistency, and improved clinical management as a result of better understanding the medical condition(s) associated with the claim and the various therapies in use. Remaining mindful of the aforementioned five essential characteristics of HCPCS can therefore not only mitigate claim leakage but also achieve a better outcome.

This article was produced by Helios and not the Risk & Insurance® editorial team.

Helios brings the focus of workers’ compensation and auto no-fault Pharmacy Benefit Management, Ancillary, and Settlement Solutions back to where it belongs—the injured person. This comes with a passion and intensity on delivering value beyond just the transactional savings for which we excel. To learn how our creative and innovative tools, expertise, and industry leadership can help your business shine, visit
Share this article: