Closed Formulary Could Decrease Use of ‘N’ Drugs
The recent success of the closed pharmacy formulary in the Texas workers’ comp system has caught the attention of practitioners in other states. A new report from the Workers Compensation Research Institute concludes that, all things being equal, other states could see similar results.
Texas was the first multi-payor state to adopt a formulary that requires pre-authorization for certain medications deemed as investigational, experimental, and those with “N” drug status under the Official Disability Guidelines, including many opioids. A study by the Texas Department of Insurance last year showed the formulary resulted in a decrease of about 80 percent in payments made for non-formulary drug prescriptions.
“If other states are able to successfully implement a Texas-like formulary, there is a huge potential for decreasing the utilization of the drugs designated as non-formulary drugs by Texas,” the report says, “which may in turn lead to substantial prescription cost savings in all states, particularly New York.”
The study looked at 23 states in terms of how a closed formulary might affect the prevalence and costs of drugs. Non-formulary drugs — those requiring pre-authorization in the Texas system — were most prevalent in New York.
The Texas study found physicians reduced prescriptions for non-formulary drugs by 70 percent and infrequently substituted formulary drugs for non-formulary drugs in response to the closed formulary. In assessing the potential impact of a closed formulary in the other states, the authors considered various alternative assumptions about how physician prescribing practices might change.
In the scenario where the response of physicians in other states is similar to that of their Texas counterparts, total prescription costs could be reduced by 14-29 percent among the study states with New York on the higher end. “Other states that could realize potential prescription cost savings of 20 percent and higher are New Jersey, Virginia, Massachusetts, Pennsylvania, Connecticut, and Maryland,” the report said. “Even at the lower end, states like California and Missouri might reduce their prescription drug spending by 14 percent.”
Some states may instead see physicians substitute with formulary drugs more frequently than Texas physicians did. “States may realize sizable but lower cost savings if all non-formulary drugs are substituted with other drugs,” the report states. “We estimated that within-class substitution of all non-formulary drugs with formulary drugs may reduce prescription costs by 4 to 16 percent in other study states.”
Cost savings could be greater in states where brand name medications are common. Even if physicians substituted all non-formulary drugs with cheaper generic alternatives, there could be substantial cost savings.
The researchers noted that the formulary is only one aspect of the Texas workers’ comp system that may differ from those in other states. States that do not have a “well-defined” utilization review process might see less cost savings due to the increased litigation.
Nonetheless, the authors said non-formulary drugs were prevalent in the 23 states studied, which could result in at least some cost savings. “States with higher prevalence [of non-formulary drugs] like New York, and Louisiana, have a larger scope for reducing the use of non-formulary drugs. In these states, workers’ compensation payors have an opportunity for more active management of prescribing patterns.”
WC Payers More Likely To Face Reimbursement Requirements for Pot
Peter D. White is compiling receipts and other financial transactions to determine how much his client has spent on medical marijuana since a state workers’ comp judge OK’d reimbursement last year. Once done, the New Mexico attorney will submit the information for payment of past and ongoing use of the drug to the employer and insurer — with the backing of the New Mexico Court of Appeals.
The case has drawn a plethora of comments and reactions from workers’ comp practitioners. While the case may not generate major changes in the near future, the issue is not going away anytime soon.
“To be honest, it’s a matter of timing as much as anything,” White said of the ruling. “It’s the tide in this country.”
White noted that the U.S. House of Representatives recently voted to restrict the Drug Enforcement Administration from using funds to enforce the federal ban on the drug against state-licensed medical marijuana patients and providers.
“I think this [case] would certainly serve as a model,” he said. “I would hope that would be the trend.”
The case, Gregory Vialpando v. Ben’s Automotive Services and Redwood Fire & Casualty, involved a worker whose lower back injury in 2000 resulted in multiple surgical procedures. All parties to the case ultimately agreed he had a 99 percent permanent partial disability.
Last year, a New Mexico workers’ compensation judge found that Vialpando was qualified to participate in New Mexico’s Medical Cannabis Program authorized by the state’s Compassionate Use Act. The WCJ also ordered his employer and the insurer to reimburse the worker for the medical marijuana. The appeals court upheld the decision.
Several factors likely contributed to the ruling, White and others said. One of the factors is that another client of White’s has been getting medical marijuana for the past four years. In that case, the workers’ comp judge ordered the employer — the state of New Mexico — to reimburse the injured worker for the drug rather than pay for it outright.
“We used the order from his case and think it mattered that there had not been any issues that had arisen,” White said.
A unique aspect of the case is that there was no divergence of medical opinion as to whether the claimant would benefit from the use of medical marijuana.
The court also considered medical marijuana more of a service than a medication. “In New Mexico, workers’ comp physicians do recommend a lot of things that are not medications such as therapy and acupuncture,” White said. “The idea being that this is part of the overall picture of reasonable and necessary medicine.”
In its appeal, the employer said the WCJ’s order was illegal and unenforceable under federal law, and that the state act and regulations promulgated pursuant to it do not recognize reimbursement for medical marijuana. But the appeals court disagreed (see box).
“I kind of felt it gave a little short shrift to the issue,” said Albert B. Randall Jr., a Baltimore-based attorney with Franklin & Prokopik PC. “Rather than the court trying to find out what was the correct answer, it pointed to the attorney saying ‘if you didn’t raise the issue or supply enough information, we’re going to rule the way we are going to rule.”
Looking Into the Future
If the same scenario were presented again, Randall does not necessarily believe there would be a different outcome. “I find it hard to believe that the Court of Appeals will rule on the constitutionality of the Compassionate Use Act within the context of a workers’ compensation claim; rather, I think that would have to be a separate challenge addressed by the court.”
Other attorneys were not so sure. “The employer apparently did an inadequate job of making the argument because the appellate court could not identify any federal law that was being violated,” said Colorado attorney Ronda K. Cordova of Ritsema & Lyon PC. “This seems like an argument that could be explored further.”
Another workers’ comp attorney concurs that a more definitive defense could have been mounted. James Pocius, a shareholder with Marshall Dennehey Warner Coleman & Goggin in Philadephia, believes a criminal attorney or workers’ comp attorney with a more extensive background in other areas of the law could determine that requiring reimbursement would make the employer an accomplice by violating a federal law.
“If the federal argument is not made more clearly, you could have another state make the same decision,” Pocius said. “I think it will be incumbent on the person with the next case to argue it correctly.”
As to whether the ruling will prompt similar litigation, Randall believes it will open the flood gates. “There is no question any savvy claimant’s attorney will use this in support of his argument,” he said. “I think this is going to be a groundbreaking case and likely will be cited throughout the country in support of the use of medical marijuana in workers’ compensation claims.”
This is the first of a two-part series exploring the potential legal and practical ramifications of the order. In part two, experts weigh in on the likelihood the case may spur more requests for medical marijuana in the workers’ comp system and issues surrounding reimbursement.
Global Program Premium Allocation: Why It Matters More Than You Think
Ten years after starting her medium-sized Greek yogurt manufacturing and distribution business in Chicago, Nancy is looking to open new facilities in Frankfurt, Germany and Seoul, South Korea. She has determined the company needs to have separate insurance policies for each location. Enter “premium allocation,” the process through which insurance premiums, fees and other charges are properly allocated among participants and geographies.
Experts say that the ideal premium allocation strategy is about balance. On one hand, it needs to appropriately reflect the risk being insured. On the other, it must satisfy the client’s objectives, as well as those of regulators, local subsidiaries, insurers and brokers., Ensuring that premium allocation is done appropriately and on a timely basis can make a multinational program run much smoother for everyone.
At first blush, premium allocation for a global insurance program is hardly buzzworthy. But as with our expanding hypothetical company, accurate, equitable premium allocation is a critical starting point. All parties have a vested interest in seeing that the allocation is done correctly and efficiently.
“This rather prosaic topic affects everyone … brokers, clients and carriers. Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
– Marty Scherzer, President of Global Risk Solutions, AIG
Basic goals of key players include:
- Buyer – corporate office: Wants to ensure that the organization is adequately covered while engineering an optimal financial structure. The optimized structure is dependent on balancing local regulatory, tax and market conditions while providing for the appropriate premium to cover the risk.
- Buyer – local offices: Needs to have justification that the internal allocations of the premium expense fairly represent the local office’s risk exposure.
- Broker: The resources that are assigned to manage the program in a local country need to be appropriately compensated. Their compensation is often determined by the premium allocated to their country. A premium allocation that does not effectively correlate to the needs of the local office has the potential to under- or over-compensate these resources.
- Insurer: Needs to satisfy regulators that oversee the insurer’s local insurance operations that the premiums are fair, reasonable and commensurate with the risks being covered.
According to Marty Scherzer, President of Global Risk Solutions at AIG, as globalization continues to drive U.S. companies of varying sizes to expand their markets beyond domestic borders, premium allocation “needs to be done appropriately and timely; delay or get it wrong and it could prove costly.”
“This rather prosaic topic affects everyone … brokers, clients and carriers,” Scherzer says. “Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
There are four critical challenges that need to be balanced if an allocation is to satisfy all parties, he says:
Across the globe, tax rates for insurance premiums vary widely. While a company will want to structure allocations to attain its financial objectives, the methodology employed needs to be reasonable and appropriate in the eyes of the carrier, broker, insured and regulator. Similarly, and in conjunction with tax and transfer pricing considerations, companies need to make sure that their premiums properly reflect the risk in each country. Even companies with the best intentions to allocate premiums appropriately are facing greater scrutiny. To properly address this issue, Scherzer recommends that companies maintain a well documented and justifiable rationale for their premium allocation in the event of a regulatory inquiry.
Insurance regulators worldwide seek to ensure that the carriers in their countries have both the capital and the ability to pay losses. Accordingly, they don’t want a premium being allocated to their country to be too low relative to the corresponding level of risk.
Without accurate data, premium allocation can be difficult, at best. Choosing to allocate premium based on sales in a given country or in a given time period, for example, can work. But if you don’t have that data for every subsidiary in a given country, the allocation will not be accurate. The key to appropriately allocating premium is to gather the required data well in advance of the program’s inception and scrub it for accuracy.
When creating an optimal multinational insurance program, premium allocation needs to be done quickly, but accurately. Without careful attention and planning, the process can easily become derailed.
Scherzer compares it to getting a little bit off course at the beginning of a long journey. A small deviation at the outset will have a magnified effect later on, landing you even farther away from your intended destination.
Figuring it all out
AIG has created the award-winning Multinational Program Design Tool to help companies decide whether (and where) to place local policies. The tool uses information that covers more than 200 countries, and provides results after answers to a few basic questions.
This interactive tool — iPad and PC-ready — requires just 10-15 minutes to complete in one of four languages (English, Spanish, Chinese and Japanese). The tool evaluates user feedback on exposures, geographies, risk sensitivities, preferences and needs against AIG’s knowledge of local regulatory, business and market factors and trends to produce a detailed report that can be used in the next level of discussion with brokers and AIG on a global insurance strategy, including premium allocation.
“The hope is that decision-makers partner with their broker and carrier to get premium allocation done early, accurately and right the first time,” Scherzer says.
For more information about AIG and its award-winning application, visit aig.com/multinational.