Closed Formulary Warrants Careful Consideration
California’s workers’ comp system could save as much as $420 million per year by instituting a closed pharmaceutical formulary, according to estimates. However, state lawmakers are being cautioned to proceed carefully before implementing such a change.
The estimate from the California Workers’ Compensation Institute last year did lend support for adopting a system where only certain medications are allowed for injured workers without pre-authorization. With a bill introduced in California this year, at least one pharmacy benefit manager is urging the legislature to carefully explore the option.
California Assembly Member Henry T. Perea, D-Fresno, introduced Assembly Bill 1124 last month, following the successful implementation of a similar law in Texas.
“We acknowledge the documented success of the Texas closed formulary in reducing the frequency and cost of the restricted drugs, or ‘N’ drugs, in their system. However, it should also be acknowledged that the legislation has resulted in some unintended consequences,” wrote Brian Allen, president of government affairs for Helios, in a posting on the company’s website. “Data shows that unrelated medications, medications outside of treatment guidelines, and expensive compounded medications are processing within the confines of the Texas closed formulary, thus adding unnecessary cost, and potentially risk, to the system.”
Texas’ closed formulary took effect in 2011 for new injuries and 2013 for all injuries. The Texas Department of Insurance has said the number of new claims with nonformulary drugs requiring pre-authorization decreased by 67 percent after the change was implemented.
The California legislation would “require the administrative director to establish a formulary for the purposes of prescribing prescription medications.” Allen said Helios supports the effort to allow the Division of Workers’ Compensation to “explore a closed formulary solution while giving them the flexibility” to look at the best ways to meet the needs of injured workers and employers.
“Allowing this flexibility will provide a forum for discussion on the various closed formulary models currently in place, while also advancing potential innovations or other enhancements that could help reduce the incidence of prescribing opioids and other problematic medications in the workers’ compensation system in California,” Allen wrote. “A thoughtful development process is not only prudent; it will also allow stakeholders and the DWC to evaluate best practices for managing all medications in a closed formulary environment.”
Allen encourages stakeholders to engage in the discussion but says they should also consider the role PBMs can play. “A closed formulary that fully integrates the tools of a PBM will help ensure the right medications are provided to an injured worker at the right time, while minimizing potential risk or unnecessary medication costs.”
Compounds Drove Drug Spend in 2014
An “unprecedented explosion” in spending for compounded medications drove a “significant increase” in overall prescription drug spend last year, according to a new report. Express Scripts said specialty drugs also factored into the 13.1 percent increase — the highest annual increase in drug spend since 2003.
The pharmacy benefit manager said health care payers last year were confronted with a “seismic change” in the pharmacy landscape. While the report included prescriptions for group health, Medicare, and Medicaid, the results may be replicated in a workers’ comp report due out next month.
“The increase in spend for compounded medications in 2014 represented a staggering change from 2013, when compounded medications did not appear among the top 10 therapy classes,” the Drug Trend Report said. “Compounded drugs strongly drove 2014 traditional trend; if excluded from the analysis, total traditional trend would have been only 2.3 percent.”
Compounded medications are created by combining various ingredients to fit the unique needs of a particular patient. A regulation adopted in 2012 is said to be responsible for the sudden cost increase.
“Compounding pharmacies began exploiting a loophole in a new regulation that made the creation and dispensing of unproven topical creams a lucrative cottage industry,” according to the report.
An effort to increase transparency resulted in an updated version of the Health Insurance Portability and Accountability Act standard for pharmacy claims transactions. “One component of this standard was the requirement that all components of compounded drugs be specified and billed using average wholesale price at the ingredient level, rather than being rolled up under the highest-priced ingredient according to previous claims and billing standards,” the report explained. “Since then, bulk manufacturers and compounding pharmacies have substantially raised AWP prices for the components of many compounded drugs, creating unsustainable cost increases.”
The report identified the following as the top ingredients by volume in compounded drugs:
- Progesterone micronized
- Propylene glycol
In addition, the report says spending for new, high-priced therapies for hepatitis C also contributed to the increased drug spend last year. The consolidation of drug manufacturers put additional strain on the supply chain to handle temporary shortages while “the pipeline of new medications” for conditions such as high cholesterol and cancer threatened to “undermine the sustainability” of the country’s pharmacy benefit.
“These challenges are unprecedented, and the need to respond has never been greater,” the report said. “However, plan sponsors can no longer rely on the wave of less-expensive generics to control drug costs. They need to act now to more tightly manage the benefit, implement smarter formularies, control the use of compounded medications and offer clinical support to ensure that all patients are able to achieve the best health outcome possible.”
What Is Insurance Innovation?
Truly innovative insurance solutions are delivered in real time, as the needs of businesses change and the nature of risk evolves.
Lexington Insurance exemplifies this approach to innovation. Creative products driven by speed to market are at the core of the insurer’s culture, reputation and strategic direction, according to Matthew Power, executive vice president and head of strategic development at Lexington, an AIG Company and the leading U.S.-based surplus lines insurer.
“The excess and surplus lines sector is in a growth mode due, in no small part, to the speed at which our insureds’ underlying business models are changing,” Power said. “Tomorrow’s winning companies are those being built upon true breakthrough innovation, with a strong focus on agility and speed to market.”
To boost its innovation potential, for example, Lexington has launched a new crowdsourcing strategy. The company’s “Innovation Boot Camps” bring people together from the U.S., Canada, Bermuda and London in a series of engagements focused on identifying potential waves of change and market needs on the coverage horizon.
“Employees work in teams to determine how insurance can play a vital role in increasing the success odds of new markets and customers,” Power said. “That means anticipating needs and quickly delivering programs to meet them.”
An example: Working in tandem with the AIG Science team – another collaboration focused on innovation – Lexington is looking to offer an advanced high-tech seating system in the truck cabs of some of its long-haul trucking customers. The goal is to reduce driver injury and fatigue-based accidents.
“Our professionals serving the healthcare market average more than twenty years of industry experience. That includes attorneys and clinicians combining in a defense-oriented claims approach and collaborating with insureds in this fast-moving market segment. At Lexington, our relentless focus on innovation enables us to take on the risk so our clients can take on the opportunities.”
— Matthew Power, Executive Vice President and Head of Regional Development, Lexington Insurance Company
Power explained that exciting growth areas such as robotics, nanotechnology and driverless cars, among others, require highly customized commercial insurance solutions that often can be delivered only by excess and surplus lines underwriters.
“Being non-admitted, our freedom of rate and form allows us to be nimble, and that’s very important to our clients,” he said. “We have an established track record of reacting quickly to trends and market needs.”
Lexington is a leading provider of personal lines coverage for the excess and surplus lines industry and, as Power explains, the company’s suite of product offerings has continued to evolve in the wake of changing customer needs. “Our personal lines team has developed a robust product offering that considers issues like sustainable building, energy efficiency, and cyber liability.”
Most recently the company launched Evacuation Response, a specialty coverage designed to reimburse Lexington personal lines customers for costs associated with government mandated evacuations. “These evacuation scenarios have becoming increasingly commonplace in the wake of recent extreme weather events, and this coverage protects insured families against the associated costs of transportation and temporary housing.
The company also has followed the emerging cap and trade legislation in California, which has created an active carbon trading market throughout the state. “Our new Carbon ODS product provides real property protection for sequestered ozone depleting substances, while our CarbonCover Design Confirm product insures those engineering firms actively verifying and valuing active trades.” Lexington has also begun to insure new Carbon Registries as they are established in markets across the country.
Lexington has also developed a number of new product offerings within the Healthcare space. The Affordable Care Act has brought an increased focus on the continuum of care and clinical patient safety. In response, Lexington has created special programs for a wide range of entities, as the fast-changing healthcare industry includes a range of specialized services, including home healthcare, imaging centers (X-ray, MRI, PET–CT scans), EMT/ambulances, medical laboratories, outpatient primary care/urgent care centers, ambulatory surgery centers and Medical rehabilitation facilities.
“The excess and surplus lines sector is in growth mode due, in no small part, to the speed at which our insureds’ underlying business models are changing,” Power said.
Apart from its coverage flexibility, Lexington offers this segment monthly webcasts, bi-monthly conference calls and newsletters on key risk issues and educational topics. It also provides on-site risk consultation (for qualifying accounts), access to RiskTool, Lexington’s web-based healthcare risk management and patient safety resource, and a technical staff consisting of more than 60 members dedicated solely to healthcare-related claims.
“Our professionals serving the healthcare market average more than twenty years of industry experience,” Power said. “That includes attorneys and clinicians combining in a defense-oriented claims approach and collaborating with insureds in this fast-moving market segment.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.