The Cali Drug War

A drug loophole has severe side effects for the California workers' comp system.

By Peter Rousmaniere

Beware of what you wish for. Workers' comp regulators in California, trying to contain medical costs, introduced in early 2004 a tough drug fee schedule, reducing reimbursement to the lowest level in the country. Entrepreneurs then seized upon a loophole. Some prescriptions now cost much more than they did before the fee schedule.

The odd-couple coalition of labor, employers and regulators has been trying to close the loophole, but with no success to date.

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Letters to the Editor (06/01/11)

The loophole involves repackaging the drugs and rerouting the way they get to the patient. Ordinarily, the route goes from the drug company to the wholesale distributor to the drugstore to the patient. The drugstore tells a national data clearinghouse what drugs cost them at specified volumes. The clearinghouse in turn calculates a benchmark wholesale price for each drug. California's fee schedule, like many others, sets maximum retail drug prices linked to the wholesale price, to which drugs stores have to adhere. The idea is to keep costs down and to set a level playing field so payers can get a fair price.

But another way for patients to get medications is directly from their doctor. If a distributor bypasses the drugstore, packages the drug in different quantities and ships directly to a doctor's office, nobody reports wholesale costs.

There is no fee schedule because the quantity is different from the one the drugstore uses. The whole transaction is beyond the fee schedule's reach. The doctor can decide to charge the patient's workers' comp insurer any amount she wants.

The California Workers' Compensation Institute calculated that drugs sold this way--"repackaged"--cost on average of four or five times as much as the same meds bought at the drugstore. Naproxen at 500 milligrams costs the insurer $22.45 at the drugstore under the fee schedule, for instance. CWCI found that doctors' offices were charging, and getting, $126.74. The typical doctor will issue 2,000 prescriptions a year. State regulator estimates suggest that repackaging adds $150 million to California's drug costs.

In a group health setting, these high retail prices wouldn't fly because patients would choke on inflated high co-pays and deductibles. A workers' comp claimant, on the other hand, has no financial exposure.

Does doctor dispensing result in better medical outcomes? Patients are receiving more coordinated care. Fewer will fail to comply with doctor instructions, skip the next medical appointment and switch doctors. Meanwhile, recent studies have shown that occupational medicine clinics deliver much better outcomes at lower medical costs.

A state senator, Democrat Jackie Speier, filed a bill to effectively bring doctor-office distribution of drugs under the rules of the fee schedule.

While it is pending, the state workers' compensation director is drafting regulations that reportedly can go into effect without a new law. Some large employers are having, in diplomat argot, frank exchanges with medical providers they have been favoring in the past.

April 1, 2006

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