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If you're not on drugs trying to decipher prescription drug pricing, perhaps you'd better be.

Did you know that costs for drugs now represent almost 15 percent of our workers' compensation medical dollar?

Did you know that there are several different sources for the average wholesale price, or AWP, of pharmaceuticals, including Red Book, published by Thomson Medical Economics; First DataBank, a provider of electronic drug information; and Medispan, a product of Lippincott Williams & Wilkins Inc.?

Did you know that all the various sources for AWPs differ slightly, are updated at different intervals and are completely unregulated?

Did you know that there is a trend in workers' comp pharmaceutical pricing to use maximum allowable cost (MAC), schedules in place of or in conjunction with AWP, but that, unfortunately, there are multiple versions of MAC, including a federal MAC price table, individual state MAC prices and proprietary MAC pricing tables developed by individual pharmacy benefits management companies?

Did you know that 34 states have workers' comp pharmacy fee schedules, but they are based on five different pricing schemes--AWP plus x percent, AWP minus x percent, MAC, wholesale acquisition cost, federal upper limit and Medicaid?

Did you know that for the remaining usual and customary (U&C) states, there are no pricing standards, the U&C price is typically determined by the pharmacy itself (cash price) and it differs from one pharmacy to the next?

Did you know that a price of AWP minus 10 percent from one pharmacy benefit manager (PBM) is not necessarily better than a price of AWP minus 5 percent from a different vendor?

And, finally, did you know that, of your workers' comp PBM's price of AWP, 10 percent may still be nearly twice what the federal government pays for the same drugs in their programs?

If you didn't know any of this, you're not alone. In their "Guide to Understanding Common Prescription Drug Pricing Terms," the Academy of Managed Care Pharmacy writes that drug-pricing terminology is arcane and pricing methodologies complex.

Terms such as "average wholesale price," "best price" and "wholesale acquisition cost" are commonly used, according to the reference guide, but what those terms mean and when they are relevant within the distribution chain is far from clear.

"Those outside of the pharmaceutical industry, and even many within it, cannot clearly define the various drug pricing terms," the reference guide says.

And that's just for starters.

Our several months of research into this topic suggest that the quote from the AMCP is an understatement. It leaves us wondering the following: How does prescription drug pricing really work for the workers' comp industry? How can I tell if I am really getting a good price for a particular drug? Does it have to be this complex? How do I know which pharmaceuticals are, indeed, really needed by our injured workers? What is the best way to ensure we are getting the best price for the pharmaceuticals needed by our injured workers?

Some of the confusion over workers' comp prescription pricing actually appears to be programmed into the system by the individual jurisdictions.

According to a recent report, "The Cost and Use of Pharmaceuticals in Workers' Compensation," published by the Workers Compensation Research Institute, 34 jurisdictions have adopted some form of a mandated fee schedule for workers' comp prescription drugs. However, there does not seem to be much agreement among the jurisdictions on how drug prices should be set or what fee levels are appropriate.

The states use the full complement of the prescription drug alphabet soup as the basis for their pharmaceutical fee schedules, including Medicaid, FUL, WAC and MAC, but the majority (28) use AWP. Unfortunately even when states agree to use AWP as the basis for their fee schedule, they cannot agree on whether drug prices should be above, below or at the AWP rates.

By definition, these fundamental differences in fee schedules institutionalize confusion over what the "right" prices should be for workers' comp prescription drugs. The mandated state fee schedule prices from AWP-based states vary from 12 percent below AWP to 40 percent above AWP.

Data from PMSI, the largest and most experienced workers' comp pharmacy benefits manager, suggests the most commonly prescribed drug in workers' comp in 2006 was generic Vicodin; whereas, the top drug based on total dollars paid was Oxycontin. According to Nick Page, vice president, pharmacy services at PMSI, the AWP for a supply of 100 tablets of generic Vicodin on July 1, 2006, was $16.99. The AWP for a typical 30-day supply, 60 tablets, of generic Oxycontin (10mg) on July 1, 2006, was $88.07.

This means that the state-mandated rates, before any dispensing fees, for the same prescription of Vicodin on that day varied from $14.95 to $23.79--a unit-cost difference of more than 59 percent. The price for generic Oxycontin, according to the state-mandated rates, varied from $77.50 to $123.30--a difference of more than $45. If the state-mandated prices for the exact same prescription can vary by more than 59 percent, once you also introduce the issue of brand-versus-generic pricing, it is no wonder the industry has no idea how much they should be paying for injured workers' prescription drugs.

On top of the regulatory pricing differences, payers and employers must also cope with variations among the different PBMs due to differences in the source of their AWP data, how frequently the PBMs update that pricing data and variations in their pharmacy contracts. As previously noted, there are at least three different sources of AWP data that vendors may use as the foundation of their repricing processes. AWP prices can vary by up to 5 percent between sources, so it is clear that buyers cannot simply choose a PBM based on which vendor offers the greatest discount off AWP.

Because different vendors may actually be using different AWP baseline prices and each vendor may charge vastly different dispensing fees, a vendor that offers AWP minus 5 percent may actually offer a better value than a vendor that offers AWP minus 10 percent.

For example, as mentioned above, suppose the AWP from Red Book for a 30-day supply of generic Oxycontin (10 mg) on July, 1, 2006, was indeed $88.07. Because the AWPs can vary by as much as plus or minus 5 percent based on the source of the data, the AWP values for that same prescription could have conceivably ranged from $83.67 to $92.47 if a different PBM were using a different source of AWP. The table on Page 46 illustrates how a PBM offering the greatest discount off AWP and the lowest dispensing fee still might not provide you with the lowest net cost for that prescription.

And, to add fuel to the fire, there are several recent federal court rulings on drug pricing that focus on average wholesale prices. The most recent U.S. District Court decision found that three pharmaceutical companies had inflated the AWP prices they reported for certain drugs.

Payers and employers familiar with workers' comp have come to expect a system that usually dictates fee schedules or "approved prices" for medical care that are fairly consistent from one managed-care vendor to another. Compared with this fairly orderly approach in general medical care, prescription drug pricing in workers' comp still feels like the wild West.

Clearly, companies cannot make decisions about which PBM to use based solely on quoted pricing arrangements in proposals. Since the underlying base of those pricing agreements (AWP) can vary both by source and over time, buyers are forced to dig deeper into potential partners' actual pricing methodologies in an attempt to understand how much they truly will be paying for prescription drugs and whether those prices will actually generate meaningful savings.

What can you do to reduce some of the complexity of comparing PBM pricing? The best way to compare PBMs is to give them three to six months' worth of actual detailed historical prescription data and have them reprice it according to their network contracts. Be sure to insist that the PBMs reprice to the AWP that was in effect at the time the script was filled, rather than just picking the current AWP and/or the lowest AWP in effect during the three to six month period. This will help you even the playing field and make decisions on actual pharmacy spending rather than discounts off a "moving target."

Just as controlling general medical costs is more about utilization management than unit cost, though, a new wave of increasingly sophisticated pharmaceutical data analysis, clinical interventions and drug utilization review are starting to differentiate the crowded workers' comp PBM market. Read the next issue's companion article, "The Utilization Side of the Workers' Compensation Pharmaceutical Story," in order to move beyond unit cost to managing the utilization of pharmaceuticals in workers' comp.

MADDY BOWLING is principal of Maddy Bowling & Associates Consulting. DAVID HUTH is a senior partner in the firm.

Editor's note: The second half of this story will be published in the November issue of the magazine, which will be distributed at the National Workers' Compensation and Disability ConferenceŽ & Expo beginning Nov. 6 in Chicago.

October 15, 2007

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