The Cost and Use of Pharmaceuticals in Workers’ Compensation: A Guide for Policymakers

By Richard A. Victor

June 1, 2006 Related Topics: Medical Costs, Prescription Drugs and Opioids

The Cost and Use of Pharmaceuticals in Workers’ Compensation: A Guide for Policymakers

As in the general health care system, the cost and use of pharmaceuticals in workers’ compensation have grown rapidly. Increasingly, policymakers are considering interventions to reduce the rate and growth of pharmaceuticals, usually as a part of a larger focus on medical cost containment.  

A companion study, State Policies Affecting the Cost and Use of Pharmaceuticals in Workers’ Compensation: A National Inventory, provides a state by state inventory of public policies used in workers' compensation to regulate the costs and use of pharmaceuticals.  

 Illustrative findings:

  • Workers’ compensation payors typically pay substantially more for identical medications than do group health insurance or government programs. The principal cost containment tools used in workers’ compensation are fee schedules and generic mandates, while the most common non-workers’ compensation tool is multi-tier copayments that encourage the patient to use the least costly therapeutically equivalent medication. Copayments are generally prohibited in workers’ compensation, although nine states allow workers to circumvent the generic mandate by paying the difference between the name brand and the generic.
  • Even when the pharmacy does not know if the patient is eligible, injured workers seldom pay up front for prescriptions. Rather, pharmacies, especially large chains, tend to assume the risk. That is an important role pharmacies play in ensuring access to care, and policymakers should avoid public policy actions that undermine pharmacies’ willingness to play that role.
  • Speeding eligibility information to the pharmacies—with electronic point-of-service access—will reduce friction costs, allow public officials to lower fee schedules, and enable payors to negotiate larger discounts. Pharmacy benefit managers (PBMs) improve the efficiency of this process and negotiate discounts for payors.  But pharmacies have incentives to bill payors directly, rather than going through PBMs, because of the possibility of higher reimbursement rates (e.g., fee schedule rates or the higher “cash prices”). Public policies that clarify the circumstances under which direct billing is permissible will reduce pharmacy costs and friction costs for pharmacies and payors.
  • Physician-dispensed pharmaceuticals (known as repackaged drugs) may be increasingly common. Advocates for physician dispensing argue that the practice is more convenient for patients and leads to enhanced compliance with medication regimens. They also point to certain vulnerable populations who may have difficulty accessing retail pharmacies because of distances or language differences. Evidence from California suggests that nearly one-third of prescriptions are dispensed by physicians and that the payments for the prescriptions are much higher than if they were dispensed by retail pharmacies. The structure of the fee schedules in California creates incentives for physicians to dispense pharmaceuticals. Other states should examine their reimbursement policies to ensure that they have not unintentionally created perverse incentives in this area.

The Cost and Use of Pharmaceuticals in Workers' Compensation: A Guide for Policymakers. Richard A. Victor and Petia Petrova. June 2006. WC-06-13.

Copyright: WCRI

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Research Questions:

  1. What are the costs and use of pharmaceuticals? What are the cost drivers? How are they similar to or different from those in general health?
  2. What is the “business” of dispensing prescriptions to injured workers? Who are the key players? What are the incentives and leverage points?
  3. What public policy tools are used to regulate the cost and use of pharmaceuticals?
  4. What evidence is found in credible research studies about the impact of various public policy interventions in workers’ compensation and in other programs? 

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