Information and Commentary on Pharmacy in the Workers Compensation System

William M. Zachry
in Workers Compensation


A basic responsibility of the workers compensation claims administrator is to support and facilitate the medical treatment process. Theoretically, the right drug or medical treatment at the right time will maximize recovery and result in the earliest possible return to work, with the least possible residual disability. Too much, or too little medical treatment does not optimize clinical outcomes, and adds unnecessary costs to the system.

To support quality care and control medical costs, it is important that claims administrators and employers understand and manage pharmacy, an increasingly important cost driver within workers’ compensation.

This paper is a wide-ranging introduction to pharmacy issues in the California Workers Compensation system.

Fundamental Changes in Pharmacy Usage

There is an ongoing fundamental cultural change in the basic nature of what drugs are used for. We see this change primarily manifested in group health, but it also applies to workers’ compensation. A factor difficult to quantify but pervasive is the phenomenon of “medicalization.” That is, all kinds of complaints are now thought have a medical origin and therefore can be fixed with a pill. Drugs were discussed 59% more often during office visits in 1999 (than in 1985), with the rate of multiple prescriptions per visit up 39%. In the same time frame, prescription rates rose from 109 to 146 prescriptions per 100 visits.

In the past, pharmacy usage by the general population was primarily for pain management and infection control. In the last few years, sophisticated drugs have been developed ( e.g. statins for cholesterol management, ACE inhibitors for hypertension, COX II inhibitors for arthritis, etc.) for chronic conditions, to be used for the life of the patient. Additionally, other drugs are preventative, or may substitute for surgical intervention.

The primary indicators for pharmacy in the workers compensation system remain pain, inflammation and infection. However there are more drugs now used as a preventative (such as antiviral for exposures to blood borne pathogens). On the horizon are drugs for regeneration severed nerves, and lost connective tissue (knee meniscus). In workers compensation the majority of drugs treat symptoms, and do not reverse or cure the underlying disease or injury.

As obesity increasingly becomes a medical cost driver for group health (diabetes, hypertension, vascular and circulatory problems) it will also drive up the pharmacy usage in workers compensation.

Access and Trends in Drug usage in CA Workers Compensation

In California pharmacy has grown, as a percentage of medical from 6.1% in 2001 to 11.5% in 2005. As of 2006, it was as high as 15% for some insurance carriers (WCIRB). During the past five years, injured worker access to pharmacies has significantly increased. (CWCI Study April 2006).

Reasons for Percentage Increases in Ca Workers Compensation

As non-pharmacy medical expenditures have declined as a result of SB 899 (Utilization Review), there has been a relative increase in pharmacy costs. This is because there is little formal Utilization Review being performed on pharmacy or drugs that were dispensed out of the physicians office. Additionally, the introduction of newer, more expensive (but not necessarily more effective) patented drugs has increased costs. Finally, repackaging abuse resulting from the loophole in the pharmacy fee schedule (SB 228) has added significantly to pharmacy costs.

Pharmacy Fee Schedule in California

The legislature intended to reduce pharmacy costs by establishing a pharmacy fee schedule (SB228) tied to the MediCal schedule. The maximum reasonable fee is currently the lower of the Federal Upper Limit (FUL); the Maximum Allowable Ingredient Cost (MAIC); and the “Average Wholesale Price (AWP)*of the drug minus 17%; plus a $7.50 dispensing fee”. The allowance may not exceed the retail, or Usual and Customary (U&C) fee. When the legislature tied the workers compensation pharmacy fee schedule to MediCal’s it created a fee schedule loophole for repackaged and compounded drugs.

Pharmacy Repackaging

Since the passage of SB 228, pharmacy-repackaging companies have been selling drugs to treating physicians who have been dispensing the drugs out of their offices.

Though it can be argued that patients receive medications on a convenient and timely basis when dispensed from the physician’s office; there is evidence to suggest that the prescribing patterns of treating physicians are negatively influenced when the physicians dispense the drugs they prescribe. In addition to excessive costs and potentially inappropriate prescriptions, it is impossible to determine if dispensed drugs are counterfeit, or if the repackaged drugs are stale dated.

On April 1, 2007, the Acting Administrative Director (Carrie Nevans) passed regulations intended to close the repackaging loophole. A comprehensive discussion of the repackaging issue may be found in the CHSWC 2005 report to the legislature.

Even if the repackaging regulations stop the abuses, there will still be a significant increase in pharmacy cost in the workers compensation system during the next ten years.

Not All Dispensed Drugs Are Used

Not all of the pharmacy scripts written by the physicians are submitted to a pharmacy for filling. Not all submitted prescriptions are picked up by the injured worker. Not all dispensed drugs are taken by the injured worker.

Three Ways to Create Pharmacy Control There are three effective ways for the claims administrator to control pharmacy utilization:

1. A medical Utilization Review process. Most physicians in the workers compensation system do not pre-request authorization to write a prescription. Utilization on pharmacy, if performed, is usually done retrospectively.

2. The development of a pharmacy network per AB-749. AB-749 allowed employers and insurance carriers to create their own pharmacy network. With the development of a network, the claims administrator has 100% pharmacy cost control, but it does not control physicians’ prescribing decisions.

3. MPN or HCO. Membership within a Medical Provider Networks gives the physician rights and responsibilities. Some MPN contracts between the employer and the physician also require the physicians to follow formularies unless exceptions are justified and/or pre-approved.

Name Brand vs. Generic

When the legislature passed SB-228, it included not only a mandate for a fee schedule but also provided cost savings instructions for generic versus name brand drugs. Currently 56% of all dispensed medications in general medicine are generic.

One problem with mandating Generic use of drugs is that each person reacts to drugs slightly differently. The diet, age, sex, size, race, prior medical history and genetic predisposition all have an impact on how a particular drug is absorbed, works and is metabolized by the individual patient (“bioequivalence”).

There are procedures currently in place which allow for dispensing of name brand drugs when appropriate. Appropriateness, however, is within the discretion of the prescribing physician, with little or no oversight or availability of treatment guidelines. The treating physician is often forced to rely on the subjective, non-verifiable reporting of the patient, whose knowledge and motives for preferring a name brand drug is unknowable.

Drug Usage and Oversight Issues

The biggest problem with drug usage oversight is the fact that there is little formal process for feedback to the treating physician on if the patient actually got the prescription filled or if they took the drug. Problems with drug usage oversight by the treating physician include the fact that they can not force their patient to undergo tests to determine if the drugs which were prescribed are being used.

Drug tests are usually expensive and many tests cannot determine the concentration of the drugs in the system. If the prescription is for Oxycondin or Vicodan, most tests can determine if the patient was taking the drug but can not determine if the patient was only taking one per day and selling the rest of the medication. Most physicians who write the original prescription never get a full disclosure of how much the drug was dispensed and how much of that was taken, or what effect or impact the drug had on the recovery process.

Most pain management physicians utilize a contract with the patient, when deemed necessary. Such contracts requiring that patient not seek drugs from other physicians, submit to random testing, avoid use of non-authorized and illegal medications. Violation of the contract generally leads to termination of the physician/patient relationship. This is a rarely used but effective tool.

Oversight by Pharmacy Board or CMA

The bodies responsible for oversight of drug dispensing and usage (such as the pharmacy board and the physician licensing boards) have not recognized this problem nor have they held physicians accountable for turning a large number of productive workers into disabled drug addicts.

Fraud and Pharmacy Issues

Several states are working on legislation to determine the “pedigree” of the drugs. Pedigree legislation mandates that the dispensing organization have full knowledge and control over the chain of ownership. This process will help reduce some of the pharmacy fraud gambits.

The following is a list of fraud gambits, which increase the costs for everyone in the system:

  • Billing for name brand drugs while dispensing generic drugs
  • Dispensing counterfeit drugs Dispensing drugs past the expiration date Dispensing higher-priced drugs or non-generic drugs when there are appropriate lower costing drugs or generic drugs available
  • Physicians dispensing and billing for sample drugs
  • Physicians prescribing same drugs and quantities regardless of diagnosis (prescriptions typically filled at clinic’s in-house pharmacy)
  • Dispensing drugs for inappropriate off label use

Workers Compensation Pharmacy Formularies

Very few organizations have established workers compensation pharmacy formularies. A formulary is a list of prescription medications selected for coverage under a health insurance plan. Drugs may be included on a drug formulary based upon their efficacy, safety and cost-effectiveness. Some health insurance plans may require that patients obtain preauthorization before non-formulary drugs are covered. Other health insurance plans may require that a patient pay a greater share or all of the cost involved in obtaining a non-formulary prescription. A pharmacy fee schedule, in conjunction with the mandate for dispensing generic drugs was the legislated foundation for pharmacy cost savings in the system. The Legislature did not provide specific authorization to create a workers compensation drug formulary. The legislature did set general criteria of “evidence based medicine” for treatment interventions other than pharmacy. Workers compensation drug formularies, based on diagnosis, may be developed and implemented based on evidence based medicine.

Off Label Drug Usage

In the United States, the Food and Drug Administration (FDA) oversees the drug industry. The FDA approves all new drugs after a rigorous review of the effectiveness and safety. Usually the FDA approves a drug for a specific use (usually associated with treatment for a specific disease or condition, “on label use”). Once the drug receives approval from the FDA the drug company has a patent and approval to exclusively manufacture sell the drug for seven years. The patent may be renewed for a second seven years.

Many drugs are prescribed and dispensed for treatments not associated with the original approval by the FDA. This is called “off label use”. The FDA has no authority or control over the use of medications for “off label” uses. Recent studies have found that three out of five “off label use” of drugs have no medically based evidence supporting the use of that drug.

In the workers compensation system, every drug used on an “off label” basis has a corresponding drug which was approved by the FDA. Frequently, the “off label” use may be the primary and/or most lucrative use of a drug (no patents, and no regulations). Such use is often due to aggressive advertising by drug companies (sometimes masquerading as educational presentations at legitimate seminars) or the availability of financial incentives for the physicians.


The Federal Government has yet to define a patent process for Biopharmaceuticals. Thus, generic Biopharmaceuticals (“BIO- similars”) will not be available for the foreseeable future. Though not routinely used in the treatment of injured workers, about 150 such drugs are presently available, with another 500 in the pipeline. Although most Biopharmaceuticals presently available are for cancer and associated treatment, future pharmaceutical costs for treatment of the injured worker (e.g. viscosupplementation for the treatment of osteoarthritis) could spiral out of control.


The group health industry uses a technology called “NCPDP” to transmit confidential pharmacy data between the provider and payer. The NCPDP process allows electronic adjudication of the pharmacy bills in a real time process. This process significantly reduces the system friction costs. AB-228 required the AD to develop an electric adjudication process for pharmacy by July 1, 2006. The regulations for this are still pending.

Physician Licensing

The Drug Enforcement Agency enforces licensure for prescribing medications in the USA. A physician must be licensed to prescribe medications in a hierarchy or “schedule” of drugs (narcotics at top). A simple prescription form can be used for most drugs. However, the highest scheduled drugs require a specialized “triplicate” form imprinted with the physicians data, and good for one fill of one drug.


We can expect an increase in the usage and cost of pharmacy related to workers compensation. The oversight and administration of pharmacy issues is very complex process. It is important that the claims community educate itself on pharmacy issues so it may manage the process well. By aggressively managing the pharmacy issues the claims administrator can improve the quality of care for the injured workers, and reduce the costs at the same time.

Glossary of Pharmacy-Related Terms

* The Average Wholesale Price (AWP) is self-declared by manufacturers and relabellers and bears little relationship to wholesale or average prices.

Average Wholesale Price (AWP): A national average of list prices charged by wholesalers to pharmacies. AWP is sometimes referred to as a “sticker price” because it is not the actual price that larger purchasers normally pay. For example, in a study of prices paid by retail pharmacies in eleven States, the average acquisition price was 18.3 percent below AWP. Discounts for HMOs and other large purchasers can be even greater. AWP information is publicly available.

Best Price (BP): The lowest price available to any wholesaler, retailer, provider, health maintenance organization (HMO), nonprofit entity, or the government. BP excludes prices to the Indian Health Service (IHS), Department of Veterans Affairs (DVA), Department of Defense (DoD), the Public Health Service (PHS), 340B covered entities, Federal Supply Schedule (FSS) and State pharmaceutical assistance programs, depot prices, and nominal pricing. BP includes cash discounts, free goods that are contingent upon purchase, volume discounts, and rebates.

Actual Acquisition Cost (AAC): The net cost of a drug paid by a pharmacy. It varies with the size of container purchased (e.g., ten bottles of 100 tablets typically costs more than one bottle of 1,000 tablets) and the source of purchase (manufacturer or wholesaler). A drug’s ACC includes discounts, rebates, chargebacks and other adjustments to the price of the drug, but excludes dispensing fees.

Average Manufacturer Price (AMP): The average price paid to a manufacturer by wholesalers for drugs distributed to retail pharmacies. AMP was a benchmark created by Congress in 1990 in calculating Medicaid rebates and is not publicly available. FSS and 340B prices, as well as prices associated with direct sales to HMOs and hospitals, are excluded from AMP under the rebate program. The Congressional Budget Office estimates AMP to be about 20 percent less than AWP for more than 200 drug products frequently purchased by Medicaid recipients.

Average Sales Price (ASP): A new system created by Federal and State government prosecutors in settlements with pharmaceutical manufacturers TAP and Bayer to ensure more accurate price reporting. ASP is the weighted average of all non-Federal sales to wholesalers and is net of chargebacks, discounts, rebates, and other benefits tied to the purchase of the drug product, whether it is paid to the wholesaler or the retailer.

Formulary: A preferred list of drug products that typically limits the number of drugs available within a therapeutic class for purposes of drug purchasing, dispensing and/or reimbursement. A government body, third-party insurer or health plan, or an institution may compile a formulary. Some institutions or health plans develop closed (i.e. restricted) formularies where only those drug products listed can be dispensed in that institution or reimbursed by the health plan. Other formularies may have no restrictions (open formulary) or may have certain restrictions such as higher patient cost-sharing requirements for off-formulary drugs.

Manufacturer: For purposes of the 340B Program, manufacturer includes all entities engaged in (1) the production, preparation, propagation, compounding, conversion, or processing of prescription drug products, either directly or indirectly by extraction from substances of natural origin, or independently by means of chemical synthesis, or by a combination of extraction and chemical synthesis, or (2) the packaging, repackaging, labeling, relabeling, or distribution of prescription drug products. A manufacturer must hold legal title to or possession of the NDC number for the covered outpatient drug. Such term does not include a wholesale distributor of drugs or a retail pharmacy licensed under State law. “Manufacturer” also includes an entity, described in (1) or (2) above, that sells outpatient drugs to covered entities, whether or not the manufacturer participates in the Medicaid rebate program.

National Drug Code (NDC): The NDC is the identifying drug number maintained by the Food and Drug Administration. Manufacturers that have executed Pharmaceutical Pricing Agreements (PPA) report quarterly information to the Office of Pharmacy Affairs by NDC number including labeler code, product code, and package size code.

Patient: An individual is considered a patient of a covered entity (with the exception of State operated or funded AIDS drug assistance programs) only if: (1) the covered entity has established a relationship with the individual, which includes maintaining records of the individual’s health care; (2) the individual receives health care services from a health care professional who is either employed by the covered entity or provides health care under contractual or other arrangements (e.g., referral for consultation) such that responsibility for the individual’s care remains with the covered entity; (3) the individual receives a health care service or range of services for which grant funding or federally-qualified health center look-alike status has been provided. (Disproportionate share hospitals are exempt from this requirement.)

Pharmacy Benefit Manager (PBM): An organization that provides administrative services in processing and analyzing prescription claims for pharmacy benefit and coverage programs. PBM services can include contracting with a network of pharmacies; establishing payment levels for provider pharmacies; negotiating rebate arrangements; developing and managing formularies, preferred drug lists, and prior authorization programs; maintaining patient compliance programs; performing drug utilization review; and operating disease management programs. Many PBMs also operate mail order pharmacies or have arrangements to include prescription availability through mail order pharmacies. PBMs are expected to play a key role in managing pharmacy benefit plans in the Medicare drug program.

Single Source Drug: As defined in Section 1927(k)(7)(A)(iv) of the Social Security Act, a covered outpatient drug which is produced or distributed under an original new drug application approved by the Food and Drug Administration, including a drug product marketed by any cross-licensed producers or distributors operating under the New Drug Application (NDA). It also includes a covered outpatient drug approved under a Product License Approval (PLA), Establishment License Approval (ELA), or Antibiotic Drug Approval (ADA).

Wholesaler: A wholesaler is a company that serves as a bridge between a drug manufacturer and a covered entity. This means any entity (including a pharmacy or chain of pharmacies) to which the labeler sells the covered outpatient drug, but that does not relabel or repackage the covered outpatient drug.


Physicians must follow the California Health and Safety Code when they prescribe or dispense drugs. Attached is a copy of the Health and Safety code regulations. These regulations some times make it difficult for the physician to control overuse. 124960. The Legislature finds and declares all of the following:

(a) The state has a right and duty to control the illegal use of opiate drugs. (b) Inadequate treatment of acute and chronic pain originating from cancer or noncancerous conditions is a significant health problem. (c) For some patients, pain management is the single most important treatment a physician can provide. (d) A patient suffering from severe chronic intractable pain should have access to proper treatment of his or her pain. (e) Due to the complexity of their problems, many patients suffering from severe chronic intractable pain may require referral to a physician with expertise in the treatment of severe chronic intractable pain. In some cases, severe chronic intractable pain is best treated by a team of clinicians in order to address the associated physical, psychological, social, and vocational issues. (f) In the hands of knowledgeable, ethical, and experienced pain management practitioners, opiates administered for severe acute and severe chronic intractable pain can be safe. (g) Opiates can be an accepted treatment for patients in severe chronic intractable pain who have not obtained relief from any other means of treatment. (h) A patient suffering from severe chronic intractable pain has the option to request or reject the use of any or all modalities to relieve his or her severe chronic intractable pain. (i) A physician treating a patient who suffers from severe chronic intractable pain may prescribe a dosage deemed medically necessary to relieve severe chronic intractable pain as long as the prescribing is in conformance with the provisions of the California Intractable Pain Treatment Act, Section 2241.5 of the Business and Professions Code. (j) A patient who suffers from severe chronic intractable pain has the option to choose opiate medication for the treatment of the severe chronic intractable pain as long as the prescribing is in conformance with the provisions of the California Intractable Pain Treatment Act, Section 2241.5 of the Business and Professions Code. (k) The patient’s physician may refuse to prescribe opiate medication for a patient who requests the treatment for severe chronic intractable pain. However, that physician shall inform the patient that there are physicians who specialize in the treatment of severe chronic intractable pain with methods that include the use of opiates.

124961. Nothing in this section shall be construed to alter any of the provisions set forth in the California Intractable Pain Treatment Act, Section 2241.5 of the Business and Professions Code. This section shall be known as the Pain Patient’s Bill of Rights. (a) A patient suffering from severe chronic intractable pain has the option to request or reject the use of any or all modalities in order to relieve his or her severe chronic intractable pain. (b) A patient who suffers from severe chronic intractable pain has the option to choose opiate medications to relieve severe chronic intractable pain without first having to submit to an invasive medical procedure, which is defined as surgery, destruction of a nerve or other body tissue by manipulation, or the implantation of a drug delivery system or device, as long as the prescribing physician acts in conformance with the provisions of the California Intractable Pain Treatment Act, Section 2241.5 of the Business and Professions Code. (c) The patient’s physician may refuse to prescribe opiate medication for the patient who requests a treatment for severe chronic intractable pain. However, that physician shall inform the patient that there are physicians who specialize in the treatment of severe chronic intractable pain with methods that include the use of opiates. (d) A physician who uses opiate therapy to relieve severe chronic intractable pain may prescribe a dosage deemed medically necessary to relieve severe chronic intractable pain, as long as that prescribing is in conformance with the California Intractable Pain Treatment Act, Section 2241.5 of the Business and Professions Code. (e) A patient may voluntarily request that his or her physician provide an identifying notice of the prescription for purposes of emergency treatment or law enforcement identification. (f) Nothing in this section shall do either of the following: (1) Limit any reporting or disciplinary provisions applicable to licensed physicians and surgeons who violate prescribing practices or other provisions set forth in the Medical Practice Act, Chapter 5 (commencing with Section 2000) of Division 2 of the Business and Professions Code, or the regulations adopted thereunder. (2) Limit the applicability of any federal statute or federal regulation or any of the other statutes or regulations of this state that regulate dangerous drugs or controlled substances. “WorldSecure Server <>” made the following annotations on 10/10/2006 07:54:26 PM

The following is not the opinion of the State fund or of its Board of Directors. It is strictly the opinion of its Author.

1 Comment »

  1. This is an excellent survey of pharmacey issues — loaded with insight.

    Comment by Gkrohm — July 22, 2010 @ 8:29 pm

RSS feed for comments on this post. TrackBack URL

Leave a comment