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Why Can't We Control Drug Expenses?

Joseph Paduda

Health care costs in workers’ compensation have grown significantly over the last few years, and now amount to well over 50 percent of the claims dollar in Florida. One of the primary contributors to this unhappy situation has been the drastic increase in both the cost and volume of prescription drugs, which now account for about 10 percent of total medical costs.

Now, with the cost of prescription drugs associated with workers compensation claims totaling approximately $2.5 billion and increasing at an annual rate of 13 to 17 percent, carriers, Third Party Administrators (TPAs), Managed Care Organizations (MCOs), and employers are all frantically trying to figure out what to do. Unfortunately, to date their efforts appear to have provided little relief. This disappointing situation has several causes, including:

• Ability of drug companies to create and enhance demand for specific drugs among both physicians and consumers through very effective marketing programs
• Unwillingness or inability of adjusters to require usage of preferred pharmacies (While payers can cut Florida pharmacy bills from any pharmacy to the same rate as that contracted at other pharmacies, that only solves the unit cost part of the problem; unit cost; utilization review programs that are automatically applied to scripts from participating pharmacies don’t work nearly as well when applied retrospectively);
• Unwillingness or inability of adjusters or clinical case managers to take responsibility for prescription drug management by encouraging generic usage, denying drugs that are not directly related to the compensable injury, supporting usage of cheaper drugs in the same therapeutic class, or requesting usage of mail order when appropriate;
• Undue influence of third party billers, and unwillingness on the part of workers’ compensation payers to deny their bills or otherwise counter their efforts to control the drug billing process; (third party billers act as “factors” for pharmacies, paying them a discounted rate for their comp scripts and billing the appropriate payer at fee schedule):
• Poor relations between pharmacies and pharmacy benefit managers resulting in failure to follow special account instructions, comply with formularies, and cooperate with billing protocols.

Prescription drug costs in workers’ compensation do not exist in a vacuum nor are the large enough to create their own dynamic. Representing less than two percent of total drug costs, workers’ compensation drug expenses are by definition subject to many of the same influences, trends, and factors that impact group health and governmental (Medicare, Medicaid) programs. These “macro” trends appear to be favoring workers’ compensation payers, as prescription drug cost increases among all payers (group, P&C, governmental programs) moderated somewhat over the first six months of 2003, dropping from a 13.5 percent increase in 2002 to 8.5 percent.

However, the reasons for this “decrease in the rate of increase” have little to do with workers compensation. Among the factors recently cited by the Center for the Study of Health System Change were changes in benefit design to increase co-pays for prescription drugs and add more tiers in drug plans, with higher costs for branded drugs.2 There was also more use of generics and a shift from prescription to over-the-counter (OTC) drugs as more drugs received approval for OTC sales from the Food and Drug Administration. In addition, fewer new — and consequently expensive — drugs came on the market. Workers compensation’s “first dollar, every dollar” coverage negates any benefit from the first two factors, and any benefit from the final factor appears to be modest. Even the movement to generics does little for workers compensation payers — the 2003 study of drug costs in workers’ compensation by NCCI indicates limited opportunity for additional savings from switching to generics.3

All is not lost, as there are some even greater macro factors that may significantly impact at least the unit cost portion of the Rx problem. This being an election year, and drug costs being an item of significant interest to voters, we can expect to see the passage of a drug re-importation bill prior to the November election. This bill will essentially make it legal for consumers, and probably payers as well, to buy prescription drugs from Canada, Australia, and possibly other countries that have drug costs significantly lower than those found in the US. We do not have the space, nor is it the intent of this article to discuss whether or not this is a good idea, or what the political drivers are, suffice it to say that this bill will pass.

With the passage of the bill, there will be significant downward pressure on branded drug prices. There will be little to no impact on generic prices; generics are already cheaper in the US than in most other countries. This downward pressure may well result in lower unit costs, again only for branded drugs, for all payers, workers’ compensation included.

This is both great, and terrible, news. The great news is that prices will likely decrease for approximately half of the scripts written for workers’ compensation patients (the other half are generics, which will not be directly affected). The bad news is that payers will declare victory and leave the battlefield, only to learn to their chagrin that increases in costs due to higher utilization continue unabated. The terrible news is that drug re-importation amounts to price controls. Therefore, drug development efforts will be severely reduced. With the average cost of taking a new drug to FDA approval well into the several hundred millions of dollars, investors may well refuse to fund new drug development as their risk will not be outweighed by a commensurate reward.

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Joseph Paduda, Principal of Health Strategy Associates, is an independent consultant focused in the Workers' Compensation and managed care markets.  His clients include large Workers' Compensation insurers, managed care organizations, self-insured employers, and software and systems companies.  Prior to his present position, Mr. Paduda was vice president of MetraComp, a United HealthCare Company specializing in the application of managed care techniques to the Group Disability and Workers' Compensation industry.   Paduda was responsible for marketing, sales, and account management. Paduda holds a Master's of Science Degree in Health Management from the American University and is a frequent speaker on managed care issues.  He lives and works in Madison, Connecticut and can be reached at 203 245 1249 or jpaduda@healthstrategyassoc.com>