Report Suggests Compounders Adapted to California Price Controls

By Don Jergler | February 6, 2013

Think California’s new workers’ compensation reform law addressed just about every aspect of an unwieldy system which, few would argue, desperately needs fixing? Think again.

A report on compounding drugs reveals the effects of another workers’ comp-related law enacted at the beginning of 2012. According to the report issued on Tuesday by the California Workers’ Compensation Institute, compounded drug prescriptions fell in 2012 to 2 percent of California workers’ comp prescriptions after the state enacted unit price controls on these medications last year.

That figure in 2012 fell from 3.1 percent in 2011. However, compounded drugs consumed a much larger share of workers’ compensation prescription dollars in 2012, and more than made up for the impacts of the price controls, according to the CWCI report.

Drug compounding was not directly addressed by Senate Bill 863, the massive workers’ comp overhaul bill that took effect at the beginning of 2013. And if they want to address the rising costs, lawmakers would likely be faced with coming up with another legislative fix this year, an author of the CWCI study suggested.

The study shows that not only did the mix of ingredients used in compounded drugs change, but the average number of ingredients, the average quantity of each ingredient, and the average payment per ingredient increased, driving the average reimbursement for these prescriptions up 68 percent.

Following the price controls at the start of 2012 the average amount paid for compounded drug prescriptions rose to $774.21. The average was $460.42 a year earlier.

Those price controls were created via Assembly Bill 378, authored by lawmaker Jose Solorio, D-Santa Ana, to address a rise in the utilization and cost of compounded drugs in workers’ comp.

The law, which took effect at the beginning of 2012, required that: any compounded drug dispensed to an injured worker be billed at the ingredient level by the compounding pharmacy or dispensing physician; compounded drug bills identify each ingredient and the corresponding quantity by its National Drug Code; no separate reimbursement for compounded drug ingredients without an NDC; compounded drug payments to physician-dispensers be set at 300 percent of the physician’s paid cost, and not to exceed $20 above that paid cost; compounded drugs and other pharmacy goods be added to the list of products that workers’ comp physicians are prohibited from self-referring.

It was estimated that AB 378 would save about $50 million a year, and some of that savings would come from a provision in the bill on compound drugs.

So far there has been no direct tie made to show compounders are intentionally raising prices to make up for the restrictions of the new pricing law, but no other good explanation came to mind for Alex Swedlow, CWCI’s executive vice president of research and co-author of the report.

“We can’t say in terms of cause and effect,” Swedlow said. “We can say that the change is clearly associated with the implementation of AB 378. It was a rather sudden and dramatic shift in the composition of the compounds and the pricing of the compounds.”

The effects of the bill were “very quickly and efficiently compensated for by the average overall price of compound drugs,” he added.

It’s common in the healthcare services industry that price suppression is dealt with by increasing the units sold of that healthcare service, according to Swedlow.

“What tends to happen is utilization changes,” he said.

According to CWCI research published in 2010, there was a spike in the use of compounded drugs, medical foods and co-packs, which combine medical foods with prescription drugs, in California workers’ compensation after the state adopted stricter price controls on repackaged drugs dispensed through physician offices.

Compounded drugs, which are created by combining, mixing, or altering two or more ingredients into a customized medication, are not evaluated for safety or efficacy by the Food and Drug Administration. In workers’ comp, most compounded drugs involve pain medications mixed into topical creams.

In fact the single fastest rising component in compounding, according to the report, was dextromethorphan, a cough suppressant.

“It’s an interesting ingredient to find in compound drugs,” Swedlow said. According to him it’s being mixed with antidepressants, and pharmacists that CWCI has consulted with have stated the combination is being used for treating chronic pain.

CWCI analyzed data from a sample of 586,575 prescriptions dispensed to injured workers in either the first half of 2011 or in the first half of 2012, before and after the changes took effect.

Using that data the authors traced the increase in total compounded drug payments to several factors:

  • While the average amount paid for workers’ compensation prescriptions for non-compounded drugs fell 4.6 percent in the first half of 2012, the average amount paid for compounded drug prescriptions rose 68.2 percent.
  • The average number of NDC ingredients per compounded prescription rose 13.1 percent from 3.4 in the first half of 2011 to 3.8 in the first half of 2012.
  • The average amount paid per NDC ingredient used in workers’ comp compounded prescriptions rose 48.7 percent, from $135.63 in 2011 to $201.67 in 2012.
  • The average quantity per NDC ingredient increased 25.5 percent, while the average days’ supply showed only a nominal decline, down 3.5 percent. This suggests that the potency of workers’ comp compounded drugs rose significantly between the first half of 2011 and the first half of 2012.

The report’s bottom line: Without greater federal oversight of drug compounding, or new requirements mandating independent, clinical trials to verify the efficacy of compounded drugs, relying on unit price controls without stricter utilization controls is not enough to contain the overall growth in compounded drug costs in workers’ comp.

To address the issue would require a new workers’ comp laws, Swedlow said, adding “they would have to revisit the issue by focusing on utilization.”

Swedlow pointed out that Medicare has a straightforward fix: It only pays for medications that are FDA approved.

It is possible the problem could also be dealt with in part through the extensive independent medical review language that was in SB 863, Swedlow said, adding “but this was not contemplated as standalone issue.”

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