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Recent public health concerns and legislative actions have raised the profile of compound drug utilization in the California workers’ compensation system. In 2011, California lawmakers enacted Assembly Bill 378, which took effect January 1, 2012. The legislative intent of this statute was to control the increase in prescriptions for and thee costs associated with compounded pharmaceutical products in the California workers’ compensation system through the implementation of unit price controls.

In 2002, California lawmakers passed Assembly Bill 749, the first of several workers’ compensation reforms that included provisions to modify the delivery of pharmacy benefits and contain the rapidly escalating cost of prescription drugs used to treat injured workers. In January 2004, the California Division of Workers’ Compensation adopted a pharmacy fee schedule that capped maximum reimbursements for pharmacy services and drugs at 100 percent of Medi-Cal rates, which at the time, were at least 10 percent below the average wholesale price (AWP) for prescription drugs, plus a dispensing fee. However, these legislative and regulatory adjustments, which focused on unit price controls, were only partially successful in containing the growth in workers’ compensation prescription drug costs. Following the full implementation of the 2002-2004 reforms, the average amount paid for pharmaceuticals on a California workers’ compensation indemnity claim within the first two years of injury more than doubled from $599 to $1,234 between accident years 2005 and 2009.

After the repackaged drug regulations took effect, some manufacturers began promoting compound drugs, medical foods and convenience packs (or “co-packs”) that included prescription medications and “medical foods” to California workers’ compensation medical providers.

Compounding pharmacies provide drugs to patients who may experience challenges obtaining specific prescription medications that are not available through conventional means. Such challenges include special formulation requirements to improve tolerance or products that lack a critical mass of potential patients to make their manufacturing economically viable. Although many compound drugs outside of workers’ compensation are related to hormone replacement, dermatology, children’s formulations for those who can’t swallow pills and anti-cancer treatment, most of the compounded drugs in the California workers’ compensation system are pain management medications delivered through topical creams.

Assembly Bill 378, signed into law in 2011 and implemented on January 1, 2012, was designed to curb the increased use of and the rapidly growing costs associated with compounded pharmaceutical products in the California workers’ compensation system. The measure sought to reduce the amounts paid for compounded drugs used to treat injured workers through the adoption of additional unit price controls and billing conventions. AB 378 strengthened the pharmacy fee schedule by requiring that any compounded drug used to treat an injured worker must be billed at the ingredient level by the compounding pharmacy or dispensing physician, with each ingredient identified using the applicable National Drug Code (NDC) of the ingredient and the corresponding quantity. The bill also prohibited separate reimbursement for ingredients with no NDC. Workers’ compensation reimbursements for compounded medications were set at the rates allowed by Medi-Cal for each ingredient, plus a dispensing fee equal to that allowed by Medi-Cal. The maximum reimbursement for a compound drug dispensed by a physician was set at 300 percent of the physician office’s Documented Paid Cost, but in no case could that amount exceed $20 above the Documented Paid Cost.

A new CWCI study examines changes in compound drug utilization and payments before and after the implementation of AB 378 by measuring the volume of compound drugs prescribed to California injured workers and the amounts reimbursed for those drugs in the first half of 2011 to the comparable data from the first half of 2012.

Compound drugs fell from 3.1 percent of California workers’ compensation prescriptions in the first half of 2011 to 2.0 percent of the prescriptions dispensed to injured workers in the first six months of 2012, a relative decline of 35 percent; yet at the same time, compound drug reimbursements increased from 11.6 percent to 12.6 percent of California workers’ compensation prescription payments, a relative increase of 9 percent. Over the same period, the average amount paid per compound drug prescription increased 68.2 percent from $460.42 to $774.21, while the average paid for a non-compound drug prescription decreased 4.6 percent from $112.78 to $107.61.

The average number of NDC ingredients used within compounded drugs dispensed to California injured workers increased from 3.4 in the first half of 2011 to 3.8 in the first half of 2012, a 13.1 percent increase; while the average paid per NDC ingredient increased 48.7 percent from $135.63 to $201.67. In addition, there was a 25.5 percent increase in the quantity per NDC ingredient but virtually no change in the average days’ supply per compound drug prescription, suggesting that more potent compound drugs are being dispensed.

There is little evidence from clinical trials to support the use of many of the compound drugs dispensed to injured workers. Ingredients such as Dextromethorephan are reimbursed at significantly higher levels than alternative therapeutic equivalents without adequate cost/benefit evaluation. The lack of rigorous independent evaluation and the lack of federal and state oversight limit the California workers’ compensation payers’ ability to control compound drug utilization and cost. Current Trends in Compound Drug Utilization and Cost in the California Workers’ Compensation System Alex Swedlow, MHSA Eileen Auen, MBA