A Case to Create a California Formulary

| | Utilization Review

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In sports, successful teams are often viewed as model franchises – a blueprint for other teams to follow. In business, success is measured not by wins and losses, but often by dollars earned after overhead.

In the niche market of workers’ compensation, success is generally measured not by wins and losses, or money earned, but by money saved. To this end, states often examine each other’s workers’ comp systems to see areas where they are saving money. Like successful sports franchises, successful states should be imitated by less successful states in an effort to save money – to deliver the best for less.

Every two years, the Oregon Department of Consumer and Business Services releases a study of workers’ compensation premium rates in the United States. This year, California topped the list with an average of $3.48 per $100 of payroll. California is the only state with an index rate above three dollars. The next most expensive state, Connecticut, trails far behind at $2.87 per $100 of payroll. There is no end-all-be-all fix to reduce workers’ compensation costs, but a report by the California Workers’ Compensation Institute (CWCI) extrapolates the methods used in two other states with respect to drug formularies, with the idea that the golden state follow suit.

As with any complicated system, California’s workers’ compensation system is comprised of many component parts. One of the components has been prescription drug payments. The state’s Division of Workers’ Compensation (DWC) adopted a pharmacy fee schedule in 2004, but it only applied to pharmacy services. At that time drugs dispensed from pharmacies were capped at 100 percent of the Medi-Cal rates.

Meanwhile, repackaged drugs dispensed by a physician were still being reimbursed according to a 2003 Medical Fee Schedule, with limits of 140 percent of the average wholesale price (AWP) for generic drugs and 110 percent of the AWP for brand name drugs. This means physicians were being paid 500 percent more than pharmacies dispensing the same drug.

To cut the price differential, the DWC revised the pharmacy fee schedule in 2007, and by 2013 the volume and amount paid for repackaged drugs fell 90 percent. In response, pharmaceutical manufacturers and distributors began promoting compound drugs, medical foods and convenience packs containing prescription medications.

From 2006 to 2009, total payments for these products increased from 2.3 percent to 12.0 percent of all pharmaceuticals in California’s workers’ comp system. In response, lawmakers passed AB 378 in 2012 to cap mark-ups on the ingredients in compound drugs. This led to the use of more and pricier ingredients.

Between 2012 and 2013, the average cost per compound drug increased 68 percent. It seemed that each legislative attempt to fix the problem met with a counter move by providers and manufacturers. As a result the CWCI has proposed a plan to help solve this pharmacy cost control puzzle.

That same Oregon study showing California as the nation’s most expensive workers’ comp state also revealed Texas and Washington as having the 36th and 17th highest premiums respectively. While neither is ranked exceptionally well, the CWCI thought to examine each state’s system with an eye toward their mandatory state formularies.

According to the CWCI, formularies are described as “lists of approved drugs that define the scope, and in some cases, limit the variability in prices for specific therapeutic drug categories.” As tends to be the case with lists of any sort, there are often differences between them.

CWCI chose Texas and Washington for two reasons. First, those states are two of only three states in the country that have a state formulary. Second, while both utilize a mandatory formulary, they are designed differently. Texas’ formulary has been described as inclusionary, that is, there is greater choice of drug groups and brand name drugs. Washington’s formulary, implemented in 2004, has been deemed exclusionary, meaning there are limited choices when it comes to drug groups and brand name drugs.

To put them in perspective, 21,141 FDA-approved drugs are excluded under the Texas formulary, while 165,475 FDA-approved drugs are excluded under Washington’s. In spite of these differences, both formularies have successfully reduced prescription drug costs.

As stated earlier, success in a workers’ comp system is usually attributed to dollars saved. In the first year, payments for non-formulary drugs fell 82 percent in Texas. A 2011 Workers’ Compensation Research Institute (WCRI) study showed Washington’s average prescription payment per claim was 40 percent below the median. In that same WCRI study, California was well above the median by 80 percent. If the goal was for Texas and Washington to reduce prescription drug costs, it is safe to say that they succeeded. To replicate this success, the CWCI showed how California’s system would look and fare if given these same formularies.

When drugs are excluded from a formulary, there must be an alternative or substitute available, and the authors of the study created a seven point system for establishing a viable alternative or substitute. Formulary drugs were compared to non-formulary drugs and given a score; the higher the number, the closer the match, or substitute.

Using this substitution method, the study found that prescription drug payments in California would decrease 29 percent with the Texas formulary and 70 percent using the Washington formulary. Likewise, the number of drug prescriptions would drop 17 percent with the Texas formulary and 39 percent using the Washington formulary.

Similarly, brand-name drugs are often a cause for high costs, and much like the substitution method, the use of generic drugs over brand-name drugs can result in cost savings. The CWCI study found that the Texas formulary would eliminate 42 percent of payments for brand-name prescriptions, and the Washington formulary would eliminate 95 percent.

In dollar terms, the study projected cost savings based on three levels of substitution matching. Using a lower range of substitute options the Texas system would save $225 million, and the Washington system would save $503 million. A median range, using middle cost substitutes and options, would produce an estimated cost savings of $182 million with the Texas system and $459 million with the Washington system. At an upper level, in which drugs would be matched to as close a substitute as possible, cost savings are estimated at $102 million and $364 million respectively. All states are not created equal, and what works for one may not work for another. Regardless, the CWCI has presented a statistical projection of the cost savings California could expect using the formularies currently in use in Texas and Washington.

Like with sports teams though, some adjustment would be required as the component parts in the California workers’ compensation system differ from those in Texas and Washington. Ultimately, the question to ask is “What does success mean for the California workers’ compensation system?

If there are cost savings to be had, California should indeed study other states, like Texas and Washington, and implement something similar. Even a modified version of the Texas or Washington drug formulary could yield 10–25 percent savings for California. With comp premiums running $3.48 per $100 of payroll, California should leave no stone unturned in its quest to lower comp costs.

This article was written by guest contributor Kenny Shiau, who currently serves as regulatory analyst for UniMed Direct.