7-23-12; Hidden Costs in U.S. Workers’ Compensation: the Dark Underbelly of Average Wholesale Pricing of Pharmaceuticals—Analysis from Arik D. Hetue, J.D.

A small provision was snuck into the 2011 amendments to the Illinois Workers Compensation Act which dealt with prescriptions filled at a doctor’s office. Almost assuredly this was put into the bill thanks to some decent lobbying money expended on the part of doctors and the pharmaceutical companies. Problem is, this provision – which sounds innocuous enough, may end up costing Illinois business millions. Almost the exact same language was put into the Florida WC Act years ago and they have recently been having a major policy discussion in that state to see what can be done about it. A few recent studies by NCCI and WCRI, and a recent New York Times article are starting to turn a national spotlight on a glaringly unfair and costly practice for business.

The Amendments to the IL WC Act Governor Quinn signed into law in June 2011 had a small section dealing with prescription drugs:

Prescriptions filled and dispensed outside of a licensed pharmacy shall be subject to a fee schedule that shall not exceed the Average Wholesale Price (AWP) plus a dispensing fee of $4.18. AWP or its equivalent as registered by the National Drug Code shall be set forth for that drug on that date as published in Medispan.

If a drug is dispensed “outside a licensed pharmacy” it is being dispensed out of a doctor’s office. Sounds reasonable, right? The medical community would have you believe that it’s in the patient’s best interest to have their drugs handed to them by the doctors, as the patients are far more likely to take those drugs, instead of having to deal with the complex issue of filling a prescription! OK – fair enough, and according to this section of the IL WC Act, its only $4.18 over wholesale pricing – apparently not too bad.

Hold on to your hats folks, let’s look at what this actually means. The key wording that allows for these scams to be set up – when they do not address what the AWP is, it is left open to interpretation. Medispan, the company noted in the Illinois WC Act actually states in its own internal documents “AWP is not based on actual transactional, marketplace price data. Despite its name and its sometime use as a price index, the AWP published by [Medispan] is not an average of actual wholesale prices. It is not intended to represent, and cannot be assumed to reflect, actual transaction prices…AWP relies and is based exclusively on information reported by manufacturers.

The way this gets set up is a middleman company will help a doctor set up an office pharmacy by providing them with billing software and connecting them with suppliers who “repackage” medications for office sale. Doctors sell the drugs but they do not collect payments from insurers, but instead the middleman company pays the doctor some percentage, sometimes up to 70%, of what the doctor charges, then seeks to collect the full amount from insurers. What happens is “repackaging” – take Drug A which runs $.25 per dose, and Drug B which runs $.10 per dose, repackage them together as a new Drug C, and charge $3.50 per dose, for a 1000% markup split amongst the doctors and the middlemen.

In a recent article in the New York Times, Barry Meier and Katie Thomas noted the practice has become so profitable that private equity firms are buying stakes in the middleman businesses, and political lobbying over the issue has gone wild. As an example, in 2010, Abry Partners, a private equity firm in Boston, bought a stake in Automated HealthCare for $85 million. Automated HealthCare Solutions is a leader in physician dispensing, and has defeated repeated efforts to change what doctors can charge. Recent figures suggest they have given more than $3.3 million in political contributions either directly or through entities its principals control. “It’s all for the benefit of the injured workers”, they say. No need to concern yourself with the businesses who bear the brunt of these spiraling charges.

While this activity is affecting a lot of states, some such as California and Tennessee have already begun to legislate it away, Florida is truly a “sister state” with Illinois based on the language of their respective WC Acts – and looking at them, we can see where this is heading in Illinois. Florida’s workers’ compensation law specifies reimbursement at a drug’s average wholesale price, plus $4.18 as well – amazing they were able to come up with the same number as we did. In Florida, as a direct result of this change in its WC Act, there has been a sharp increase in the number of physician-dispensed drugs. The National Council on Compensation Insurance (NCCI), calculated in 2003, only nine percent of drugs were dispensed by doctors. NCCI says that number has now risen to more than 50 percent, making Florida the highest of 46 states. Rising profits from the sale of pharmaceuticals are shared by doctors, middlemen who help physicians start in-office pharmacies and drug distributors who repackage medications for office sale.

Surprise, surprise, the Workers Compensation Research Institute (WCRI), an independent, not-for-profit research organization based in Cambridge, MA had a press release a few days ago confirming nearly 2/3 of pharmacy payments in Illinois were paid to doctors using these in-office pharmacies. With the inclusion of the new portion of the IL WC Act in 2011, the percentage of prescriptions filled in doctor’s offices shot from 22% in 2009 to 66% in 2012. According to WCRI, the frequency and cost of physician-dispensed drugs in Illinois grew the fastest among the 23 states studied. WCRI also noted the harm that comes even from drugs not recombined - the price for the most commonly used drug, Vicodin, nearly tripled when dispensed by physicians compared to the pharmacy—an average of $1.44 per pill at the physicians’ offices versus $0.53 at the pharmacy. Of note amongst other frequently prescribed drugs, Mobic by 39 percent, and Ultram by 24 percent. WCRI noted the prices of these drugs dispensed at pharmacies stayed the same or dropped over the same period of time.

This won’t go away easy, now that the door has been opened. But it needs to be addressed, and soon – this single silly provision is going to cost Illinois business millions and millions of dollars until the loophole is shut. Our legislature and Governor need to act quickly to simply write the fee schedule back into law for all drugs dispensed as part of a workers compensation claim.

There is a meeting tomorrow on this important topic for Illinois business. We saw this on the Illinois Register and will have someone attend the meeting:

1) Rulemaking:

A) Description: The rule will be amended to specify that prescriptions filled and dispensed outside of a licensed pharmacy that have been repackaged shall be billed using the original National Drug Code. Section 8.2 if the Workers' Compensation Act provides that prescriptions filled and dispensed outside of a licensed pharmacy are to be reimbursed at the Average Wholesale Price, pus a dispensing fee of $4.18. Average Wholesale Price is determined by the National Drug Code set forth in Medispan.

B) Statutory Authority: Section 16 and Section 8.2 of the Workers' Compensation Act [820 ILCS 305/16; 820 ILCS 305/8.2].

C) Scheduled meeting/hearing dates: The Workers' Compensation Commission and the Medical Fee Advisory Board will discuss this rule at their meetings on July 24, 2012 to be held at Illinois Workers' Compensation Commission

This article was researched and written be Arik D. Hetue, J. D. who can be reached at ahetue@keefe-law.com.