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Drug Formulary: California Expects Substantial Savings But What About Cost Shifting and Provider Behavior?

August 20, 2015 (5 min read)

By Thomas A. Robinson, J.D., co-author of Larson’s Workers’ Compensation Law

Prescription drugs continue to be a significant contributor to the medical expenses segment of workers’ compensation claim costs, and drug formularies are increasingly being seen as not only a way to better manage costs but also to influence prescribing patterns towards more effective and less dangerous prescription drugs. Washington, a monopolistic state, was the first state to adopt an “open” drug formulary in 2004 that is applicable for all healthcare (not just workers’ compensation). Texas and Ohio both implemented a “closed” drug formulary in 2011. Delaware created a “preferred drug list” in 2013 and Oklahoma adopted a “closed” formulary in 2014 that was modeled somewhat after Texas. Drug formularies are expected to be implemented in Tennessee and Arkansas during 2016, while the concept is actively being discussed in California, Louisiana, South Carolina and North Carolina. For example, the Texas “closed” formulary adopted Appendix A of the Official Disability Guidelines (ODG), published by the Work Loss Data Institute and includes all FDA-approved drugs, except for investigational and experimental drugs. The ODG classifies each of the drugs as either ‘Y’ drugs (appropriate first line therapy, no pre-authorization process required) and ‘N’ drugs (not appropriate for first line therapy, pre-authorization process recommended prior to dispensing). The Texas formulary also excludes any compounded drug that contains at least one drug identified with an “N” status in in the ODG. Among the excluded drugs are some 25 popular brands of opioid pain relievers, muscle relaxants, and antidepressants. Notably, every benzodiazepine is classified as an ‘N’ drug.

In Texas, effective September 1, 2011, all new claims were required to be compliant with the drug formulary. This was an important first step in educating prescribers and pharmacists on the new process as well as not allowing dangerous drugs to even be started. Although ‘Y’ drugs were not required to be pre-approved through the Utilization Review process, they are not always clinically appropriate or the best option, so retrospective review could be done to evaluate their appropriateness. All ‘N’ drugs were required to go through the Utilization Review process, and unless approved were not allowed to be dispensed to the patient.

There was then a remediation period of two years to address “legacy” claims, or those with a date of injury prior to September 1, 2011. Because these injured workers could have potentially been using a combination of ‘N’ and ‘Y’ drugs for many months or years, time was granted to allow a weaning process to take place. That weaning process could result in the discontinuance of all ‘N’ drugs, switching from ‘N’ to corresponding ‘Y’ drugs, or creating a clinical rationale justified by ODG that continued use was appropriate. Texas granted great latitude to payers and prescribers on how to address these “legacy” claims, but effective September 1, 2013 the “closed” formulary then became effective for them as well. An expedited appeal process, called the Medical Interlocutory Order (MIO), was created in anticipation of issues arising on or after September 1, 2013 due to the inability of injured worker’s to secure their usual regimens, but it was largely unused because payers and prescribers used the two year period effectively and established ongoing drug regimens that complied with the “closed” formulary and clinical assessment via ODG.

Reports released by the Texas Division of Workers’ Compensation show significant savings following adoption of the “closed” formulary. For the injury year beginning September 2011 to August 2012 (services covering September 2011 to August 2013), the Division’s key findings (Texas Department of Insurance, “Impact of the Texas Pharmacy Closed Formulary,”, Feb. 2015, last visited June 30, 2015):

    • ·   The number of injured employees receiving “N” drugs fell by 65
    • ·   “N” drug costs fell by 83 percent, and N-drug costs as a percentage of all drug costs decreased by 70 percent
    • ·   The number of injured employees receiving other drugs fell by 1 percent
    • ·   The share of N-drug claims among all claims fell from 18 percent to 7 percent
    • ·   The total number of prescriptions for N-drugs fell by 76 percent while it fell by 4 percent for other drugs
    • ·   The average number of N-drug prescriptions per claim fell by 31 percent
    • ·   The generic substitution rate for N-drugs increased from 61 percent in 2010 to 74 percent in 2011
    • ·   The number of N-drug prescriptions fell by 65+ percent across all drug groups
    • ·   The number of prescriptions for the ten most-prescribed N-drugs decreased by 82 percent

A recent WCRI study suggests that if other states were to adopt a Texas-like “closed” formulary, overall prescription costs related to workers’ compensation claims could be significantly reduced. The study examined 23 other states in terms of how a “closed” formulary might affect prescription costs. The potential savings varied considerably. For example, the researchers noted that the use of non-formulary drugs—those requiring preauthorization—was most prevalent in New York. If the response from New York physicians to the formulary was similar to that experienced in Texas, insurers could see a reduction of between 14 and 29 percent in costs. The savings in New Jersey, Virginia, Massachusetts, Pennsylvania, Connecticut and Maryland was estimated at 20 percent. The study concluded that even at the lower end, e.g., California and Missouri, significant savings approaching 14 percent might be expected. The study noted that in those states that permit physicians to dispense medications, the savings would likely be muted (Thumula, Vennela, et al., “Impact of a Texas-Like Formulary in Other States,” Workers Compensation Research Institute, June 2014. WC-14-31).

Some experts are skeptical about the true dividends achieved, however. The WCRI study constructs four different scenarios (with assumptions about what a provider might do with respect to prescribing non-formulary drugs and substituting formulary drugs) to illustrate the extreme sensitivity to provider behavior that is at play when measuring a Texas-like formulary’s impact on a particular state. If the predictions regarding physician behavior are inaccurate, the savings could be much smaller. Moreover, some of the perceived savings might be explained, for example, by cost-shifting, with prescriptions of N-drugs now being paid under the employee’s health insurance.

© Copyright 2015 LexisNexis. All rights reserved. This article is excerpted from Occupational Injuries and Illnesses (LexisNexis).