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Uncovering the True Costs of Physician Dispensing of Drugs

February 03, 2017 (6 min read)

Do the hidden, and not so hidden, costs of physician dispensing of drugs outweigh the benefits?

Drugs prescribed and dispensed directly by physicians often cost substantially more to consumers, and by extension any covering insurer, than drugs dispensed by pharmacies. Last April, I looked at a recent study that examined the effect of state legislative and regulatory attempts to control these cost discrepancies through reforms that limited the amounts that can be charged by physicians for repackaged drugs to the original manufacturer’s average wholesale prices (AWP). That study found that drug companies and physician-dispensers have been taking advantage of those reform efforts tied to AWP prices by creating new drug formularies with new dosage amounts and new AWPs that are not limited in price by the reforms, thus allowing physician dispensers to continue to charge consumers more, sometimes substantially more, for certain prescription drugs than would be charged by a pharmacy.

In “Does the Practice of Physician Dispensing Lead to Overprescribing of Drugs?”, a paper published by the Sedgwick Institute, author Richard Victor, Ph.D., formerly of the Workers’ Compensation Research Institute, further examines this problem of physician dispensing of drugs, focusing more on the incentives to prescribe more drugs created by the profitability of physician-dispensing generally and examining policy changes that could be taken to control this behavior, specifically in the context of workers’ compensation claims.

The Effect of Financial Incentives

Noting the unquestioned financial rewards that can be had from physician dispensing, fueled by secondary industries that develop and provide the business frameworks and supplies necessary for the practice at little or no financial risk to the physicians, Victor outlines some of the evidence showing the negative impact the practice can have on prescribing patterns. One study showed that a ban in Florida of physician dispensing of stronger opioids did not lead to a noticeably higher rate of pharmacy dispensing of these opioids as might be expected, but rather to an increase instead of physician dispensing of weaker pain medications that were not subject to the ban, creating questions about the need for the stronger opioids being prescribed before the ban.

However, this is not the only evidence of the negative effects created by the financial incentives of physician dispensing. For example, in Georgia, Illinois, and Florida, some drugs that were overwhelmingly being prescribed by physician dispensers, including Prilosec and Zantac, were generally being billed by the physicians at twice the amount per pill as when they were dispensed by a pharmacy and at 10 times or more per pill as over-the-counter equivalents.

In addition, as mentioned above, a study released last Spring suggested that physician dispensers in states that had implemented reforms that limited prices based on AWP were, in conjunction with pharmaceutical companies, finding a way around those reforms by prescribing newer formularies with different dosages and AWPs. However, these newer formularies were much more expensive than the cost-controlled older formularies, even though the newer formularies were often weaker strength than the older ones, and physicians who did not dispense rarely prescribed the new, more expensive formularies.

Victor also points to evidence from other countries where bans on prescription dispensing have recently been implemented, specifically Taiwan and Korea, that showed that the bans resulted in fewer prescriptions being written. In Switzerland, where physician dispensing is permitted only in areas with fewer pharmacies, a study showed that physician dispensers were substantially more likely to prescribe generic drugs with higher profit margins than were non-dispensing physicians.

All of this would seem to suggest that prescription patterns of physician dispensers are being driven at least to some extent by the physician’s desire to profit from the drug sale. When physicians are allowed to dispense the drugs they prescribe, the financial incentives result in more prescriptions being written, or at least more prescriptions for higher-priced drugs, or both.

Does Physician Dispensing Benefit Injured Workers?

In contrast to these negative impacts of physician dispensing, Victor also examines some of the arguments that have been offered in support in the practice, specifically in the context of injured workers, and finds the evidence generally does not support the justifications. To counter the argument that physician dispensing is convenient and improves access to drug dispensing for injured workers, studies call into question whether worker access is actually a problem. For example, a California study found that 80 percent of injured workers had a pharmacy within 2 miles of their homes and 95 percent had one within 4 miles. Other studies examining rural areas in other states also found that the vast majority of rural residents had access to pharmacies within 20 miles. Moreover, surveys indicate that the vast majority of patients are generally unwilling to pay an extra premium for the convenience of having prescriptions filled by the doctor, despite the fact that they often unknowingly do so.

Victor also challenges claims about the efficacy of physician dispensing on patient welfare. One California study found that workers who did not get physician-dispensed drugs returned to work about 8% faster than workers who did. An Illinois study found a similar result, with the period away from work in workers’ compensation claims being greater for workers who received physician-dispensed drugs within 90 days of injury than for workers who did not receive physician-dispensed drugs. Victor also notes that another argument, that patients are more likely to comply with prescribed medications when dispensed by the physician, is of little value in the injured worker context where pain medications constitute the overwhelming majority of prescriptions, as noncompliance with pain medication prescriptions generally means that the pain is manageable without the drugs.

In addition to the already-mentioned drawback that physician-dispensed drugs usually cost more to the consumer, Victor also notes one other benefit to pharmacy dispensing over physician dispensing: pharmacists are much more likely to run software checks for drug interactions that could be potentially harmful to the patient and can also check pharmacy records to see if the patient is receiving drugs from multiple physicians.

Policy Options

Given the way that financial incentives can negatively affect prescription patterns and the lack of any real benefit for injured workers of physician dispensing, what might be done to improve the situation given the problems that have been found with previous reform efforts based on AWP-linked price controls? Victor identifies three potential options:

> Banning physician dispensing altogether.

> Restricting physician dispensing to a short period after the first office visit.

> Giving payers such as workers’ compensation insurers the ability to direct patients to specific dispensaries, whether that be a local pharmacy, a mail order pharmacy, or a physician’s office.

However, he questions how effective the first two options would be, noting that when bans were implemented in other countries, physicians often responded by opening onsite pharmacies in order to work around the ban. Moreover, he points out that “not all physician dispensers prescribe unnecessary medications or charge unnecessarily high prices,” although the banning options would still negatively impact these practitioners as well.

As Victor notes, the final option permitting payer selection of the dispenser might avoid these issues. Allowing the payer to specify the dispenser would not eliminate physician dispensing, but could effectively punish those physician dispensers who overprescribe or prescribe at higher prices. Payers are better positioned than patients to detect over time which physicians might be engaging in this behavior and would have the financial incentive and ability to direct patients to other dispensaries, while at the same time allowing physicians who do not abuse the system to continue dispensing.

Implementing this option would require some effort in some jurisdictions, however, as Victor counts 19 states that currently prohibit payer direction to a specific pharmacy. Conversely, both California and New York specifically authorize the practice, and the practice could potentially be implemented in other states as well. The benefits to injured workers and payers could be worth it.

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