Slicing Workers’ Comp Drug Costs

Employers find ways to stem cost increases for prescription drugs under workers' compensation.

By Elizabeth Agnvall Mar 1, 2007
HR Magazine, March 2007 Two years ago, Bob Steggert, vice president of casualty claims at Bethesda, Md.-based Marriott International, turned a critical eye toward the company’s workers’ compensation program. Specifically, he looked for ways to control the program’s growing costs for prescription drugs.

The prescription drug portion of Marriott’s costs for workers’ compensation admittedly was below the national average of 13.4 percent—the 2003 figure, up from 12 percent of total injury costs in 1998, according to the latest data from the National Council on Compensation Insurance (NCCI). Nonetheless, Steggert felt there was room for improvement. “It was one of the few remaining areas where we didn’t have a national cost control program,” he says.

It’s hard enough for employers to gain control of escalating prescription drug costs in health care plans; it’s even harder in workers’ compensation plans, which differ from conventional health plans in several important ways.

For example, employers or their insurance companies are required by law to pay 100 percent of costs associated with an on-the-job injury, including the total cost of medications prescribed—whether brand-name drugs or less expensive generics. A 2003 NCCI study found that drugs paid under workers’ compensation claims cost 75 percent more, on average, than under group health plans for the identical pharmaceuticals.

For that reason and others, work-injury pharmaceutical management is a hot issue for companies.

Marriott’s Solution

While most companies use either an insurance company or a third-party administrator to handle workers’ compensation, Marriott is self-insured for its workers’ compensation program and administers the program itself.

Yet Steggert believed there was little transparency in the system. For example, there was concern that some physicians treating the company’s injured workers were bundling the cost of prescription drugs with the overall workers’ compensation medical care bill. Marriott’s workers’ comp recordkeeping system didn’t break down components of the bill into the drug portion and physical evaluation visit, making it difficult to track medication costs.

Steggert wanted to find a new workers’ compensation benefits management system that would enable Marriott to track expenditures by state, physician and medication and that would include a consistent nationwide drug formulary—a list of medications approved by Marriott for use in treating workers’ injuries.

Early in 2006 Steggert sent out a request for protocol to the top five or six pharmacy benefit management (PBM) companies with workers’ compensation expertise. He selected a national PBM company, First Script Network Services, and rolled out the new program in September. Marriott continues to self-insure and self-administer workers’ comp, but the PBM company is the pharmaceutical provider.

First Script also helps the company encourage physicians to prescribe generic medications whenever possible.

The program also allows Marriott to recommend physicians who have experience in occupational injuries and who help employees return to work as quickly as possible.

Because the company’s list of doctors is only a recommendation, Marriott can use the list both in states that allow employees to choose the doctor and in those that allow companies to decide which doctor will treat an injured employee. (For more on state laws, see the online version of this article at

Steggert says Marriott will soon conduct internal audits and bring in external consultants with expertise in PBM audits to measure program results so far and look for potential areas of improvement.

Negotiating Pharmaceutical Costs

A company’s ability to negotiate its workers’ comp program’s drug costs depends on how the program is run. Companies that self-insure and self-administer, as Marriott does, are often deeply involved in pharmaceutical negotiations, whereas an employer that uses an insurance company or third-party administrator to handle workers’ comp usually has less control over the negotiation process.

Regardless of the arrangement, experts say, companies should pay attention to drug prices and should be mindful that prescription drug pricing can be highly complex. For example, Steggert says, the average wholesale price that most PBM companies use is just a starting point for negotiation, often referred to as the “sticker price.” Steggert says it’s worthwhile to delve into PBM companies’ fixed costs and ask good questions about the types of rebates they get from drug manufacturers.

In fact, recent moves in the pharmaceutical industry suggest the system may get more transparent. In July, two of the largest PBM companies, Medco Health Solutions and Caremark Rx, agreed to participate with eight smaller PBM companies to create a purchasing model that discloses more information to employers about retail and mail-order prescription costs, passes on drug company rebates to employers and doesn’t add a margin to amounts paid to pharmacies for drugs dispensed.

Pharmaceutical companies customarily give rebates to PBM companies, which then pass a percentage of the rebate—typically 70 percent—to the employer, says Joe Paduda, principal of Health Strategy Associates, a managed care consultancy in Madison, Conn.

Employers generally pay PBM companies in one of two ways: a set amount per year or an amount per prescription. If PBM companies are paid per prescription, Paduda says, the PBM company takes a small amount—as little as $1.50 per prescription for large employers.

Mark Sidney, senior vice president and general claims manager for Boston-based insurance provider Liberty Mutual, says due diligence in choosing a PBM company should include bidding out contracts and comparing drug prices and the percent of generic substitution.

Sidney says Liberty Mutual is looking for the deepest discounts in prescription drug prices and the highest degree of substitution of generic drugs for brand-name medications.

Liberty Mutual’s company software allows it to dig deep into PBM data such as prescription volume and frequency and type of prescription. He says the analysis from this data allows Liberty Mutual to benchmark responsible dispensing patterns nationwide.

Any system that employers use to track workers’ compensation prescription drug costs should be able to show whether doctors “layer” prescription medications, adding different medications for the same ailment rather than prescribing one and taking one away. The system should also track whether doctors treating employees with a work-related injury routinely prescribe medications that can become addictive, thus possibly causing problems and expense for employers as well as employees. (See “Painkiller Addiction”.)

“A lot of employers and insurance companies focus on the price they are paying per pill,” Paduda says. “It’s not the price per pill; it’s the type and volume of pills.”

Are Formularies the Key?

Edward Bernacki, director of the division of occupational medicine at the Johns Hopkins School of Medicine in Baltimore, says drug formularies can be designed to both manage workers’ comp medication costs and ensure good care for employees.

Bernacki is currently conducting a study with the Louisiana Workers’ Compensation Corp. (LWCC), a private, nonprofit mutual insurance company based in Baton Rouge that is the state’s largest writer of workers’ compensation claims and covers about 23,000 policyholders in Louisiana.

In 2004, LWCC worked with Johns Hopkins experts and local doctors from Louisiana who specialized in pain, orthopedics, podiatry and other areas to develop a three-tiered list of preferred drugs. The list includes preferred medications for different types of ailments, substituting generics for brand-name drugs when possible, and uses evidenced-based medicine practices to recommend the best medications for specific injuries and conditions.

For example, Bernacki says, the formulary recommends prescribing ibuprofen as an anti-inflammatory rather than the more costly Celebrex, and acetaminophen for pain before a stronger medication like OxyContin.

“This is not just substitution, but actually looking at a better medication to prescribe,” Bernacki says. “We’re trying to use something that may be a little less harmful to the patient or makes more sense.”

In Louisiana, insurance providers can’t dictate what medications doctors prescribe for certain conditions, or even whether they must prescribe generic equivalents to brand-name drugs. But Bernacki says Johns Hopkins nurses call the doctors assigned to the case to discuss medication choices. He adds that under the guidance and suggestions of the Johns Hopkins nurses, doctors tend to stick to the preferred list.

Final results of the study should be available sometime this year, but Bernacki speculates that the new medications list will most likely result in savings for prescription drugs and improved patient care.

“We don’t know if this is going to save a significant amount of money,” Bernacki says. “The big thing that we think it will do is probably avoid a lot of abuse from people being addicted to narcotics. We’re hoping that it will improve the medical care of these people.”

Integrated Approach—Wave of the Future

Some forward-thinking companies are concentrating on an entirely new approach to workers’ compensation.

John Burton, editor of Workers’ Compensation Policy Review and professor emeritus at the Rutgers University School of Management and Labor Relations in Piscataway, N.J., says companies that have been most successful in keeping workers’ compensation drug costs under control and providing quality programs for employees have been moving toward combining workers’ compensation with other health care systems within the company.

Burton says the kind of health care and pharmaceutical expenditures data collected on employees from workers’ compensation should be integrated with the employer’s general health care system. He says sometimes employees use medications through workers’ compensation and their regular health care provider that may, in combination, negatively interact with each other and may exacerbate illnesses or injuries.

In many companies, Burton says, finance handles workers’ compensation, risk management handles short-term and long-term disability plans, and HR manages the health care system. He says some companies have tried to integrate all units that handle disability and health care, resulting in lower health care costs and healthier workers.

Companies that integrate workers’ compensation and group health can work to manage the whole health of the worker—both on and off the job. This can include eliminating duplicate medications, monitoring for dangerous drug interactions, and instituting programs that help workers recover more quickly and return to work.

“It’s an important thing to make sure that benefits being provided through workers’ compensation are consistent with what you are doing elsewhere for this person,” Burton says.

“There are companies who judge their workers’ comp function on how many cases they can successfully challenge and what’s the lowest cost they can pay for medication. That’s myopic thinking,” he adds.

Rather than concentrate on fighting workers’ compensation claims, Burton says, a more effective approach is to put energy into getting injured workers back to work as quickly as possible.

Elizabeth Agnvall is a Washington, D.C.-based freelance writer.

Controlling Drug Costs

The following are tips for pharmaceutical management in workers’ compensation, as suggested by Mark Sidney, senior vice president and general claims manager for Liberty Mutual insurance company:

  • Ensure that the drug you are paying for is related to the work injury. Workers’ compensation generally shouldn’t pay for cholesterol, blood pressure and asthma medications, for example, because these medications typically treat conditions that are not related to a workplace injury. Make sure your insurer, third-party administrator (TPA) or pharmacy benefits management (PBM) company has the tools and systems needed to track medications with types of injuries.
  • Minimize medication costs. Try to substitute generic equivalents for brand-name drugs, which can cost three times as much as generics. Understand how your insurer, TPA or PBM company negotiates discounts with pharmacies and recommends generics where appropriate.
  • Track drug utilization. Know who is prescribing what medications, how often they are being prescribed and what the dosages are. Use a system that checks for multiple prescriptions of the same medication. This helps avoid dangerous drug interactions and spots potential addiction issues—both of which can harm the injured worker while driving up the pharmacy cost of the workers’ compensation claim.
  • Consider using a system that has a list of specific drugs tied to specific injuries. “Drug formularies” are broad lists of medications approved by the insurer, TPA or PBM company for workers’ comp claims. “Drug strategies” are narrow lists of drugs approved for workers’ compensation injuries only during a certain period in the treatment or for an injury to a specific body part.
  • Look for a system that can track doctors’ prescribing habits. In states that allow employers to direct the care of injured workers, tracking prescribing habits enables the insurer, TPA or PBM company to select doctors with more-efficient prescription practices. It also can influence providers by showing them how their prescribing practices compare with their peers’.
  • Develop a list of preferred physicians with expertise in occupational safety and health and with specialties commonly associated with occupational injuries. Encourage employees to use physicians from that list, if allowed by the state.
  • Set expectations. Regularly remind employees of the process for reporting workplace injuries; that the company welcomes injured employees back and will create temporary modified-duty positions to speed their recovery and return to work; and of the process of getting treatment for a workplace injury.

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