Drug Loophole in Workers’ Comp

The campaign to cut workers’ compensation costs in California is being hampered by some doctors who are exploiting a legal loophole that allows them to sell prescription drugs directly to patients at markups that can surpass $500 on a single bottle of medication.

The practice is costing employers and insurers more than $250 million a year, according to a preliminary UC Berkeley study, at a time when most other areas of the state’s program for providing benefits to victims of workplace injuries are showing significant cost savings and premiums paid by California businesses are falling.

Those savings stemmed from a recent overhaul of the workers’ comp system that, among other cost-cutting measures, put tight limits on prescription drug prices. But the price caps apply only to drugs sold through pharmacies, leaving physicians and clinics free to continue selling so-called repackaged drugs directly to their patients, potentially pocketing big profits.

“This is just a gaping loophole we did not patch last year that allows repackagers of drugs to escape the fee schedule,” said state Sen. Jackie Speier (D-Hillsborough), who is sponsoring a bill that would make it less lucrative for doctors to fill their own prescriptions.

Industry literature makes no secret of the financial potential for doctors. By selling drugs directly to patients rather than writing prescriptions to be filled at a drugstore, physicians can “generate from tens of thousands to hundreds of thousands of dollars annually in new revenues,” boasts promotional material from DispenseXpress, a Burbank drug repackager that buys drugs in bulk and resells them in smaller lots to doctors for resale to patients.

According to a DispenseXpress price list, doctors can clear $65.50 every time they dispense a 90-tablet bottle of 800-milligram ibuprofen. They can buy the common painkiller from DispenseXpress for $9.19, but under current workers’ comp rules, they can bill insurers at a rate of $74.69 per bottle.

On the same price list, a 90-tablet bottle of 350-milligram carisoprodol, the generic version of the muscle relaxant sold under the brand name Soma and the most commonly prescribed drug for workers’ comp patients, lists for $7.99. It can be billed to insurers for $518.49 -- a potential profit of $510.50.

When the same drugs are purchased at a pharmacy rather than from a doctor, the workers’ comp insurer is billed $12.81 for the ibuprofen and $41.19 for the carisoprodol, according to the state’s fee schedule for medications provided under the program. The fee schedule is based on prices paid by the state’s Medi-Cal program for low-income people.

Prices can vary widely among repackagers, with some drugs billed at more modest markups. But the potential for profits is almost always there. Lake Forest repackager Southwood Healthcare Affiliates provides its sales force with a detailed table of drugs used to treat workplace injuries that promises doctors an average profit of $91.76 on prescriptions with an average billable cost of $103.86.

Doctors contend that they dispense drugs directly because it allows them to treat patients more quickly and efficiently -- not because it boosts their profits. Prescription fees cover the costs of buying and stocking drugs, they say, as well as the cost of billing insurers.

“We’re providing a real service to the injured worker,” said Dr. Ronald Crowell, a specialist in emergency medicine who owns HealthFirst Medical Group, which operates two occupational healthcare clinics in Santa Fe Springs.

He acknowledged that “apparently some people are plundering the system,” but warned that lawmakers shouldn’t “throw out the baby with the bath water” by making it financially unrewarding for doctors to continue filling prescriptions in their offices.

“We’re not looking for windfall profits and obscene profits,” said Crowell, who currently dispenses drugs at state-approved prices similar to those touted by DispenseXpress. “We’re looking for a fair return.”

Dispensing drugs directly to patients -- a longtime practice by some doctors -- is legal under California law as long as patients are offered a written prescription and told that they have the option of getting it filled at a pharmacy. Various Federal Trade Commission rulings in the 1980s endorsed such direct sales, suggesting that increased competition between doctors and pharmacies could lead to lower drug prices.

As drug dispensing by physicians became more common, especially in the area of workers’ comp and occupational medicine, federally approved pharmaceutical repackaging companies made the practice more appealing to doctors by developing software that monitors inventories and streamlines the process of getting insurance reimbursements.

It’s not clear how many of the doctors in California who handle workers’ comp cases dispense drugs directly to patients, or whether all of them charge markups as high as those listed by DispenseXpress. But Berkeley researcher Frank Neuhauser estimates that at least 40% of the $660 million spent each year on workers’ comp prescriptions could be linked to sales by doctors at premium prices.

And though it’s not uncommon for drugs to undergo significant markups no matter who’s selling them, a recent study by the Rand Institute for Civil Justice and Health, a Santa Monica think tank, found that many drugs dispensed by doctors command unusually high prices.

For example, 100 tablets of the 50-milligram generic equivalent of the pain reliever Ultram sells for $37.93 at a pharmacy but can be priced as high as $234.05 when sold at a doctor’s office, according to the study, which was paid for by the California Commission on Health, Safety and Workers’ Compensation.

Inflated doctor reimbursements could result in higher insurance premiums for or further cuts in medical services for injured workers, said Angie Wei, a lobbyist for the California Labor Federation, which supports Speier’s effort to close the loophole.

“It’s a total rip-off,” she said. “It’s exploiting the premium dollars the employers pay, and ultimately it’s going to be taken out of the workers’ benefits.”

Employers, who are counting on the workers’ comp overhaul for relief from skyrocketing insurance premiums, aren’t happy either.

“We started seeing an increase in the number of prescriptions being supplied by doctors to people and an increase in total costs,” said Bill Zachry, vice president for corporate workers’ compensation at Pleasanton, Calif.-based Safeway Inc. “It concerned me that this was an opportunity for mischief. While it may not be fraud, it certainly is an abuse of the system.”

Speier’s bill, which passed the full Senate on May 26 and has been approved by an Assembly committee, would bring insurance reimbursements for drugs dispensed by doctors in line with payments made to pharmacies for similar prescriptions.

The bill, due to be taken up again when lawmakers return from summer recess Monday, is backed by a coalition of employers and labor unions that is working to cut costs in the workers’ comp program. Gov. Arnold Schwarzenegger, who has made workers’ comp overhaul a keystone of his administration, hasn’t taken a position on the bill.

The California Medical Assn., which represents about a third of the 92,000 licensed doctors in the state, and companies that run occupational healthcare clinics are fighting the Speier bill, asking that action be postponed until next year so that physician drug dispensing can be studied further.

Crowell, the Santa Fe Springs physician, said he was eager to see the state set a “reasonable reimbursement” rate -- although he would want it to be at least 50% higher than the current Medi-Cal price cap for workers’ comp prescriptions filled by pharmacies. Crowell, the president of a trade group called California Occupational Medicine Physicians, said his organization was working independently of drug repackagers to craft a compromise on the Speier bill.

A spokesman for DispenseXpress didn’t respond to requests for comment, but Robert Goodrich, Southwood Pharmaceuticals’ director of operations and regulatory affairs, said he agreed with Speier’s goal of reducing prescription costs. However, he questioned whether her bill provided a workable method for reimbursing doctors for drug dispensing costs.

Goodrich said his company favored bringing down the cost of all workers’ compensation drugs. But he said he wasn’t surprised that some people might look for ways to take advantage of the system.

“There’s a lot of people who are always going to take the maximum allowable under the law,” he said. “It’s just a fact of our culture.”

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Medicine markups

Doctors in workers’ compensation cases often charge much more than pharmacies do for the same drugs, based on prices recommended by drug repackaging firms. Here’s a comparison of prices for a selection of drugs from repackager Southwood Healthcare Affiliates and what pharmacies charged based on a Medi-Cal fee schedule:

*--* BTR Pharmacy price Doctor’s office price BTRSoma $44.68 $396.98 BTRProzac $14.81 $131.82 BTRDarvocet $12.65 $39.32 BTRAcetaminophen/Hydrocodone $12.81 $58.31

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Price comparisons are for identical dosage and units of generic equivalents.

Source: April 2005 study by Rand Institute for Civil Justice and Health