Compounded drugs bring big profits to California doctors, study finds


Many California doctors are making large profits by prescribing and directly dispensing custom-made “compounded” drugs to people with work-related injuries, according to a new Rand Corp. research report.

Use of these pricey drugs — mostly painkilling creams for patients who might need an alternative to pills — has soared in recent years, driving up costs in California’s workers’ compensation system and alarming some legislators, who are now looking to rein in their use.

Rand was hired to do the study after lawmakers asked the California Commission on Health and Safety and Workers’ Compensation to look into the compounded-drug trend.


Total payments by insurers and employers for compounded-drug claims accounted for 12% of all workers’ compensation drug costs in the first quarter of 2009. That was up from 2.3% in the first quarter of 2006, Rand said in a report released Friday, citing an August 2010 analysis by the insurance-industry-supported California Workers’ Compensation Institute. Payments for compounded-drug claims totaled $29 million for the three-year period, the institute said.

The jump has been even more dramatic at the State Compensation Insurance Fund, a government-controlled company that dominates the California workers’ compensation market. Billings for compounded drugs reached $28 million, or nearly a quarter of the fund’s total prescription billings, in 2009. Billings were so low in previous years, the fund didn’t bother to track them.

“There are a number of incentives within the workers’ compensation program that are leading to the use of these products in questionable situations,” said Barbara O. Wynn, the report’s author and a senior health policy researcher at Rand. “Policies can be strengthened for determining the medical appropriateness of the products and that payments for covered products are reasonable for those that are medically appropriate.”

Pharmacists concoct compounded drugs from a number of separate ingredients purchased in bulk. These medications, advocates say, are useful alternatives to pills and capsules for people who have difficulty swallowing or for those concerned about the effects of anti-inflammatory medicines on their liver, kidneys and other organs.

Price markups in billings from physicians to insurance companies for ingredients in compounded drugs often are seven to 10 times higher than the lowest price for the same bulk chemicals in the government’s National Drug Code list, according to the report by the Santa Monica think tank.

A painkilling ingredient in one compounded drug, amitriptyline-DT cream, was listed with a top billing price of $12.60 for a 1.2-gram dose. The equivalent amount of the same drug in pill form was $1.88.


Use of many of the active ingredients in widely prescribed compounded drugs is not recommended or is recommended for only limited circumstances under state workers’ compensation medical treatment guidelines, the Rand report says. What’s more, compounded drugs are not regulated by the U.S. Food and Drug Administration.

“These are expensive products with no scientifically demonstrated medical utility,” said Lachlan Taylor, a retired workers’ compensation judge with the California Commission on Health and Safety and Workers’ Compensation. “They are not utilized in other healthcare delivery systems [such as Medi-Cal or health maintenance organizations], which further makes us question their medical necessity.”

The dramatic increase in prescriptions for compounded drugs is driving up costs in California’s $6.6-billion workers’ compensation insurance system, said Assemblyman Jose Solorio (D-Santa Ana), chairman of the Assembly Insurance Committee. Solorio plans to hold an oversight hearing on the issue and is putting finishing touches on a bill to curb the prescriptions.

“This new Rand report definitely motivated me to stay on track with our goal of reducing the costs associated with compounded drugs and trying to eliminate the incentives that some in the medical profession have to prescribing these compounded drugs,” said Solorio. “In reality, there are other more cost-effective alternatives out there.”

Last year, lobbyists for doctors specializing in workers’ compensation opposed and helped stall a Solorio bill on compounded drugs. They say they’re willing to work with the assemblyman on a new proposal if it would curb abuses without prohibiting necessary prescriptions for compounded drugs.

“There’s a place for these things,” said Steve Cattolica, director of governmental affairs for the California Society of Industrial Medicine and Surgery. “The question is what is its place, who decides that and what do they get paid?”