The Incredible Economics of Physician Dispensing

The Workers Compensation Research Institute just-released Physician Dispensing in Workers' Compensation, a data-based analysis of the pricing of prescriptions associated with worker’s comp claims. (The report is $25 for members and $45 for non-members.)

The results are less-than-super news:

• In some states, physician-dispensed scripts are more than 40% of the worker’s comp market.
• Physician-dispensed pills were 60% to 300% more expensive than retail pharmacies.
• Some physicians routinely prescribe over-the-counter drugs and are paid large multiples of retail cash prices.
• Repackaging frequently inflates Average Wholesale Price (AWP) for physician-dispensed prescriptions

Although pharmaceutical manufacturers play no part in these schemes, I suppose it’s only a matter of time before the trial lawyers go after the drug makers anyway.

THE DATA

The report is based on more than 750,000 worker’s compensation claims and the 5.7 million prescriptions associated with those claims. The claims are from 23 states and cover work-related injuries from 2006 through 2010, with prescription filled through March 2011.

In my opinion, the data and conclusions are credible, although Joe Paduda of Managed Care Matters reports that one major physician-dispensing technology vendor is unhappy with the study. Yawn.

Note that the WCRI's data and critiques do not apply to dispensing of oral oncology drugs by oncology practices, as discussed in Oral Oncology Channel Battle: Payers vs. Providers. As far as I know, oral oncology drugs are rarely (if ever) repackaged. Plus, dispensing from oncology-practice affiliated pharmacies is still a small portion of the oncology market.

SUPER MARGIN RELOCATION PROGRAM

Physician-dispensed worker’s compensation scripts are a surprisingly large share of the market. Physician dispensing is more than 40% of scripts paid by worker’s compensation in such large states as California, Illinois, and Florida.

Three states—Massachusetts, New York, and Texas—generally prohibit physician dispensing, although a practice can usually dispense drugs if it obtains a separate pharmacy license. Appendix A of the report has a very helpful guide to state laws regarding physician dispensing and reimbursement.

The most damning evidence comes from a comparison of reimbursement paid to pharmacies vs. physicians. Prices per pill paid to physicians were 60% to 300% higher than prices paid to pharmacies. Here’s a snapshot of prices per pill for hydrocone-acetaminophen (Vicodin)  in three states:

As you can see, prices for the physician-dispensed scripts went up, while pharmacy prices went down. Hmmm…

Some physicians also routinely prescribe over-the-counter drugs, such as omeprazole (Prilosec) and randitidine HCL (Zantac). In four states, these two drugs accounted for about 8% to 11% of all physician-prescribed worker’s compensation prescription claims. Even more startling, prices were 5 to 15 times higher than retail prices at a major chain drugstore.

JACK-JACK ATTACK

Illinois illustrates the warped incentives that created this system.

In the Land of Lincoln, physician-dispensed worker’s comp drugs are reimbursed at Average Wholesale Price (AWP) plus $4.18. There is no requirement that the original manufacturer’s National Drug Code be used for pricing, although the state is apparently reconsidering this approach.

Compare that rate with the discounts paid to retail pharmacies. According to PBMI’s 2011-12 Prescription Drug Benefit Cost and Plan Design Survey, 30-day retail prescriptions are paid at AWP minus 16.4% plus an average dispensing fee of $1.54.

For a prescription with an AWP of $200, the physician-dispensed prescription would be $204.18, while the pharmacy-dispensed prescription would be only $168.74.

Nice work if you can get away with it.

A REPACKAGING MIRAGE

As the report notes, repackaging companies help make physician-dispensed drugs even more profitable.

All U.S. drugs are identified and reported using a universal product identifier called the National Drug Code (NDC). The first segment of a product’s NDC identifies the Labeler for a specific drug product. Each Labeler is assigned a unique 4 or 5 digit code by the FDA.

Repackaged drugs are drugs manufactured by FDA-licensed manufacturers and purchased in bulk by FDA-regulated repackaging companies. When these companies repackage the drugs, they can assign a new NDC number to the repackaged drug and then report a new Average Wholesale Price (AWP) for this "new" NDC.

Prest-o, change-o! The AWP can fly!

A 2009 GAO study—Brand-Name Prescription Drug Pricing: Lack of Therapeutically Equivalent Drugs and Limited Competition May Contribute to Extraordinary Price Increases—shed light on this issue. The report found that most repackaged drugs are typically sold to health care providers—hospitals or physician’s offices—who then resell them to patients. Apparently, this report escaped the attention of the folks administering worker’s compensation programs.

NO CAPES!

Believe it or not, California altered the incentives by requiring equal payments for physician- and pharmacy-dispensed prescriptions. In 2007, California required that the fee schedule for physician-dispensed drugs be based on the original manufacturer NDC for the drug.

Magically, the price premium for physician-dispensed drugs vanished, and the percentage of scripts for repackaged drugs plummeted. Shocking, right?

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If you have any interest in physician-dispensing, then I suggest you purchase this report. I learned a lot about this murky market.