BILL ANALYSIS Ó
AB 378
Page 1
Date of Hearing: May 3, 2011
ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER
PROTECTION
Mary Hayashi, Chair
AB 378 (Solorio) - As Amended: April 4, 2011
SUBJECT : Workers' compensation: pharmacy products.
SUMMARY : Regulates the dispensing of compounded medications in
the workers' compensation system, including the establishment of
a fee schedule and maximum fees for compounded drugs dispensed
directly by physicians. Specifically, this bill :
1)Adds "pharmacy goods" to the list of goods and services for
which a physician may not refer a patient if the physician or
his or her immediate family has a financial interest in the
provider of the goods or services.
2)Defines "pharmacy goods" as a dangerous drug or device, as
defined in the Business and Professions Code, medical food as
defined in the Health and Safety Code, and over-the-counter
(OTC) drugs as classified by the federal Food and Drug
Administration (FDA).
3)Provides that for a pharmacy service, drug or other product
that is not covered by a Medi-Cal payment system, the maximum
reasonable fee shall be 83% of the average wholesale price
(AWP) of the lowest priced product of equivalent therapeutic
effect.
4)Provides that, until the Administrative Director (AD) of the
Division of Workers' Compensation (DWC) adopts a fee schedule
for compounded drug products, the maximum reasonable fee for a
compounded drug product shall be the sum of the compounding
fee for route of administration and quantity, the dosage
compounding fee, the sterility fee, if applicable, and the
dispensing fee, all as provided by the Medi-Cal payment
system, plus the sum of the amounts allowed for the
ingredients of the compounded drug product, as follows:
a) If an ingredient is available in bulk from three or
more suppliers listed in national pricing compendiums,
the unit price shall be the lesser of 150% of the unit
price of the lowest cost alternative for purchases made
AB 378
Page 2
in quantities of the largest packaging size available
from each supplier, or the unit price listed in the
Medi-Cal database;
b) If an ingredient is not available as outlined in a),
above, but is listed in the Medi-Cal database, the unit
price shall be the lesser of the Medi-Cal price or 120%
of the documented costs paid by the pharmacy that
compounds the drug product; and,
c) If an ingredient is not available as outlined in a),
above, and is not listed in the Medi-Cal database, the
unit price shall be the lesser of 83% of the AWP for the
manufacturer as published in the current version of a
national compendium of drug pricing or the documented
costs paid by the pharmacy that compounds the drug
product. Both the AWP for the manufacturer and the
documented paid cost shall be determined with respect to
the actual source of the ingredients used in the
compounded drug product.
5)Provides that no fee shall be allowed for any ingredient that
is not identified by a valid National Drug Code, number of
units, unit price, and, if applicable, documented paid cost.
No fee shall be allowed for a compounded drug ingredient if
complete information for any component of the fee, as
specified, is not included in the initial billing.
6)Specifies that the fee for any product dispensed by a
physician shall not exceed the lesser of 120% of the
physician's documented costs or the physician's documented
cost plus $250.
7)Specifies that for a compounded drug product dispensed by a
physician, the maximum fee shall not exceed the lesser of the
amount calculated pursuant to a), above, or 4), above.
8)Provides that the rules governing payment to physicians for
drugs that they dispense shall apply only until a fee schedule
for these medications has been adopted by the AD.
9)Contains definitions for the various terms used in the bill.
10)Contains Legislative findings and declarations.
AB 378
Page 3
11)Repeals provisions of law in the Labor Code sections being
amended by this bill that expired on January 1, 2011.
EXISTING LAW
1)Provides for a comprehensive system of workers' compensation
benefits for injuries to employees arising out of or in the
course of employment. Injured workers are entitled to
appropriate medical treatment, including necessary
medications, among other benefits.
2)Requires the AD of the DWC to adopt and revise periodically a
medical fee schedule for specified services, drugs, fees and
goods, other than physician services, generally requiring
payment based on the Medi-Cal fee schedule. If the AD
determines that a pharmacy service or drug is not covered by
the Medi-Cal payment system, the AD shall establish maximum
fees for that item.
3)Requires, by regulation, that physicians dispensing medication
directly to patients from bulk supplies bill at the amount
that the Medi-Cal schedule requires for the amount of
medication being dispensed.
4)Authorizes physicians to directly dispense medications to
patients.
5)To the extent they are paid pursuant to workers' compensation
law, provides that it is unlawful for a physician to refer
clinical laboratory, diagnostic nuclear medicine, radiation
oncology, physical therapy, physical rehabilitation,
psychometric testing, home infusion therapy, outpatient
surgery, or diagnostic imaging goods or services if the
physician or his or her immediate family has a financial
interest in the provider of the goods or services.
FISCAL EFFECT : Unknown
COMMENTS :
Purpose of this bill . According to the author's office,
following California's workers' compensation reforms and the
establishment of a pharmaceutical fee schedule based on Medi-Cal
rates, some physicians and companies providing services to
physicians began directly dispensing medications that had been
AB 378
Page 4
"repackaged" from bulk containers into normal sized doses. In
doing this, they circumvented the Medi-Cal fee schedule's price
controls by eliminating the National Drug Code (NDC) number that
would normally apply to that count of any given medication. "No
NDC number, no fee schedule, no price control, and massive
over-billing. There were documented common examples of up to
1000% over the normal pharmacy price for the same medicine. A
regulation in late 2007 put a stop to this practice by mandating
use of the fee schedule price that applied to the same type and
quantity of drugs.
"With strikingly coincidental timing, the incidence of
dispensing of custom compounded medications began a meteoric
rise in the workers' compensation system. In the (three) years
since the abusive repackaging practices were limited, there has
been a (five)-fold increase in the use of these custom
medications, virtually all of it via physician dispensing. This
is a scandalous state of affairs, costing employers tens of
millions of dollars or more annually, and siphoning off dollars
that ought to be diverted to re-(establishing) fair permanent
disability benefits for injured workers."
Background . Compounded drugs are medications that have been
specially-formulated for a particular patient need, such as
altering the dosage form or strength of a drug or re-combining
active ingredients. They are typically used only in unusual
circumstances, and usually only after conventional therapies
have been shown to be ineffective or to cause unintended side
effects. Compounded drugs are commonly prescribed to manage
pain, and frequently come in the form of a topical cream.
Because of their unique nature, compounded drugs are not
FDA-approved, but are regulated at the state level.
Under current law, physicians may dispense compounded drugs
directly to patients or write a prescription to be filled at a
pharmacy. When dispensing directly to a patient in the workers'
compensation system, the physician bills the employer or insurer
for the cost of the medication.
Physician-dispensing of compounded drugs to workers'
compensation patients came under scrutiny when billings began to
increase in 2006. This came on the heels of regulations issued
to limit costs billed for repackaged medications, which had
spiked dramatically in the first few years after regulators
adopted California's workers' compensation pharmacy fee schedule
AB 378
Page 5
in 2004.
Prior to these regulations, physicians could skirt the Medi-Cal
fee schedule by buying repackaged drugs from distributors in
packages labeled for direct distribution to patients. These
packages had NDC numbers that were distinct from the NDC of the
bulk ingredients normally distributed to pharmacies. Because
the Medi-Cal fee schedule is based on the NDC of the product,
and the repackaged drugs did not appear in the Medi-Cal fee
schedule, the reimbursement to physicians was not based on the
Medi-Cal fee schedule, but on an AWP assigned by the repackager.
The actual cost to the physician was a fraction of the AWP, yet
this AWP is how the drugs were billed. This arrangement enabled
physicians who engaged in this practice to obtain excess profits
by dispensing drugs at prices several times the price of the
same drugs distributed through pharmacies. The AD's regulation
mandates that repackaged medications be billed at the Medi-Cal
schedule equivalent, even though there is not a Medi-Cal code
for the individual packages.
It is generally acknowledged that a similar billing approach has
since being taken with compounded medications. According to a
study released by the California Workers' Compensation Institute
in August of last year, the percentage of NDCs in the state's
workers' compensation system associated with compounded drugs,
convenience packs (co-packs) and medical foods nearly quadrupled
between 2006 and 2009. The amount charged for these products
grew from 2.2% to 11.8% of total dollars billed as
"medications," and the percentage of workers' compensation
medication dollars that paid for these products increased from
2.3 % to 12%.
AB 2779 (Solorio) of 2010 attempted to address this issue by
requiring a pre-authorization before a physician could dispense
a compounded medication, and requiring the physician to employ
more conventional therapies before resorting to the use of
compounded medications. These elements are required in the
Medi-Cal Program, and in general are the rules in the group and
individual healthcare system. However, it was argued that these
requirements do not work in the workers' compensation system.
AB 2779 passed the Senate Committee on Labor and Industrial
Relations, but was not taken up in the Senate Appropriations
Committee.
In light of issues raised with respect to AB 2779, Senator
AB 378
Page 6
DeSaulnier and Assemblymember Solorio requested that the
Commission on Health and Safety and Workers' Compensation
(CHSWC) commission a study of the issue and develop policy
recommendations. CHSWC contracted with the RAND Institute to
perform the study. According to the author's office, AB 378
represents proponents' best efforts to draft language to
implement the recommendations of the study, which has been
released in working paper format with public comments due by
March 1, 2011.
AB 378 differs from AB 2779 in its approach, instead outlining a
specific reimbursement schedule for compounded drugs to be in
effect until such time as the AD adopts one.
AB 378 also includes "pharmacy goods" in the list goods and
services for which a physician may not refer a patient if the
physician or his or her immediate family has a financial
interest in the provider of the goods or services. Pharmacy
goods is defined to mean a dangerous drug or device as defined
in the Business and Professions Code, medical food as defined in
the Health and Safety Code, and OTC drugs as classified by the
FDA. The author's office has presented several examples in
which OTC substances specifically labeled for the workers'
compensation market are used in lieu of OTC medications in ways
to obtain excessive billings.
There has been no confirmed AD at the DWC for the past several
years, only acting ADs. According to the DWC, the problem this
bill seeks to remedy has not been addressed via regulations due
to a lack of expertise at the DWC regarding the highly complex,
technical nature of developing a fee schedule for compounded
medications.
Staff comments . Current law requires the AD of the DWC to adopt
and revise a medical fee schedule for services, drugs, fees and
goods, including pharmacy services or drugs. If the AD
determines that a pharmacy service or drug is not covered by the
Medi-Cal payment system, the AD must establish maximum fees for
that item. While the DWC has indicated a current lack of
resources available to develop a fee schedule for compounded
medications, it is not clear that the fee schedule proposed by
this bill will be a suitable substitute for a fee schedule
developed under existing law and which will not inadvertently
discourage appropriate physician discretion to prescribe
compounded drugs. The committee may wish to consider whether it
AB 378
Page 7
would be appropriate to establish a sunset date on the medical
fee structure proposed by this bill, and to require the AD of
the DWC to report to the Legislature on the DWC's progress on
this issue and provide recommendations on removing any barriers
the AD may face in exercising the current statutory authority to
set fees for pharmacy services or drugs in the workers'
compensation system.
This bill also provides that it is unlawful for a physician to
refer pharmacy goods or services, including OTC products, if the
physician or his or her immediate family has a financial
interest in the provider of the goods or services, such as any
type of ownership, interest, debt, loan, lease, compensation,
remuneration, discount, rebate, refund, dividend, distribution,
subsidy, or other form of direct or indirect payment.
Violations are a misdemeanor subject to disciplinary action for
unprofessional conduct by the appropriate licensing board and
civil penalties of up to $5,000 for each offense.
Current law generally prohibits physician self-referral for
prescribed drugs and medical services, not for products or
services that can be obtained without a physician prescription
or referral. Given this context, the potential ramifications of
the bill's provision prohibiting self-referral for OTC
medications are unknown and potentially confusing. If a
physician recommends or refers an OTC substance that the patient
then purchases from an entity in which the physician or his or
her family member holds a financial interest (i.e., investments
in, or a family member employed by, a national drug store
chain), would this action be subject to discipline for
unprofessional conduct and civil penalties? The committee may
wish to consider the potential unintended consequences of taking
the significant step of extending to OTC products existing
prohibitions against self-referral for physician prescriptions
and medical services, when an appropriate fee schedule would
solve inflated pricing issues.
In summary, there appears to be some agreement that abuses are
occurring with compounded drug prescribing. However, there also
appears to be agreement that compounded medications can be an
effective treatment. The committee may wish to consider that a
delicate balance needs to be struck between preventing abuses
and unnecessarily discouraging or preventing physicians from
dispensing compounded medications, and the possible unintended
negative effect an overreaching solution might have on patient
AB 378
Page 8
care.
Support . The California Labor Federation writes, "The practice
of compounding is being misused and abused in cases where it is
an excuse to charge inflated prices for ingredients that the
patient could safely take in FDA-approved formulations. It is
even worse when the ingredients are not even medically
necessary. In these cases, injured workers are being used as an
excuse for unethical practitioners to bleed the system for their
personal profit."
The California Chamber of Commerce states, "Because compound
medications are specialty products designed specifically for
individual patients, they currently are not covered by the
Medi-Cal fee schedule, even though most or nearly all of the
active components of the compound are on the fee schedule. This
creates an opportunity for some pharmacists and physicians to
prescribe and charge fees beyond what would be allowed for
pharmaceutical treatments within the fee schedule. Cost
pressures are added to the workers' comp system, which in turn
leads to higher costs for insurers and higher premiums for
employers. This bill is a good start at establishing guidelines
to the compounding of drugs and under what circumstances they
would be covered."
Opposition . The California Medical Association states that the
bill's fee schedule is problematic and potentially undervalues
compounded medications "to a level that will make it impossible
for providers to cover their costs in producing them. This will
unduly limit injured workers' ability to access these
medications when a physician prescribes them. Moreover, the
bill contains self-referral limitations for (OTC) medications
that will restrict access to cost-effective treatment while also
presenting new legal liability for physicians who may happen to
have ownership in a retail facility the sells OTC
substances?Compounding represents a small but necessary subset
of the prescriptions used in occupational medicine, and it is
critical to ensure access to these medications in those cases
wherein a physician determines them to be the most effective
treatment for a given injured worker."
Previous legislation . AB 2779 (Solorio) of 2010 specifies
conditions under which physicians shall be reimbursed under
workers' compensation for dispensing compounded drugs, including
pre-authorization and documented failure of FDA-approved
AB 378
Page 9
alternatives to the compounded drug. This bill was held on the
Senate Floor.
SB 292 (Speier) of 2005 establishes a reimbursement rate for
drugs not found in the Medi-Cal payment system. This bill was
held in Assembly Appropriations Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
American Insurance Association
California Chamber of Commerce
California Labor Federation
California State Association of Counties Excess Insurance
Authority
CompPharma
Pacific Compensation Insurance Company
Opposition
California Medical Association
Pharmacy Access Coalition
Analysis Prepared by : Angela Mapp / B.,P. & C.P. / (916)
319-3301