BILL ANALYSIS                                                                                                                                                                                                    

                                                                    AB 1124

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          Date of Hearing:  April 22, 2015

                           ASSEMBLY COMMITTEE ON INSURANCE

                                   Tom Daly, Chair

          AB 1124  
          Perea - As Amended April 14, 2015

          SUBJECT:  Workers' compensation:   prescription drug formulary

          SUMMARY:  Requires the Division of Workers Compensation to adopt  
          a prescription drug formulary for workers compensation benefits.  
           Specifically, this bill:  

          1)Requires the Administrative Director of the Division of  
            Workers Compensation to develop a prescription drug formulary.

          2)Requires the Administrative Director to convene an advisory  
            committee to assist in the development of the formulary.

          EXISTING LAW:  

          1)Requires employers to provide medical treatment to an injured  
            worker that is reasonably required to cure or relieve an  
            injury that occurs on the job.


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          2)Requires the Administrative Director to adopt a medical  
            treatment utilization schedule (MTUS) that addresses the  
            frequency, duration, intensity, and appropriateness of all  
            treatment procedures and modalities commonly performed in  
            workers compensation cases.

          3)Provides that the MTUS is presumptively correct on the extent  
            and scope of treatment for workers' compensation patients.   
            This presumption is rebuttable by proving with a preponderance  
            of the evidence that a treatment is reasonably required to  
            cure or relieve the injured worker.

          4)Requires pharmacies to dispense generic drug equivalents for  
            workers' compensation patients unless the prescriber expressly  
            prohibits it.

          FISCAL EFFECT:  Undetermined


           1)Purpose  .  According to the author, current law is unclear if  
            the Administrative Director has authority to establish a  
            prescription drug formulary in the workers' compensation  
            system. This bill is needed to give the Administrative  
            Director clear authority to establish a formulary, control  
            rising prescription drug costs in California's workers'  


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            compensation system, limit the over-prescribing of  
            highly-addictive opioids, and ensure injured workers get the  
            necessary treatment needed to get back to work. 

           2)Formularies  .  Drug formularies have proven to be very  
            effective at managing the cost of prescription drugs.  Health  
            plans have been using formularies in California for decades  
            and they are commonly accepted as a useful cost control  
            mechanism.  They control costs by limiting the utilization of  
            high priced drugs and reducing the price of drugs.   
            Formularies are usually developed by companies known as  
            pharmaceutical benefits managers (PBMs) who design formularies  
            and manage prescription drug benefits for a contracting health  
            plan. At the most basic level a formulary is a list of drugs  
            that a health plan or insurer agrees to cover.  However,  
            formularies are not simply arbitrary limits on drug use.   
            Formularies must be broad enough to provide drug treatment  
            options when they are available, and formulary decisions are  
            guided substantially by the scientific evidence regarding  
            individual drugs.  However, in most cases there are multiple  
            drugs available to treat a given condition and formularies are  
            constructed to drive treatment choices to the most  
            cost-effective option.  

            Formularies use a number of strategies to control costs driven  
            by utilization including:

               a.     Quantity Restrictions - formularies commonly  
                 prohibit dispensing a greater quantity of the drug than  
                 is typically necessary.  Antibiotics and opioids are  
                 examples of drug categories where there have been  
                 historical patterns of overprescribing and abuse that can  
                 be addressed by quantity restrictions.


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               b.     Refill Restrictions - formularies commonly will not  
                 allow a prescription to be refilled until the period of  
                 time that the initial prescription was expected to last  
                 has elapsed.  

               c.     Use of Generics - formularies commonly will not  
                 include a name brand drug if there is a generic version  
                 of that drug available.  Generic drugs are chemically  
                 identical to a name brand drug but typically are  
                 available at dramatically lower prices.  

               d.     Category Restrictions - formularies can also exclude  
                 some categories of drugs entirely, generally because  
                 there are drugs in other categories that are more  

               e.     Prior Authorization - formularies also commonly  
                 impose prior authorization requirements on certain drugs  
                 because of the high cost of the drug or because some  
                 drugs have common non-therapeutic uses.  Drugs requiring  
                 prior authorization are covered by the formulary, but  
                 only after the prescriber has established a medical need  
                 for the drug.  Prior authorization is commonly used for  
                 expensive biotech drugs prescribed for serious conditions  
                 and for drugs that have common cosmetic or recreational  

               f.     Step-therapy - formularies commonly require that a  


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                 prescriber begin therapy with the lowest cost drug in a  
                 category and demonstrate the drug failed to remediate the  
                 problem before prescribing higher cost drugs in the  
                 category.  In many categories there are less expensive  
                 (generally older) but comparable drugs available and  
                 step-therapy requirements push treatment to these drugs  
                 but allow for a more expensive (generally newer) drug if  
                 the cheaper drug doesn't work for the individual patient.  

               g.     Co-Payments - formularies outside of workers  
                 compensation almost always include a patient "co-payment"  
                 for each prescription.  In the mainstream world of health  
                 plans, a tiered structure of co-payments is commonly used  
                 where the lowest co-payment is for generic drugs, a  
                 higher co-payment is for the preferred branded drug, and  
                 non-preferred branded drugs are subject to a still higher  
                 co-payment.  Typically these co-payment structures are  
                 steeply slanted to create financial incentives for  
                 patients to choose a generic or lower cost branded drugs  
                 over higher cost alternatives.  This structure is also  
                 commonly referred to as an "open" formulary.  

            Formularies are constructed to drive treatment to the most  
            cost-effective options for treating the group of patients as a  
            whole.  However, formularies do generally include provisions  
            for prescribing outside the formulary after the prescriber has  
            established that the formulary restrictions are not  
            appropriate for an individual patient.  

            In addition to using these strategies designed to control the  


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            utilization of drugs, PBMs also use formulary construction to  
            reduce the price of drugs.  By aggregating the purchasing  
            power of multiple health plans, a PBM can negotiate discounts  
            from competing drug manufacturers.  By making a particular  
            drug in a category the preferred drug on the formulary, the  
            PBM can increase the sales volume of that particular drug and  
            many manufacturers are prepared to offer favorable pricing to  
            secure the added volume of sales.  The combination of  
            utilization controls and the exercise of market power to  
            reduce pricing has been effective and made formularies a  
            pillar of managed care.  

           3)Why A Formulary  ?  Drug costs have been growing significantly  
            in the workers compensation system in recent years (especially  
            the cost of opioids which is discussed in greater detail  
            below) and formularies have a proven track record of reducing  
            drug costs in other states.  As noted above, formularies work  
            both by both restricting utilization of higher cost drugs and  
            reducing the cost of drugs and present a logical alternative  
            to restrain the increasing cost of drugs in the workers  
            compensation system.  This would be particularly true for  
            workers' compensation as there is no financial incentive for  
            prescribers or patients in the system to control drug  
            utilization or to have cost factor into prescribing decisions.  
             The absence of copayments in the workers' compensation system  
            also means that the tiered copayment structure (what is also  
            referred to as an open formulary) will be ineffective in the  
            workers' compensation system.  However, a closed formulary  
            does not rely on the financial incentive of a copayment to  
            influence drug utilization and would be required for any  
            formulary to be effective in workers' compensation. 

           4)CWCI Study  .  The California Workers Compensation Institute (a  


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            highly regarded industry research organization) published a  
            study in November of 2014 that evaluated the potential impact  
            of adopting a workers compensation formulary in California.   
            The study found that applying the workers compensation  
            formularies adopted in Texas and Washington could reduce  
            California workers' compensation payments for non-formulary  
            drugs between $124 and $420 million per year.  Both Texas and  
            Washington adopted formularies in response to sustained,  
            double-digit growth in their workers' compensation  
            prescription drug costs. 

            The Texas formulary was phased in beginning in September 2011,  
            with initial implementation for new injuries and subsequent  
            expansion to legacy claims. It had an immediate impact. In the  
            first year, non-formulary drug payments fell by 82 percent  
            (from 17 percent to 4 percent of total drug expenditures) and  
            the number of prescriptions fell 74 percent. 

            Washington implemented its formulary in 2004, and it also had  
            a significant effect on the utilization and cost of workers'  
            compensation prescription drugs. A 2011 Workers' Compensation  
            Research Institute (WCRI) study found average prescription  
            payments per claim in Washington were significantly lower than  
            the median cost in 17 other states.  According to the WCRI,  
            Washington has lower drug prices for several reasons,  
            including: a pharmacy fee schedule; mandatory generic  
            substitution; and a formulary, which mandated substitution of  
            generic alternatives when no generic equivalents are  
            available. The WCRI study also looked at prescription drug  
            payments from California's workers compensation system and  
            found that the California exceeded the average prescription  
            payment per claim of the 17 other study states by 80 percent.


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           5)Opioids  .   CWCI has also produced a significant volume of  
            research documenting the rapid escalation in the use (and  
            associated cost) of opioids in workers' compensation.  Opioids  
            include powerful painkillers such as morphine, fentanyl,  
            oxycodone, codeine, and hydrocodone.  Opioid use has been  
            rising nationwide and there is a well-documented problem with  
            abuse of and addiction to these prescription painkillers, and  
            workers' compensation patients are not excluded from this  
            phenomenon.  According to a recent CWCI report,  

                "The findings show that in the first half of 2013, Schedule  
               II opioids, which include powerful narcotics such as  
               oxycontin, fentanyl and morphine, have grown to 7.3 percent  
               of California workers' compensation prescriptions - nearly  
               6 times the proportion noted in 2002. Over the same period,  
               payments for these drugs have increased from 4.7 percent to  
               19.6 percent of California workers' compensation  
               prescription dollars. The data also suggest that the use of  
               Schedule II drugs in workers' compensation may have  
               stabilized near this record level, as over the most recent  
               3-1/2 years these drugs have accounted for between 6.5 and  
               7.3 percent of all prescriptions dispensed to injured  
               workers, while over the most recent 4-1/2 years Schedule II  
               drug payments have represented about 1 out of every 5  
               dollars paid for workers' compensation prescriptions in  
               California. The findings also show that since 2002, less  
               powerful Schedule III opioids - primarily Vicodin or other  
               forms of hydrocodone compounded with a non-steroidal drugs  
               such as acetaminophen - have accounted for a much more  
               consistent share of workers' compensation prescription  
               drugs, generally representing around 20 percent of all  
               prescriptions dispensed to injured workers and 10 to 11  
               percent of the overall drug spend."


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            A workers' compensation formulary would likely have a powerful  
            impact on the spiraling use of opioids.  The utilization  
            control mechanisms such as quantity and refill restrictions,  
            prior authorization requirements, and step therapy  
            requirements are all likely to be very effective at weeding  
            out cases with excessive opioid use and potential abuse.  Pain  
            medication is always going to be present at a meaningful level  
            in occupational medicine given the nature of occupational  
            injuries, but there is compelling evidence that there are far  
            more workers on long term, high-dose opioid therapy than would  
            is consistent with sound medical practice.  In this area a  
            formulary is likely to both reduce costs and improve the  
            quality of care received by workers suffering from chronic  

           6)Work In Progress  .  Most stakeholders agree that a  
            well-constructed formulary for workers' compensation has the  
            prospect of controlling costs and providing quality care to  
            injured workers.  Like any change to a very complicated  
            workers' compensation system of providing healthcare,  
            establishing a formulary is a complex venture and will require  
            stakeholders to work over the coming months to arrive a fully  
            formed solution.  This perspective is not universally  
            subscribed to.  The California Applicants Attorneys  
            Association argues that establishing a formulary is just  
            another in a long line of take aways from injured workers.



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          American Insurance Association

          Association of California Insurance Companies

          California Chamber of Commerce

          California Coalition on Workers' Compensation

          California Grocers Association

          California Labor Federation (if amended)

          California Manufacturers and Technology Association

          California Professional Association of Specialty Contractors 

          Liberty Mutual Insurance Corporation


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          California Applicants Attorneys Association

          Analysis Prepared by:Paul Riches / INS. / (916) 319-2086