BILL ANALYSIS Ó
AB 1124
Page 1
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.
AB 1124
Page 2
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
COMMENTS:
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'
AB 1124
Page 3
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.
AB 1124
Page 4
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
effective.
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
uses.
f. Step-therapy - formularies commonly require that a
AB 1124
Page 5
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
AB 1124
Page 6
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
AB 1124
Page 7
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.
AB 1124
Page 8
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."
AB 1124
Page 9
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
pain.
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.
AB 1124
Page 10
REGISTERED SUPPORT / OPPOSITION:
Support
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
AB 1124
Page 11
Opposition
California Applicants Attorneys Association
Analysis Prepared by:Paul Riches / INS. / (916) 319-2086