An injured worker picked up her prescription for diclofenac 2% gel, a common generic topical nonsteroidal anti-inflammatory drug used to treat pain, at her local Walgreens. Walgreens charged $53.64 for the drug.

Cliff Goldstein

But the worker was urged to switch pharmacies. She was steered to a “workers’
compensation” pharmacy that charged the employer $2,955.02 for the same drug — more than 55 times the Walgreens price.

There is nothing exceptional about this scenario. Some workers’ compensation pharmacies charge up to 100 times more than normal retail pharmacies.

Workers’ compensation pharmacies claim to have special expertise in handling workers’ compensation cases. But almost all drugs used in workers’ compensation cases are common generic medications that require no special instructions, and there is scant evidence that these pharmacies do much more than act as online fulfillment houses, taking orders and shipping drugs with little or no interaction with claimants.

How is this pricing possible? Who benefits from it? And why would a claimant switch to a pharmacy that charges dramatically more than a local retail chain?

The root of the problem: AWP

Many states, including Pennsylvania, still use average wholesale price, or AWP, as a basis for determining the amounts that can be charged. AWP is a misnomer. Most drugs dispensed in workers’ compensation are generics, and for generic drugs, reported AWPs often bear little relationship to the prices pharmacies actually pay to acquire those drugs at wholesale. Most federal payment programs have discarded AWP, and outside of workers’ compensation and some auto insurance claims, virtually no company pays AWP. It is an artificial reference figure selected by drug manufacturers that can make discounts from AWP appear to represent substantial savings.

For example, pregabalin is a common generic drug frequently prescribed in workers’ compensation cases. Pharmacies can buy a bottle of 60 pills at wholesale for about $5. Most national retail chains sell the drug for about $19. But the published AWP for the same drug is $556. Using that AWP amount, a workers’ compensation pharmacy can charge an employer or insurer up to 100 times the actual wholesale acquisition cost. Courts, private payers, the federal government and many statutes have moved away from AWP because it can be artificially inflated. But some states, including Pennsylvania, still use AWP as a payment standard.

How do payers try to control unrealistic pricing?

Most employers and insurers use a pharmacy benefit manager, or PBM, that performs a variety of administrative functions and negotiates drug prices. PBMs can often obtain discounts of 25% to as much as 85% off AWP because AWP can be dramatically higher than the actual acquisition cost of the drug. If a worker uses one of the roughly 80,000 in-network pharmacies offered by the PBM, the payer may obtain substantial relief from AWP-based pricing. For example, when the drug flows through a PBM, the employer or insurer might pay about $250 for pregabalin after the PBM’s price reduction. But in many states, including Pennsylvania, a worker cannot be forced to use an in-network pharmacy. Increasingly, some workers are being steered by doctors and lawyers away from in-network pharmacies and to out-of-network “workers’ compensation” pharmacies, which may charge the full AWP or more.

Most workers’ compensation pharmacies do not participate in PBM programs or offer the types of discounts from AWP that are typical in the industry. Instead, they may charge the full AWP and tend to dispense products carrying unusually high prices, such as the drug in the example at the beginning of this article. About one-third of all drugs dispensed by workers’ compensation pharmacies are topical products that average more than $1,000 per fill. Some products dispensed by these pharmacies are versions of over-the-counter products that retail for less than $20 but are billed for as much as $3,000 per fill. PBMs can help reduce drug payments, but generally not for drugs dispensed by out-of-network workers’ compensation pharmacies.

Who benefits from higher drug prices?

Recent case law confirms that some prescribing physicians may have direct ownership or other financial interests in the dispensing workers’ compensation pharmacy. In other reported cases, some pharmacies have entered into arrangements to sell receivables — the right to receive payment — to prescribing doctors. Federal and state laws and professional ethics rules may restrict physician referrals to entities in which the physician has a financial interest, although the application of those restrictions varies and exceptions may apply. While more information must be gathered and shared, it appears that many of the highest-priced products sold by some workers’ compensation pharmacies are prescribed by a relatively small group of doctors. The industry should investigate and share information about doctors who may be directly or indirectly profiting from referrals to workers’ compensation pharmacies.

Doctors are not the only potential beneficiaries of higher drug prices. Claimants’ attorneys, who often work for contingent fees, may be permitted to receive fees based on medical expenses, including drug payments. At a 20% fee, a $2,955 drug payment can generate approximately $591 in attorneys' fees, while a $53 drug payment would generate about $11.

Claimants may also benefit indirectly from high drug prices because recurring drug expenses can create pressure on employers and insurers to settle claims more quickly or for higher amounts. Drug bills that exceed monthly indemnity payments can materially increase the cost of keeping a claim open. An employer paying $5,000 each month for drugs may, therefore, have a strong financial incentive to settle the case and eliminate the continuing expense.

The dispensing workers’ compensation pharmacies and their related billing companies also benefit from higher-than-necessary pricing. Workers’ compensation pharmacies can buy many generic drugs commonly used in workers’ compensation for less than 5 cents per pill and then bill employers and insurers as much as $5 per pill.

What can be done?

Legislative reform eliminating AWP as a reference point would be an important start. If reimbursement were based instead on actual wholesale acquisition costs, such as those reported by the federal government through the National Average Drug Acquisition Cost, or NADAC, pharmacies could no longer base charges on irrelevant or fictitious reference numbers. Legislative reform is also underway in some states to curb or cap payments for the most expensive and least justifiable topical pain products. But inertia, political pressure and limited understanding of the issue combine to make legislative reform in Pennsylvania and other states difficult.

There are also self-help strategies that may be used to challenge abusive pricing by workers’ compensation pharmacies. Some insurers and employers are beginning to push back, considering options ranging from Racketeer Influenced and Corrupt Organizations Act, or RICO, lawsuits — such as one recently filed in Michigan federal court involving a similar problem in auto insurance drug payments — to efforts to obtain more information about potential financial arrangements between doctors and dispensing workers’ compensation pharmacies. Negotiations, unilateral reductions based on interpretations of case law, and use of a new type of explanation of benefits form are also gaining momentum.

Self-help and litigation-focused remedies carry risk, and most insurers and employers are risk-averse. But routinely paying these prices in full and without challenge also carries substantial financial risk. If it is ultimately determined that a payer could lawfully have paid less on a bill, the payer may have little or no practical recourse to recover the overpayment. The choice, therefore, is not between risk and no risk. Employers and insurers must weigh the legal and administrative risks of challenging these charges against the financial and broader societal costs of continuing to pay drug prices that may bear little relationship to actual acquisition cost or market value.

Cliff Goldstein, Esq., formerly CEO and Senior Litigator at Chartwell Law, has more than 40 years of experience litigating complex workers’ compensation matters. He now concentrates exclusively on excessive pricing, fraud, abuse and waste involving drugs in workers’ compensation systems. He can be reached at 215-588-4901 or cliffagoldstein@gmail.com. Goldstein is licensed to practice in Pennsylvania and has an office in Merion Station.

[Author's note: This article does not provide legal advice. All cases are unique and, where appropriate, should be discussed with counsel of the reader’s choosing. This article is intended solely to stimulate discussion and is not a substitute for independent research or legal consultation before taking or refraining from any action. The article expresses only the opinions of the author and does not create an attorney-client relationship. No pharmacy, PBM, billing company, physician, or other individual or entity is accused of wrongdoing. The pricing examples used herein are illustrative only and may not be representative of the industry as a whole.]