Insight, analysis & opinion from Joe Paduda


Regulation, Legislation, and Unintended Consequences

I attended a meeting of work comp insurance execs in DC yesterday that addressed, among other topics, the dynamic situation in Texas, fee schedules for drugs, pending Federal legislation and the potential impact on comp, and the Gulf oil spill and its potential ramifications for Jones Act and Longshore/Harbor workers coverages.
While there wasn’t a common theme (beyond the obvious) at the outset, by the end of the morning I was struck (as were several others in attendance) by the unintended consequences of past actions, and potential adverse consequences of future legislation and regulation.
As an example.
California slashed the work comp pharmacy fee schedule just about in half six years ago. Since that time, the number of scripts per claimant has increased 25% and costs per claimant are up 31% (CWCI stats). And that’s not the worst of it. Schedule II narcotics have gone from less than one percent of scripts to almost six percent, a six-fold increase.
Why? How could costs go up if the fee schedule cut prices so deeply?
Simple. Some bad actors figured out how to game the system by repacking drugs and inventing their own prices, prices that were several times higher than they should have been. OK, that was fixed, albeit several years, and several hundred million dollars, later.
But there’s another problem, one highlighted by the huge growth in narcotic dispensing – PBMs could not afford to effectively manage the drugs dispensed to claimants.
PBMs make their margin on the delta between what payers pay the PBM for scripts and what the PBM pays the pharmacy. When that delta is negative, as it is in California, there isn’t any money to pay for data mining to identify potentially problematic prescribers; pharmacies that have low generic fill rates; claimants taking multiple narcotics and/or other meds that may conflict with those narcotics. And if they can identify the issues, they can’t pay pharmacists and physicians to review medical records, contact the treating physician, discuss the issues, and resolve any disagreement.
Sure, PBMs and payers could decide to operate on a cost-plus basis, but there are business reasons payers prefer bundled pricing – its easier to assign it to a file, simpler to administer, and easier to report to clients and regulators.
That’s not to say all PBMs don’t try to clinically manage claimants’ drugs – many do, and do a pretty good job given their severely limited resources. The payers that operate in multiple jurisdictions know that the PBM’s fees in other states subsidize their California drug spend…and as long as California is the only state with a catastrophically low pharmacy fee schedule, that’s OK (unless you’re a California only payer, in which case good luck finding a PBM that will handle your pharmacy at fee schedule). But if other states decide to use a similarly low fee schedule, the wheels fall off the system.
This is but one example of unintended consequence of a seemingly obvious and easy way to reduce comp costs – costs actually increased dramatically, and I’d argue that length of disability did as well for those claimants on narcotics that otherwise would not have been.
The pending sunset of pharmacy networks in Texas is another example; due to the wording of Texas’ comp reform legislation (as interpreted by the decision makers in Texas), PBMs can’t operate in the state after 12/31/2010. There’s a good bit of activity in Austin as various entities attempt to resolve this situation before the end of the year, and there’s some hope those efforts will be successful. That said, there’s no question a lot of work is being done by a lot of people who are tasked with cleaning up the ‘unintended consequence’ of unfortunately-worded legislation.
What does this mean for you?
As some smart person said years ago, “What makes you think you’ll have time to fix it if you don’t have the time to do it right to begin with”. Lest readers construe this as a ‘blame the regulator/legislator’ rant – it isn’t. Rather, stakeholders must engage with the people tasked with addressing these issues – before the laws are passed and regulations written. And yes, regulators and legislators would be well served to listen to those who live these issues every day.

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Joe Paduda is the principal of Health Strategy Associates




A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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