California becomes fifth state to require closed drug formulary for workers' compensation claims

By Kate Riordan November 16, 2015

California Governor Jerry Brown has signed Assembly Bill No. 1124, which mandates that the Division of Workers’ Compensation (DWC) implement a prescription drug formulary by July 1, 2017. The bill, sponsored by Henry Perea (D-Fresno), makes California the fifth state—along with Texas, Oklahoma, Washington, and Ohio—to provide a closed pharmacy formulary for medications prescribed to injured workers.

A closed formulary is a predetermined list of prescription medications approved for certain medical conditions. Unapproved medications, commonly referred to as “N” drugs, will need prior authorization for payment. The law also requires the DWC to meet with stakeholders and publish interim reports describing the status of the formulary, provide quarterly updates, and create a Pharmacy and Therapeutics Committee to review and consult with the DWC regarding those updates. It’s significant that the new law will enable the DWC to update the formulary without a formal administrative rule-making process (which would require a public comment period and a public hearing).

Proponents of the closed drug formulary concept laud its potential to reduce costs, improve predictability in provider behavior, and provide a seamless experience in medication delivery to injured workers. This change is particularly valuable because increases in medical costs and pharmacy spend can pose barriers to timely claim settlement and potentially delay an injured worker’s return to employment.

Perea’s office referenced a study published by the California Workers’ Compensation Institute (CWCI), indicating that a closed drug formulary in the state based on the Washington state formulary and the current Texas ODG (Official Disability Guidelines) model could lead to a savings of up to $420 million annually.i The Texas model, adopted in 2011, distinguishes between new and legacy claims. The Texas Department of Insurance released a report early this year finding that the cost of “N” drugs in new claims fell by 83 percent and the average pharmacy cost in legacy claims dropped 18 percent in the first month they became subject to the formulary.ii The study also revealed the generic substitution rate for “N” drugs increased, leading to lower costs.

When the new law goes into effect, the potential costs savings may have a direct impact on premium costs in California. In addition, a CWCI study indicates that 44 percent of utilization reviews and 35 percent of independent medical reviews involved disputes over pharmaceuticals.iii  When providers adhere to a list of approved medications for specific conditions, the number of disputes and reviews filed should decrease, thereby leading to reduced administrative costs and faster delivery of medications for treatment.

Formularies are likely to remain a hot topic over the next five years. Almost a dozen other jurisdictions are currently considering drug formularies in their workers' compensation system. California’s implementation of AB 1124 will be closely watched across the country as lawmakers seek to reduce opioid access and addiction and insurers seek to rein in skyrocketing medical costs while maintaining the integrity of patient care.

 


i Swedlow, Alex, MHSA, Steve Hayes, MHSA, and Rena David, MBA, MPH. Are Formularies a Viable Solution for Controlling Prescription Drug Utilization and Cost in California Workers’ Compensation. Rep. Oakland: California Workers’ Compensation Institute, 2014. Web 21 Oct. 2015.

ii Impact of the Texas Pharmacy Closed Formulary. Rep. Texas Department of Insurance Workers’ Compensation Research and Evaluation Group, Feb. 2015. Web 22 Oct. 2015.

iii Swedlow, Alex, MHSA, Steve Hayes, MHSA, and Rena David, MBA, MPH. Are Formularies a Viable Solution for Controlling Prescription Drug Utilization and Cost in California Workers’ Compensation. Rep. Oakland: California Workers’ Compensation Institute, 2014. Web 21 Oct. 2015.


Kate Riordan

Kate Riordan is the director of Medicare Secondary Payer (MSP) initiatives at ISO Claims Partners. She has well over five years of experience in completing Medicare Set-Asides and obtaining CMS approvals, with a concentration in California claims. Kate graduated Bowdoin College and Suffolk University Law School and is a Medicare Set-Aside Certified Consultant.