Purpose: The California workers' compensation (WC) system is under review regarding the rising costs to the State of California, insurance carriers and employers. The legislature, in an attempt to control rising costs, approved Senate Bill 228, a new pharmaceutical pricing system based on the Medicaid reimbursement model. Using data from WC insurers, we determined if the decision to change the new pharmaceutical pricing system produced the proposed economic benefits. In addition, we assessed alternative drug pricing methods that could be used to support future WC pharmacy payment legislation.

Methods: A large workers' compensation insurers' database from the California Workers' Compensation Institute and Medi-Cal pharmacy expenditures from the State Drug Utilization Project are analyzed to compare utilization and savings to WC in 2002 with the new pharmacy legislation. More specifically we substituted Medi-Cal amounts paid in 2002, for the total workers' compensation drug amounts paid in 2002 for pain and pain-related medications and calculated differences in costs between the two systems. Analysis was with linear regression

Results: Compared to the former California WC fee schedule, the newly implemented 100% Medi-Cal fee schedule will result in a savings of $125 million, a 29.5% reduction. However, 60% of the former system could not be converted to a Medi-Cal reimbursement model because there was no substitute price, so legislation was changed to keep these payments the same. We suggest alternative methods including using Medi-Cal with Average Wholesale Price (AWP) minus 10% which saved $146 million. A simpler alternative payment system based entirely on AWP minus 10% saved $124 million. Linear regression demonstrated a large variability in savings across drugs and was dependent upon drug characteristics such as generic versus brand and time on market.

Conclusions: Despite the large savings in pharmaceutical costs, inconsistencies between the new pharmaceutical payment system and the current system could lead to negative incentives and uncertainty for long-term savings. Alternative pricing systems could be considered by the legislature. In addition, management of type and amount of prescribing should be combined with drug pricing improvements in future WC legislation to obtain the maximum savings.