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Compound drugs fuel dispute between docs, insurers, labor

It started in a small way, doctors’ use of specially mixed drugs to help treat workers injured on the job.

But in recent years, the practice has ballooned, driven by a lack of fiscal safeguards on the sale and distribution of so-called compounded drugs for the treatment of injured workers in the state’s workers’ compensation insurance system.

The issue is thorny and contentious, in part because it deals directly with the pocketbook, in part because doctors believe there is a potential here to interfere with their medical decision-making.

The use of compounded drugs – mostly creams and ointments – has risen exponentially. One 2010 study found that sales of the medications and so-called “medical foods” more than quadrupled, from 2.3 percent to 12 percent between 2006 and 2009.

Compounded drugs, mixed and dispensed by doctors and some pharmacies – now entail sales worth at least $100 million annually, experts believe. The mixtures aren’t FDA-approved but are legal.  

But a problem has arisen: The medications’ costs aren’t adequately controlled, contend critics of the existing system, as in other programs that entail government reimbursements, such as Medi-Cal, which has a detailed fee schedule. That schedule defines how much medical providers receive for specific services.

Legislation awaiting action in the Senate, AB 378 by Assemblyman Jose Solorio, D-Santa Ana, would pave the way for such a schedule. It blocks doctors from referring patients to any place for medications in which the doctor has a financial interest. It also requires compounded drugs to be billed at the ingredient level – a move that conforms with rules already in place at the state Pharmacy Board.

On Wednesday negotiations between the rival parties were under way to reach a compromise on the legislation by midnight Friday, when the Legislature adjourns for the year. Late Wednesday, however, it failed on a Senate vote. Lawmakers agreed to reconsider the measure, which means it could come up again, however.

The bill has an odd array of supporters – including the California Labor Federation, the American Insurance Association and the Association of California Insurance Companies. Foes are led by the California Medical Association and the California Pharmacists Association, among others.

For them, the problem is that the fee schedule sought by Solorio reflects antiquated dollar amounts and, ultimately, shortchanges those who dispense the medications.

“It (the bill) includes pharmacy compounding but for the methodology, they are relying on a medical fee schedule that hasn’t been updated for 30 years. We propose ingredient costs, plus appropriate (reimbursement) for time and expertise,” said Jon Roth, CEO of the 5,000-member California Pharmacists Association.

Pharmacies are increasingly getting into compounded medications, he added. “It’s getting back to the roots of pharmacies, with customized medications specific to the patient’s illness.”

The ingredients are provided to the doctors by makers or wholesalers – sometimes fee of charge – who mix and dispense the medications, then receive reimbursement through the workers’ compensation system. In some cases, a third-party bills the system on behalf of the physician. Some pharmacies, called compounding pharmacies, also mix and dispense the medications.

Physicians note that the compounded drugs are specifically tailored to the needs of individual patients, especially in cases of injured employees because “they (compounded drugs) focus on pain management and musculoskeletal injuries, which are common among injured workers,” according to an Assembly analysis.

The State Compensation Insurance Fund, a quasi-governmental entity that provides workers’ comp coverage to employers, has told  doctors to halt prescribing compound drugs without prior permission of an insurance adjuster or under an order of a workers’ compensation judge.

The 35,000-member California Medical Association said this week that SCIF’s move interfered with a doctor’s decision making, even to the point of barring medications at all “regardless of medical necessity.”

The CMA “believes that these new provisions are an attempt by SCIF to exert control over physicians’ practice of medicine and clinical judgment,” the association noted in a written statement, requiring doctors “to treat injured workers differently than other patients and violate state law, which allows for prescribing, dispensing, furnishing or administering controlled substances …”

The CMA also said SCIF’s rule could force physicians to be “kicked out of the MPN (medical provider network)” from which doctors are chosen to treat workers in the workers’ compensation insurance system.

But Solorio is skeptical about the need for compounding.

“Drug compounding – a legal but rarely necessary practice – has exploded as a physician profit-center in workers’ comp,” he said in a statement provided through his Capitol staff. “The State Compensation Insurance Fund reports that what was “rarely” billed prior to 2007 rapidly escalated to over $58 million in billings in a 16-month period. That practice must be stopped,” he added.

The bill’s principal backers agreed.

“Drug compounders have been able to circumvent the existing pharmacy fee schedule and as a result, pharmacy costs are increasing. One company reported their costs for compound drugs now makes up 44 percent of their pharmacy costs – up from 9.6 percent the previous year,” said a message to lawmakers from the insurers and the California Labor Federation.


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