New CWCI research shows that compounded drugs accounted for a declining share of California workers’ compensation prescriptions last year following reforms intended to contain the use and associated costs of these drugs and changes in how they are billed, but despite this decline, compound drug reimbursements continued to account for a growing proportion of the workers’ compensation prescription dollar as the average amount paid for a compounded prescription jumped 68 percent.

Compounded drugs are created by combining, mixing or altering two or more ingredients into a customized medication for an individual patient in response to a licensed practitioner’s prescription. They are not evaluated for safety or efficacy by the U.S. Food & Drug Administration, which over the past several few years has become increasingly concerned about potential health and safety issues associated with these drugs. In workers’ compensation, most compounded drugs involve painkillers mixed into topical creams.

In 2010, a CWCI study found that use of compounded drugs to treat injured workers began to increase sharply in 2007 when California adopted stricter price controls on high-priced repackaged drugs dispensed through physician offices. Rising utilization and payments, coupled with growing concerns over safety, prompted state lawmakers to enact AB 378, which effective January 1, 2012, tightened billing requirements for compound drugs dispensed to injured workers (including a requirement that they be billed at the ingredient level); established unit price controls to cap reimbursements; and added compounded drugs and pharmacy goods to the list of products that workers’ compensation physicians are prohibited from self-referring. In 2011, the state also adopted new workers’ compensation medical billing standards, establishing standard billing forms, required fields and code sets, supporting documentation, and transmission standards for paper bills submitted on or after October 15, 2011.

To measure compound drug trends in the aftermath these changes, the study’s authors examined data from a sample of 586,575 California workers’ compensation prescriptions from two time periods: those filled in the first six months of 2011, prior to the changes, and from the first six months of 2012, following the changes. Comparing the data from these two periods, the authors found that following the implementation of AB 378, compounded drugs fell from 3.1 to 2.0 percent of the workers’ compensation prescriptions (a relative decline of 36.7 percent) but at the same time, compounded drug payments continued to grow, increasing from 11.6 percent of the payments in the 2011 sample to 12.6 percent of the payments in the in the 2012, as the average amount paid for compounded medications rose 68.2 percent, from $460 in the 2011 sample to $774 in the 2012 sample.

A comparison of the 2011 and 2012 data at the ingredient level traced the recent increase in compounded drug payments to a shift toward compounded prescriptions containing a larger number of ingredients (13.1 percent more ingredients in the 2012 compounds) and more costly ingredients (the average cost per ingredient jumped 48.7 percent). In addition, compounds contained greater quantities per ingredient (the average amount of each ingredient rose 25.5 percent) with a marginal 3.5 percent decrease in the average days’ supply per compounded prescription, which is often indicative of higher potency formulations. Without increased federal oversight of drug compounding, and/or mandatory independent clinical trials to confirm the safety and efficacy of compounded drugs, these findings suggest that unit price controls alone, without stricter utilization controls such as Medicare’s ban on non-FDA approved medications or the adoption of a pharmaceutical formulary, are not enough to contain the growth of compounded drug costs in workers’ compensation.

The Institute has published additional details on the study, including background information, data tables and an appendix showing the 2011 and 2012 distributions of the most frequently used compounded drug ingredients, in a CWCI Research Note, “Current Trends in Compound Drug Utilization and Cost.” The report is posted in the Research section of the Institute’s website, www.cwci.org.