Tuesday, August 07, 2012

The Incredible Economics of Physician Dispensing

The Workers Compensation Research Institute just-released Physician Dispensing in Workers' Compensation, a data-based analysis of the pricing of prescriptions associated with worker’s comp claims. (The report is $25 for members and $45 for non-members.)

The results are less-than-super news:
  • In some states, physician-dispensed scripts are more than 40% of the worker’s comp market.
  • Physician-dispensed pills were 60% to 300% more expensive than retail pharmacies.
  • Some physicians routinely prescribe over-the-counter drugs and are paid large multiples of retail cash prices.
  • Repackaging frequently inflates Average Wholesale Price (AWP) for physician-dispensed prescriptions
Although pharmaceutical manufacturers play no part in these schemes, I suppose it’s only a matter of time before the trial lawyers go after the drug makers anyway.


The report is based on more than 750,000 worker’s compensation claims and the 5.7 million prescriptions associated with those claims. The claims are from 23 states and cover work-related injuries from 2006 through 2010, with prescription filled through March 2011.

In my opinion, the data and conclusions are credible, although Joe Paduda of Managed Care Matters reports that one major physician-dispensing technology vendor is unhappy with the study. Yawn.

Note that the WCRI's data and critiques do not apply to dispensing of oral oncology drugs by oncology practices, as discussed in Oral Oncology Channel Battle: Payers vs. Providers. As far as I know, oral oncology drugs are rarely (if ever) repackaged. Plus, dispensing from oncology-practice affiliated pharmacies is still a small portion of the oncology market.


Physician-dispensed worker’s compensation scripts are a surprisingly large share of the market. Physician dispensing is more than 40% of scripts paid by worker’s compensation in such large states as California, Illinois, and Florida.

Three states—Massachusetts, New York, and Texas—generally prohibit physician dispensing, although a practice can usually dispense drugs if it obtains a separate pharmacy license. Appendix A of the report has a very helpful guide to state laws regarding physician dispensing and reimbursement.

The most damning evidence comes from a comparison of reimbursement paid to pharmacies vs. physicians. Prices per pill paid to physicians were 60% to 300% higher than prices paid to pharmacies. Here’s a snapshot of prices per pill for hydrocone-acetaminophen (Vicodin)  in three states:

As you can see, prices for the physician-dispensed scripts went up, while pharmacy prices went down. Hmmm…

Some physicians also routinely prescribe over-the-counter drugs, such as omeprazole (Prilosec) and randitidine HCL (Zantac). In four states, these two drugs accounted for about 8% to 11% of all physician-prescribed worker’s compensation prescription claims. Even more startling, prices were 5 to 15 times higher than retail prices at a major chain drugstore.


Illinois illustrates the warped incentives that created this system.

In the Land of Lincoln, physician-dispensed worker’s comp drugs are reimbursed at Average Wholesale Price (AWP) plus $4.18. There is no requirement that the original manufacturer’s National Drug Code be used for pricing, although the state is apparently reconsidering this approach.

Compare that rate with the discounts paid to retail pharmacies. According to PBMI’s 2011-12 Prescription Drug Benefit Cost and Plan Design Survey, 30-day retail prescriptions are paid at AWP minus 16.4% plus an average dispensing fee of $1.54.

For a prescription with an AWP of $200, the physician-dispensed prescription would be $204.18, while the pharmacy-dispensed prescription would be only $168.74.

Nice work if you can get away with it.


As the report notes, repackaging companies help make physician-dispensed drugs even more profitable.

All U.S. drugs are identified and reported using a universal product identifier called the National Drug Code (NDC). The first segment of a product’s NDC identifies the Labeler for a specific drug product. Each Labeler is assigned a unique 4 or 5 digit code by the FDA.

Repackaged drugs are drugs manufactured by FDA-licensed manufacturers and purchased in bulk by FDA-regulated repackaging companies. When these companies repackage the drugs, they can assign a new NDC number to the repackaged drug and then report a new Average Wholesale Price (AWP) for this "new" NDC.

Prest-o, change-o! The AWP can fly!

A 2009 GAO study—Brand-Name Prescription Drug Pricing: Lack of Therapeutically Equivalent Drugs and Limited Competition May Contribute to Extraordinary Price Increases—shed light on this issue. The report found that most repackaged drugs are typically sold to health care providers—hospitals or physician’s offices—who then resell them to patients. Apparently, this report escaped the attention of the folks administering worker’s compensation programs.


Believe it or not, California altered the incentives by requiring equal payments for physician- and pharmacy-dispensed prescriptions. In 2007, California required that the fee schedule for physician-dispensed drugs be based on the original manufacturer NDC for the drug.

Magically, the price premium for physician-dispensed drugs vanished, and the percentage of scripts for repackaged drugs plummeted. Shocking, right?


If you have any interest in physician-dispensing, then I suggest you purchase this report. I learned a lot about this murky market.


  1. I agree that this is an issue.  Two comments.

    1. The reimbursement for retail pharmacies for WC claims is different than commercial or Medicare claims (typically).  They are reimbursed at a higher rate.  If I understand right, this was driven by the old market where Third Party Billers would buy the Rxs from the retailer based on a factoring process and get reimbursed by the WC carrier.  Some of this has changed although ESI is the only big PBM in this market.

    2. Although it's less than 2% of the commercial market, I think the same process and issues arise for commercial in-office dispensing by physicians where the drugs are repackaged and repriced. 

    From what I learned last week, it appears to be different for oncologists where in many cases they're losing money (about 25% of Rxs) and the ASP +6% creates a disincentive to use generics.  (http://georgevanantwerp.com/2012/08/02/when-is-it-good-to-pay-300-percent-profit-for-a-medication/)

    Either way, the in-office dispensing process is convenient to the consumer and offers very limited revenue to the physician (except in rare cases) but can create pricing anomolies.  IMHO

    One interesting question is whether with ACOs and PCMHs this practice will grow as MDs will be more focused on adherence starting with the initial script. 

  2. Thanks Adam for this informative post. I have heard claims that patient compliance is better when the dr dispenses the drug to the pataient and also that 30% of scripts are not filled. I have not seen any study or data to validate those claims.  Are you familiar with these studies and if so, would you comment on them?

  3. I haven't looked at those studies. I presume those studies adjust for therapy class, because adherence for an asymptomatic condition (high blood cholesterol, say) would naturally be lower than a pain-related condition.

    In fact, we have the opposite of an adherence "problem" for pain medicines, which are a big part of the physician-dispensing market.

    Note that the WCRI data are for filled prescriptions.

  4. The ASP reimbursement issue does not apply to this analysis. The physician-dispensed drugs in this study were oral solid pills, not injected or infused products. Most (all?) do not have a published ASP.

    As I note, these results also do not apply to oncology practice-affiliated pharmacies dispensing oral oncology drugs. that is an entirely different issue from both the WCRI data and the ASP issue.

    For thoughts on ASP reimbursement for generic injectables, see Ending Drug Shortages by Fixing Reimbursement and Profits from Generic Injectables: Too High or Just Right?.

  5. PUTT-Dave MarleyAugust 08, 2012

    A couple of important points not mentioned include:

    PBMs have co-opted most if not all of the retail pharmacy market creating a stupid legislated spread. 

    So the AWP "plus" for a generic Darvocet is say $78.03, and the PBM pharmacy MAC is $18.20, the PBM keeps the spread difference.

    Yes I have the actual PBM and pharmacy documents in hand...even a copy of the state's check.for this patient, 6 drugs filled one time....pharmacy paid by th PBM $914.80, and the PBM was paid $1410.28. for a one time fill profit to the PBM of $500....STUUUUUPID!!!

    Since the PBM payment is readily available for all to see in state regulations, and the pharmacies are willing sharing what they got paid, the "anecdotal" argument has no merit in the case. What we have is readily documented and legislated spread.

    Also, does anyone really believe repacked and inflated AWPs is limited to physician dispensing and not being done in mail order? Again I have those manufacturer repacked bottles that say "for mail order only". Sorry, but this DOES implicate PHARMA in the scam.

    The current WC model is outdated (created before the digital/PBM age) and needs serious attention by all 50 state legislators who are either unaware or turning a blind eye to huge PBM facilitated "fraud, waste, abuse". 

    .....and yes it is in the works for PUTT in a BIG way :) 

  6. If these spreads were the norm, then PBMs would report gross margins higher than 6-8%.

  7. Adam HaightAugust 09, 2012

    Physicians' offices are not retailers with other products to sell and 'mark-up'.  In our occupational health clinics, we dispense our own medications to alleviate the need for our patients (many of whom do not drive) to then travel to a licensed pharmacy to receive their needed scripts.  We also are not in the business of repackaging our meds to increase our profits from dispensing necessary medications.  Many of our patients work in dirty environments and if someone with a minor laceration comes in to our clinic for treatment and we send them out to pick up a script for an Antibiotic and the patient doesn't start on the Antibiotic soon enough, the minor laceration can turn into an infection increasing the severity of the injury.  Had we been able (like we are now) to start them on the Antiobiotics during the initial evaluation, the infection could have been prevented.  Also, one should expect to pay a little more to receive their medications from the doctors' offices because it's a service the doctors' office is providing them.

  8. Double StandardAugust 14, 2012

    This comment has been removed by a blog administrator.

  9. No one is questioning an antibiotic cream for urgent care. The WCRI study focused on worker's comp medications (mainly pain meds) with recurring prescriptions. 


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