Risk Management

Do Financial Incentives Spur Unneeded Medical Care?

Doctor dispensing of addictive drugs and surgeon referrals to their own ambulatory surgical centers may be driving up workers' compensation costs.
Richard A. VictorNovember 1, 2013

In 2011, workers’ compensation cost employers more than $77 billion, with nearly half of that represented by the cost of medical care, according to the National Academy of Social Insurance. Because of the rise in the kinds of health-care costs that especially hit workers’ compensation, that proportion is likely to have risen in the two years since then.

As CFOs struggle to contain these costs there is one trend that may deserve more attention, and that is the growing issue of physician self-referral. Some examples of self-referral include:

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  • Physician dispensing of prescriptions;
  • Surgeon ownership of surgery centers; and
  • Physician ownership of labs and diagnostic machines.

While limited by Medicare and Medicaid, physician self-referral is thriving in workers’ compensation. This is important for CFOs who are watching the bottom line to note, since the issue influences the cost of employer-paid benefits. It can also affect their employees’ health and ability to return to work.

The Workers Compensation Research Institute (WCRI) has conducted several studies on this issue as it relates to surgery centers and the prescribing and dispensing of prescription drugs. The first example of physician self-referral, doctors dispensing prescription drugs from their offices, is permitted in all but six states.

WCRI has done many studies on this issue. One such study, Physician Dispensing in the Pennsylvania Workers’ Compensation System, found the average price paid for physician-dispensed Vicodin®, a commonly dispensed narcotic pain medication, in Pennsylvania was more than three times as high as the price paid for the same drug dispensed at a pharmacy ($1.22 versus 37 cents per pill). (See graph.)

WCRIThe study also found that prices paid to physician-dispensers in Pennsylvania for many common drugs increased significantly over a three-year period (2008 to 2011) while prices paid to pharmacies for the same drugs changed little or decreased over the same period. For example, the average price paid for physician-dispensed Vicodin® increased 47 percent in Pennsylvania as opposed to 2 percent at pharmacies.

A number of drugs with over-the-counter strengths were commonly dispensed by Pennsylvania physicians at a higher price compared with the price at a pharmacy for the same drug. One such drug was Prilosec OTC®, which costs about $0.67 per pill at Walgreens. However, when Pennsylvania physicians dispensed the drug, they were paid an average of $7.43 per pill.

Rick_Victor_ColumnistWhat all this is telling us is that there is a financial incentive for some physicians to prescribe and dispense drugs from their offices.  And they do that even though they could instruct their patients to go to the local drug store and obtain the same medication at a fraction of the cost.

What the Doctors Say
One of the arguments we hear from the doctors is that it’s more convenient for their patients to get the drugs at their offices. If they were not able to do it, their patients may not get the medications they need, they contend. Doctors also argue that the markup is needed for them to be able to provide such services to their patients.

However, WCRI’s study, Physician Dispensing in Workers’ Compensation,  tells a different story concerning what happened as part of California’s 2007 reform effort. After eliminating the markup, many physicians continued to dispense prescription drugs. But they dispensed them at prices similar to what’s paid to pharmacies for the same drug.

Before the reforms, 55 percent of prescriptions in California were dispensed at physicians’ offices. Three years after the reforms, 45 percent of prescriptions in California were physician-dispensed. As a result of the change, injured workers got similar access to physician-dispensed medications — but at a much lower cost to payers.

California post-reform results answered critics of the regulations who voiced concerns that many patients would not get the medications they need if they could not get them directly from their doctor.

Prescribing Unnecessary Opioids?
A recent study by WCRI, Impact of Banning Physician Dispensing of Opioids in Florida, looked at the impact of a law that went into effect July 1, 2011. The law banned Florida physicians from dispensing stronger opioids (except in very limited circumstances) but did not restrict physician prescribing of these medications. Rather, the stronger opioids could only be obtained from pharmacies.

Analysis_Bug3The study found that the average physician-dispenser in Florida continued to prescribe pain medications after the ban. But they decreased their prescribing of opioids, replacing them with less addictive pain medications like ibuprofen and tramadol. The physician-dispensers could have continued to prescribe the stronger opioids (e.g., hydrocodone-acetaminophen), but would have been required to send the patients to pharmacies.

We expected little change in the percentage of patients getting stronger opioids — only a change from physician-dispensed to pharmacy-dispensed.  Instead of finding an increase in pharmacy-dispensed stronger opioids, however, the study found no material change.  Rather, there was an increase in the percentage of patients receiving physician-dispensed non-steroidal anti-inflammatory medications (e.g., ibuprofen).

This study provides tentative evidence that when given the option to continue prescribing the same drugs (i.e., opioids), but have them filled at a pharmacy, physicians in Florida opted to prescribe less addictive pain medications that they were not banned from dispensing. That allowed them to continue to dispense and earn additional revenues.

Ambulatory Surgical Centers
The last two decades have seen substantial growth in the use of ambulatory surgical centers (ASCs) and in the number of physicians who have ownership interests in these centers.

When a surgeon takes an ownership interest in an ASC, he has a financial interest both as a surgeon and an ASC owner.  This, like physician dispensing, creates an incentive for the surgeon to refer their patients for more services at the ASC they own.

A recent study by WCRI, Why Surgeon Owners of Ambulatory Surgical Centers Do More Surgery Than Non-Owners, examined 941 orthopedic surgeons and compared the number of knee, shoulder and wrist surgeries that each surgeon did before becoming an owner with the number performed after becoming an owner.

The study found that orthopedic surgeons who owned ASCs did about 20 percent more surgery than they did before they became owners.

Since the reform in California dealing with physician-dispensed drugs, a number of states have adopted similar reforms. As of July 2013, at least 14 other states have made law or rule changes with the intention of reducing the prices paid for physician-dispensed drugs while continuing to allow physicians to dispense drugs directly to their patients.

The debate has not focused on whether the economic incentives attendant to physician dispensing (like any form of physician self-referral) lead to prescribing and dispensing of unnecessary medications.

Self-referral as it relates to ownership of surgery centers has not received the same attention from state policymakers, but WCRI has more studies planned to learn more about this issue.

What can CFOs do about the unnecessary care and costs that may result from physician self-referral? The simple answer is get involved. Work with your medical and claim managers. Help educate public officials on these issues.

Richard A. Victor is executive director of the Workers Compensation Research Institute (WCRI), an independent, not-for-profit research organization based in Cambridge, Mass.