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Regulatory Impact Statement for the addition of Subchapter M,
Parts 440 and 442 to Title 12 NYCRR


  1. Statutory Authority: Workers' Compensation Law (WCL) §117 authorizes the Chair of the Workers' Compensation Board (Board) to adopt reasonable rules consistent with the provisions of the WCL. Chapter 6 of the Laws of 2007 added Section 13-o to the WCL mandating that the Chair adopt a pharmaceutical fee schedule. Chapter 6 amended WCL Section 13 to add new subdivision (i). Paragraph (5) of said new subdivision requires the adoption of regulations defining the reasonable distance for a claimant to travel to obtain prescriptions. WCL Section 13(a) was amended by Chapter 6 to mandate that the Chair establish a schedule for charges and fees for medical care and treatment. Part of the treatment listed under Section 13(a) includes medical supplies and devices that are classified as durable medical equipment (hereinafter referred to as DME).
  2. Legislative Objectives: These proposed regulations provide fee schedules to govern the cost of prescription medicines and DME in order to control the cost of workers' compensation insurance. In fact the 20 percent rate decrease announced in July 2007 by the Superintendent of Insurance included savings from the pharmacy fee schedule adopted on July 11, 2007. Additionally, these proposed regulations provide process and guidance for claimants, employers, insurance carriers, third party administrators and self-insured employers regarding the operation of pharmacy networks and the payment of prescription and DME bills according to a uniform standard so that delays in reimbursement or payment to claimants or pharmacies are reduced or eliminated.
  3. Needs and benefits: Chapter 6 of the Laws of 2007 enacted sweeping reforms of the New York workers' compensation system. Among other things, the legislation requires the Chair to adopt a pharmacy fee schedule and a fee schedule to govern reimbursement of DME. In a major shift, the legislation authorizes insurance carriers and self-insured employers to require claimants to obtain prescriptions from a designated pharmacy or one that is part of a network with which the carrier or self-insured employer has contracted. Prior to this legislation, carriers and self-insured employers were prohibited from directing claimants as to where to obtain prescription medicines, unless the carrier or self-insured employer utilized a Preferred Provider Organization (PPO). Even then claimants could opt out of the PPO after thirty days. To ensure claimants do not have to travel long distances to reach a designated pharmacy, WCL Section 13(i)(5) requires a pharmacy location to be within a "reasonable distance" of the claimant's home if the option of a mail order pharmacy is not available. The term "reasonable distance" is to be defined in regulations. Finally, new WCL §13(i) (2) sets forth the time period and process by which bills for pharmaceuticals must be paid.

    The purpose of the rule is to comply with the requirements of the legislation. The rule sets forth the fee schedules for prescription medicines and DME. Without this rule, there will be no set fee for prescriptions or DME and pharmacies and providers of DME will be able to charge the price they set. The carrier or self-insured employer must then pay the billed cost or object to the portion which is determined to be excessive or greater than the charges that prevail in the claimant's community. In the past a particular pharmacy has charged more than twice what is considered the customary charge. Disputes over the payment for prescription medications to pharmacies must, in many cases, be decided by a Workers' Compensation Law Judge (WCLJ). Using hearings to resolve these disputes is very costly and time consuming. The time a WCLJ spends deciding the correct payment to a pharmacy is time not spent adjudicating claims for benefits. By having a set fee schedule, there is no dispute over the proper payment for a prescription.

    The fee schedule also provides savings to carriers, and ultimately to employers by reducing the cost of workers' compensation insurance. These entities will indirectly benefit from the savings afforded by setting the fee schedule at average wholesale price (AWP) minus 12% for brand drugs and AWP minus 20% for generic drugs. Those carriers and self-insured employers currently paying AWP will realize savings of approximately 12 percent for brand name medications and 20 percent for generic medications.

    The fee schedule also provides savings to carriers, and ultimately to employers by reducing the cost of workers' compensation insurance. These entities will indirectly benefit from the savings afforded by setting the fee schedule at average wholesale price (AWP) minus 12% for brand drugs and AWP minus 20% for generic drugs. Those carriers and self-insured employers currently paying AWP will realize savings of approximately 12 percent for brand name medications and 20 percent for generic medications. The regulations define AWP as the price provided in the Red Book by Thomson Media or Medi-Span Master Drug Database by Wolters Kluwar Health. There are currently three providers of AWP: the Red Book, the Medi-Span Master Drug Database or the Blue Book by First DataBank. In the past the Board had identified the Red Book by Thomson Media as the sole source for providing AWP.

    There were two reasons for the use of Red Book as the sole source. First, the same drug may have a different AWP in each source. This results in the pharmacy using the source with the higher AWP than a different source used by the carrier. Second, in March 2009, Judge Saris of the United States District Court of the District of Massachusetts in the actions, New England Carpenters Health Benefits Fund, et. al. v. First DataBank, Inc. & McKesson Corp. (Civil Action No. 05-11148-PBS) and District Council 37 Health & Security Plan v. Medi-Span, a division of Wolters Kluwer Health, Inc. (Civil Action No. 07-10988-PBS), issued a Final Order and Judgment Certifying the Class for Purposes of Settlement, Approving of Class Action Settlement, and Dismissing the Action with Prejudice (Final Order and Judgment). Specifically, Judge Saris, as set forth in her Memorandum and Order dated March 17, 2009, approved the Amended and Restated Settlement Agreements filed with the Court, including the adjustment to the Wholesale Acquisition Cost (WAC) to AWP mark-up used by the defendants for certain brand name drugs that has a mark up factor basis in excess of 1.20, to 1.20. In other words where the mark up from WAC to AWP is greater than 1.20, the mark up must be reduced to 1.20 which results in an approximately 4% reduced in the AWP for the brand drugs included in the civil action. This change must occur 180 days from the entry of the Final Order and Judgment, which was September 26, 2009. As of that date, First Databank and Medi-Span will be reducing the AWP for all brand drugs by approximately 4%. Judge Saris' order resulted from allegations that First DataBank and Medi-Span conspired with drug wholesaler McKesson Corporation to inflate the AWP benchmark for the time period of 2001 to 2005, which caused consumers and payers to overpay for drugs.

    However, since that time the Board has been notified that Red Book does not publish an AWP for all drugs that may be prescribed to workers' compensation claimants. In addition, Red Book by Thomson Media has discontinued its print and CD publications, and at least one user of the emergency Pharmacy Fee Schedule has contended that it can no longer afford a subscription to Red Book. Finally, Medi-Span has been publishing AWP in conformity with Judge Saris' order. Thus users of the Pharmacy Fee Schedule have more than one source for identifying the AWP of a particular drug. As First Databank discontinued publishing AWP in September 2011, the Board has not included it in the definition of AWP.

    Additionally, the rule requires carriers to provide notice to a claimant that a network pharmacy has been designated and the procedures for filling prescriptions at the designated network pharmacy. The rule sets forth the information that must be included in the notice and the time frame within which notification must be given to the claimant and by the proper means to deliver such notice. Contracting with a pharmacy or pharmacy network and requiring its use is voluntary on the part of carriers and self-insured employers so there is no requirement or mandate that they require claimants to use the pharmacy network.

    The rule also facilitates direct billing of the carrier by the network pharmacy. This benefits the carrier as well as the claimant by reducing the delays inherent in submitting bills to the carrier by the claimant. Direct billing benefits the claimants by eliminating the out-of-pocket costs when they use a network pharmacy. Pharmacies benefit by the reduction or elimination of delay in payment. The rule also provides an incentive to pharmacies to provide prescription drugs in cases where liability is controverted by the carrier by providing an increased dispensing fee, as well as an increase in price of 25 percent.

    The rule will benefit self-insured employers and carriers by providing a set fee at which the pharmacy or claimant is to be reimbursed. A uniform standard for pricing will reduce the claims litigation which arises when there is a price difference between the price a carrier believes is usual and customary and the price billed by the pharmacy. This rule also allows self-insured employers, carriers and their agents to select a pharmacy that can provide a cost savings and provide the same or better service to a claimant. The rule will benefit workers' compensation claimants by reducing the cost of prescriptions that a claimant pays out of pocket, while increasing certainty as to the amount they will be reimbursed, reducing delay in reimbursement and increasing the use of direct billing to the carrier rather than out of pocket payments by a claimant.

    The rule will also benefit the Board as it is anticipated that there will be a reduction in the number of hearings held to determine the proper amount of reimbursement to claimants for prescription drugs or DME.

    Using AWP minus 12% for brand and 20% for generic eliminates the problems inherent with using the Medicaid fee schedule. First, the Board has had to expend significant resources to answer the questions and confusion as to what part of the Medicaid pharmacy fee schedule applies to workers' compensation claims. For example, Medicaid rules require medical providers to note on a prescription not only to dispense as written (daw) but that the brand is medically necessary in order for the pharmacy to be reimbursed at a higher amount. The notation of brand medically necessary is not applicable to workers' compensation but not all pharmacies and payors understood this and pharmacies received differing amounts. Another issue with using the Medicaid fee schedule that the Board had to research and address was the refusal by some pharmacies to fill some prescriptions for brand drugs because the reimbursement listed on the Medicaid fee schedule on the Department of Health Medicaid website was so low it did not cover their cost to purchase the drug. Research revealed that cost alternative amounts were not listed on the Medicaid website which would enable the pharmacies to recoup their cost for the drugs. The failure to list the cost alternative amount was not an issue for Medicaid because it is a single source payor with claims submitted through a closed, electronic system. On the electronic system the correct reimbursement amount was noted.

    Second, the Medicaid pharmacy fee schedule does not include all prescription drugs. The language of WCL §13-o states that reimbursement for drugs not on the fee schedule shall be usual and customary once the drug is approved for use by the Chair. This provision resulted in some claimants being unable to obtain prescriptions that were not on the fee schedule and had not been approved by the Chair. The fee schedule in this rule eliminates these problems.

    Third, reimbursement under the Medicaid fee schedule is, at a maximum, as of July 1, 2008, AWP minus sixteen and a quarter for brand name drugs and AWP minus twenty-five percent for generic drugs. Prior to July 1, 2008, the reimbursement for brand name drugs was AWP minus fourteen percent at a maximum. In addition to the discounts from AWP, the Medicaid fee schedule also applied the Federal Upper Limit and the State Maximum Acquisition Cost as appropriate. The use of the Medicaid fee schedule resulted in some pharmacies receiving less in reimbursement than it paid to acquire the drug. It also forced at least one pharmacy benefit manager to stop doing business in New York as it could not cover the cost of doing business.

    To ensure compliance with the provisions of the rule, the Chair may seek documents and impose penalties for failing to comply with the rule. This provision will ensure that claimants that do have to pay out of pocket are not charged more than the fee schedule.
  4. Costs: There are additional costs for carriers or self-insured employers. They are liable for the cost of medications if they do not respond to a bill for prescription drugs sent by a pharmacy or claimant within 45 days. This cost does not apply if carriers or self-insured employers respond in a timely fashion as provided by the rule. This cost is imposed by the legislation as WCL §13(i)(1) – (2) requires the 45 day response. There are costs associated with sending the required notices, such as the one set forth in Appendix B to the claimant that a network pharmacy has been designated and the procedures to follow in utilizing the network pharmacy. However, in many cases the required notices can be sent with currently required forms so there should be limited additional postage necessary. These costs are only applicable if the carrier or self-insured employer voluntarily decides to mandate the use of its pharmacy network.

    Pharmacies will have a minimal cost associated with posting a notice that they are part of a designated network. This requirement only applies if the pharmacy posts a notice or notices listing the insurance programs it accepts. The fee schedule will also reduce the amount that a pharmacy can charge for a drug, but it will cover the cost of purchasing the drug. This should help to reduce the burden of posting the notice and improve access for claimants. It should be noted that fee schedules are used in many other areas such as Medicare, Medicaid, and No Fault Insurance which were implemented to reduce costs associated with these programs. Pharmacies will also see this cost offset by the reduction in administrative expenses associated with seeking reimbursement from the carrier since the carrier must pay or object within forty-five days and the fee schedule will eliminate controversies regarding the reimbursement cost of a drug. The procedures for processing bill payment and reimbursement are anticipated to remain the same; therefore, no additional costs associated with record keeping or processing claims will be incurred. However, the rule does provide that the Chair will use his authority under WCL §111 to seek documentation to enforce the rule and impose penalties for non-compliance. The new rule will allow carriers, self-insured employers and their agents to contract with a pharmacy or network of pharmacies to provide prescription drugs or DME, thus allowing them to negotiate for the lowest cost of providing such drugs or DME. The use of a uniform price standard will reduce the number of hearings necessary to determine what amounts are due and owing to a claimant thus reducing the costs necessary for legal representation at the hearing. It is anticipated that costs will be reduced for claimants.
  5. Local government mandates: A municipality or governmental agency that is self-insured is required to comply with the rules for reimbursement for prescriptions. These provisions are mandated by statute. Municipalities or governmental agencies have the option to designate a pharmacy network; however, the fee schedule will still afford substantial savings to a municipality or governmental agency if a pharmacy network is not designated. If a local government decides to contract with and mandate the use of a pharmacy network, there will be some cost from sending the required notices. However, it is expected that the regulation will actually reduce costs by allowing self-insured local governments to negotiate for lower prescription costs with contracted pharmacies.
  6. Paperwork: There are notification requirements that must be met by carriers, employers and pharmacies. Carriers and self-insured employers which decide to contract with and mandate the use of a pharmacy network are required by Section 13(i)(5) of the new legislation to provide notice to claimants that a pharmacy network has been designated and that claimants are required to use it to fill their prescriptions. The regulations specify the notice in Appendix B. Additionally, notice must be given to all employees when a carrier or self-insured employer contracts with a network so that when an employee is injured he or she knows to use a network pharmacy. This will eliminate the need for the claimant to pay out of pocket and to maximize the savings for the carrier or self-insured employer. When contracting with a network, a carrier or self-insured employer also has the option to establish a streamlined method of payment, eliminating the receipt of multiple bills for prescriptions. In addition, as required by WCL §13(i)(1) – (2), carriers and self-insured employers are required to respond to a prescription bill within 45 days or they will waive any objection to payment of a prescription bill. Carriers and self-insured employers who voluntarily decide to contract with a pharmacy network are also required to certify annually to the Board that the pharmacies in the designated network are in compliance with the regulation. Self-insured employers who, and employers whose carriers, require the use of a pharmacy network are required to post notice in the workplace that a network pharmacy has been designated and the procedures for utilizing the network pharmacy as well as providing notice to the claimant. Pharmacies are required to post notice that the pharmacy has been designated as a network pharmacy, but only if it already posts a notice or notices listing the insurance programs in which it participates. The existing procedure of submitting bills and reimbursement requests to the carrier, third party administrator, or self-insured employer will remain the same. While the regulation requires a number of notices, this is to ensure the claimant is aware of the arrangement with a network and the requirement to use the network to benefit carriers, claimants and employers through lower costs.
  7. Duplication. There is no duplication.
  8. Alternatives. Based upon the mandate of the Legislature to establish fee schedules, the Chair is required to promulgate regulations in order to ensure the orderly implementation of the proposed fee schedules. To fail to delineate the responsibilities of all participating parties would be imprudent as it would lead to confusion on the issue of timely payment and cause an increase in the number and length of hearings required to resolve this issue. The Chair originally adopted the Medicaid fee schedule but for the reasons set forth above he has decided to adopt a different fee schedule. Originally a pharmacy fee schedule was developed using other states fee schedules as a model with reimbursements of AWP minus fifteen percent for both brand and generic. However, originally it was decided that Medicaid would be better and it was not adopted. With experience it is clear that reimbursement of AWP minus fifteen percent is too low for brand name drugs and too high for generic drugs.

    The Board also considered using the Medicare fee schedule. Due to the recent litigation involving the federal upper limit in the Medicare fee schedule this proposal was rejected. It was also suggested by the Pharmacy Alliance that a pharmacy fee schedule be developed to use the average wholesale price plus five dollars for brand name drugs and average wholesale price plus 10 percent plus five dollars for generics. This proposal was judged to be too high to provide significant savings, which would defeat the legislative purpose for the rule.

    Discussions about the content of the regulations were held with the Assembly and Senate as well as the Business Council of New York State and the AFL-CIO who provided comments and suggestions to be considered in the regulations.
  9. Federal standards. There are no applicable Federal Standards.
  10. Compliance schedule: The proposed regulation is mandatory. All affected carriers and self-insured employers will have to use the proposed fee schedules upon adoption.

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