A 16,000% Problem: Why Workers’ Comp Can’t Get Drug Costs Under Control

Pharmacy costs in workers’ compensation continue to climb sharply, despite years of formulary adoption, generic mandates and managed care. The problem lies in a structural gap that makes workers’ comp uniquely vulnerable to pricing abuse.

Understanding that gap starts with a comparison that should alarm anyone managing a workers’ comp program. In the Medicare, Medicaid, commercial health insurance and Medicare Advantage programs that cover the vast majority of insured Americans, plan administrators are permitted to direct care to contracted pharmacy networks. Pharmacy benefit managers (PBMs) compete fiercely for contracts, which results in pricing that reflects market pressure.

Workers’ comp, by contrast, is the only large private insurance system in the country where many states have explicitly prohibited employers and insurers from requiring injured employees to use contracted pharmacy networks. Roughly half of states do allow some form of pharmacy network direction, but the other half leave the pharmacy choice entirely to the injured employee.

On the surface, that might sound like a patient-friendly policy. In practice, it’s an open invitation to pricing abuse.

No Skin in the Game

Here’s the dynamic that makes workers’ comp pharmacy uniquely vulnerable: the injured employee bears zero financial responsibility for prescription costs. There is no copay, no deductible and no cost-sharing, so the person making the buying decision has no visibility into or responsibility for the cost. The employer absorbs every dollar in either direct costs or increased premiums.

When someone has no financial stake in a purchasing decision, there is little incentive to comparison shop. Out-of-network dispensers, which are often out-of-state mail-order operations or boutique pharmacies that specialize in workers’ comp, face no competitive pressure. They can charge as much as the market will bear, or the law will allow, because the person making the choice isn’t the one paying the bill.

Related: Most Workers Saw Reduced Symptoms Using Injury-Prevention Tech, Study Shows

The data make this concrete. A single unit of diclofenac sodium, an over-the-counter topical pain reliever, costs an average of $0.10 through a PBM contract. Through a non-retail workers’ comp dispenser, that same unit runs $16.42. That’s a markup of more than 16,000%. The same is true for other topical analgesics like Lidopro, which under a PBM contract costs $4.79 per unit, but through a non-retail dispenser runs $34.20. Even physician-dispensed pricing, which often sits between these two extremes, consistently runs two to three times the contracted PBM rate.

Private-Label Topical Problem

A separate category of medications is generating even more alarming disparities. Private-label topical analgesics are non-FDA-approved topical medications dispensed almost exclusively through non-retail workers’ comp channels and offer no demonstrated clinical benefit over inexpensive OTC alternatives.

Consider a few examples drawn from actual claims involving lidocaine patches:

• Zylotrol billed at $2,425 versus an OTC equivalent for $9
• Trubrexa priced at $2,400 against a $27 OTC alternative
• Lidocan at $2,890 versus $90 OTC

These represent a pattern of billing that thrives because there is no network infrastructure to screen it out. Government and commercial health plans rarely encounter these products because their beneficiaries fill prescriptions through network pharmacies, where formulary controls and contractual provisions block medications that lack clinical justification or cost-effectiveness. Workers’ comp lacks that network gate and so provides fertile ground for these exorbitantly priced products to proliferate.

Federal Reform Doesn’t Reach This Market

There have been federal reforms around drug pricing, most notably enabling Medicare to negotiate on a growing list of drugs, most-favored-nation pricing agreements, and direct-to-consumer discount programs. But these reforms have done nothing to address the workers’ comp marketplace, because those tools weren’t designed for this system.

The same logic applies to PBM transparency legislation, which arose from commercial health practice concerns. However, the problems they’re designed to address don’t translate cleanly to workers’ comp, where the absence of cost-sharing creates an entirely different set of incentives and abuses.

What States Can Do

The path to solving this problem runs through state legislatures, and the mechanism is straightforward. States should permit employers and insurers to direct pharmacy care to contracted networks, just as Medicare, Medicaid and every major commercial health plan already do.

This reform would subject drug pricing in workers’ comp to actual market competition. Workers’ comp PBMs could apply formulary controls to screen out clinically questionable products at the point of dispensing and eliminate the pricing vacuum that non-retail dispensers currently exploit. Finally, it would significantly reduce billing disputes for state regulators and courts since contracted network pricing resolves most issues before they arise.

Related: Sole Proprietor Need Not Notify Insurer of Injury by Deadline for Workers’ Comp

Some states have resisted network direction on the grounds it limits injured employee choice. But the practical impact on choice is modest. Injured employees would retain access to roughly 90% or more of the pharmacies they currently use. In exchange, workers’ comp would get a system that no longer systematically overpays for drugs by a factor of 160 on medications that have been on the market for decades.

At a moment when affordability concerns are reshaping the political landscape, states that still prohibit pharmacy network direction in workers’ comp are leaving one of the most actionable cost levers untouched. The pricing data isn’t subtle, and the structural cause isn’t complicated. What’s missing is the political will to apply to workers’ comp the same managed care logic that every other major insurance program already takes for granted.

Allen is vice president of government affairs at Enlyte, where he tracks legislative and regulatory developments affecting workers’ compensation pharmacy costs across the country.