Implementing a Drug Formulary for California's Workers' Compensation Program

by Barbara O. Wynn, Christine Buttorff, Erika Meza, Erin Audrey Taylor, Andrew W. Mulcahy

This Article

RAND Health Quarterly, 2017; 6(3):4


California Assembly Bill 1124 required the state's Division of Workers' Compensation in the Department of Industrial Relations to establish a drug formulary for all injured workers covered by the state's workers' compensation program. Such formularies serve to reinforce safe and effective prescribing patterns for practitioners and payers. In California, the formulary will need to be consistent with the Medical Treatment Utilization Schedule guidelines that define medically appropriate care for California's injured workers, create incentives to encourage prescribing of medically appropriate drugs, and reduce the administrative burdens associated with utilization review and medical necessity disputes. The objective of this study is to support the Division of Workers' Compensation in establishing the formulary. The authors compare and evaluate the strengths and weaknesses of four existing formularies and the formulary used by California's Medicaid program. The authors then analyze the issues involved in structuring the drug formulary for California to be consistent with the treatment guidelines, explore related policies that should be addressed in implementing the formulary, and offer recommendations.

For more information, see RAND RR-1560-DIR at

Full Text

Assembly Bill (AB) 1124 (Perea) requires the Division of Workers' Compensation (DWC) in California's Department of Industrial Relations to implement a drug formulary no later than July 1, 2017. The legislation intended that the formulary further "the goal of providing appropriate medications expeditiously while minimizing administrative burden and associated costs."

A carefully structured formulary can reinforce the Medical Treatment Utilization Schedule (MTUS) guidelines used to define medically appropriate care for California's injured workers, create incentives to encourage prescribing of medically appropriate drugs, and reduce the administrative burdens associated with utilization review (UR) and medical necessity appeals. Key strategies for achieving these outcomes are to eliminate prospective UR for first-line drug therapies and low-risk, low-cost drugs that are prescribed consistent with the MTUS and to require prospective review (PR) before other drugs are dispensed to an injured worker.

This study is the first in a series of three RAND Corporation studies on the drug formulary. Its objectives are to review existing formularies that DWC might consider and summarize their relative strengths and weaknesses, review the options for the related policies that are needed to implement and update the formulary, and make recommendations for the formulary implementation policies and updating process. The second study will provide an economic impact analysis of implementing the drug formulary. The third study will describe a monitoring framework for tracking the actual impacts of implementing the drug formulary.

Several assumptions regarding how DWC will design and implement the drug formulary underpin our methodological approach and policy analyses. First, we assume that DWC intends to adopt a formulary that is designed to maximize quality-of-care, health, and work-related outcomes. To accomplish these objectives, the formulary drug list and drug classification scheme should be evidence based and as consistent with the MTUS as possible. The formulary should also be integrated with the medical necessity determination process.

Second, we assume that controlling drug spending is an important but secondary objective. This suggests that any cost considerations incorporated into the formulary (such as restricting formulary drugs to the least costly therapeutic alternatives) should be determined through a separate process that occurs only after evidence-based drug therapies are identified consistent with the MTUS guidelines. Because the California Workers' Compensation (WC) program involves multiple payers and because there are no cost-sharing requirements, the available tools to control spending are likely to be more limited than those that might be considered by single-payer WC states or group health plans. The tools for encouraging cost effective drug use include (1) utilization management tools, such as PR for high-cost or high-risk drugs that are not first-line therapies to prevent inappropriate utilization and spending; (2) use of substitutable generics instead of brand-name drugs, except when there is a clinical rationale for prescribing the brand; (3) use of less costly therapeutic alternatives when the evidence suggests there is little or no difference in terms of effectiveness and safety; and (4) integration with the Official Medical Fee Schedule (OMFS) so that covered drugs have fee schedule prices.1

Third, we assume that the process and policies for determining how drugs are integrated into the formulary should be transparent. The time and resource constraints created by the requirement that the formulary be adopted by July 1, 2017, favor adapting an existing evidence-based formulary over developing a new formulary that is specific to the California WC program. However, because the MTUS draws on multiple sources for its treatment guidelines, some modifications may be required for consistency with the MTUS. Moreover, the policies and experiences of other programs inform potential implementation policies, but the policies that are implemented must be tailored to be consistent with AB 1124 requirements and California-specific policies, such as the MTUS, the medical dispute resolution process, and OMFS.

Formulary Structure

We reviewed five existing drug formularies:2

  • Washington State Department of Labor and Industries

  • The Reed Group's American College of Occupational and Environmental Medicine (ACOEM)

  • Work Loss Data Institute's ODG

  • Ohio Bureau of Workers' Compensation

  • California Department of Health Care Services (Medi-Cal, California's Medicaid program).

We compared each formulary across six criteria developed in consultation with California's DWC:

  • reliance on evidence-based criteria in determining the formulary drug list and recommendations for the formulary

  • compatibility with the MTUS

  • transparency in the decision process used to establish and maintain the formulary drug list and recommendations

  • established process for regular updates to the formulary drugs and recommendations

  • accessibility and ease of use by treating physicians, payers, and injured workers

  • focus on drugs needed for injured worker conditions (for example, analgesics, such as opioids and nonsteroidal anti-inflammatory drugs, and muscle relaxants).

While each formulary has features that might be models for the California formulary, we concluded that DWC's options are limited by the need for the formulary to be consistent with the MTUS guideline drug recommendations. The current MTUS incorporates treatment guidelines from ACOEM for most conditions and from ODG for chronic pain and postsurgical physical medicine treatments. Both sets of guidelines have drug recommendations associated with treatment guidelines for common WC medical conditions. Establishing a single integrated formulary that is consistent with the MTUS requires one of two approaches: (1) Adopt both the formulary and guidelines of either ACOEM or ODG, or (2) develop a California-specific WC formulary (which we call the MTUS formulary) that is derived from the applicable ACOEM or ODG guidelines for different conditions and DWC's opioid guidelines. Adopting one of the other formularies that we examined (Washington State Department of Labor and Industries, Ohio Bureau of Workers' Compensation, or Medi-Cal) would raise major issues to make the formulary consistent with the MTUS.

Through the rulemaking process, California has adopted MTUS guidelines that it believes incorporate the best available evidence base for medical care provided to injured workers. However, these guidelines are outdated and need to be updated for most clinical topics. Therefore, the implementation of the formulary poses an opportunity to review the sources for the treatment guidelines and assure that they continue to be the most appropriate source for standards of care that meet the needs of California's injured workers and whether additional clinical topics should be added.3 If the current MTUS multisource structure is retained, it would be important to implement updated guidelines before or coincident with the formulary implementation so that the updated guideline recommendations would be reflected in the formulary drug listing.

The decision on which formulary to implement involves significant trade-offs between ease of implementation and adherence to the current MTUS structure (Table 1).

Table 1. Implementation Considerations in Determining Formulary Structure

Considerations Adopt
ODG Guidelines and Formulary ACOEM Guidelines and Formulary Updated MTUS Guidelines and Formulary
Consistency with current MTUS ODG-based MTUS guidelines cover chronic pain and postsurgical physical medicine. ACOEM-based MTUS guidelines cover most clinical topics, but the MTUS uses the 2004 version of the guidelines, rather than most recent guidelines. Depends on updating decisions. Revised ACOEM-based guidelines, and 2016 versions of ODG guidelines for chronic pain and DWC opioid guidelines would be the most consistent with current structure.
Adherence to evidence-based information in determining which drugs require PR Yes-or-no rules on PR ignore condition-specific variation in some treatment guidelines. Formulary rules do not include PR requirements; presumably, DWC would develop PR rules based on condition-specific drug therapy recommendations. Assumes that PR rules would be based on specified criteria and that condition-specific PR rules would be established when needed.
Ease of implementation Could be implemented off the shelf. Requires developing PR rules based on specific criteria and clinical review. Requires developing PR requirements based on specific criteria and clinical review and integrating the different guidelines into a single formulary.
Scope and currency of guidelines Most comprehensive option for WC-related conditions with ongoing updating process. Does not have mental health guidelines; guidelines for head disorders and behavioral health under development. Some clinical topics have not been updated since 2011, but revisions are in progress. Does not have guidelines for pulmonary diseases or head disorders; ACOEM-based guidelines (including for stress-related conditions) have not been updated since implemented in 2004 and would need to be updated.

For several reasons, the ODG formulary would be easier to implement. It is already in use in several WC programs and incorporates PR recommendations. The formulary drug listing uses a simple yes-or-no structure to indicate whether PR is required for most drugs, which means that diagnostic information is not needed when processing most pharmacy bills. However, it also means that important nuances of condition-specific guideline recommendations are not reflected in the PR recommendations and that the prescriber must be familiar with the specific treatment guideline recommendations for the injured worker's condition. The drug listings are derived from evidence-based treatment recommendations that are updated regularly to incorporate new evidence. The ODG guidelines are more comprehensive than the ACOEM guidelines, but the methods used to develop them have been less rigorous (Nuckols et al., 2014), and the methodology used to derive the PR requirements when there are condition-specific variations in the guideline recommendations is not transparent. Because only the MTUS chronic pain guidelines and postsurgical physical medicine guidelines are based on ODG, the adoption of the ODG guidelines would represent a major departure from the current MTUS guidelines.

Most MTUS guidelines are derived from ACOEM practice guidelines. The guidelines are developed through a process that is more rigorous, transparent, and evidence based than ODG's (Nuckols et al., 2014). Comprehensive reviews of existing guidelines occur about every five years, but the Reed Group plans to update its formulary quarterly. Implementing a formulary based on the ACOEM guidelines would require more initial investment than one based on ODG because the formulary's drug recommendations are organized by condition and do not include PR requirements. Adopting the ACOEM guidelines and formulary would require developing a formulary drug listing by active ingredient (rather than condition) and establishing PR requirements for drugs that are in the formulary listing. The PR requirements can be derived from the guideline recommendations relatively easily because the ACOEM formulary recommendations are maintained in an electronic format. While the ACOEM drug formulary recommendations are condition specific, the PR requirements need be only if clinical review determines there are sufficient differences in the condition-specific recommendations for a particular drug to warrant condition-specific PR rules. To the extent the PR requirements do vary by condition, the ACOEM formulary would be more complex to operationalize but would also be more consistent with the treatment guidelines.

If the current MTUS structure is retained, updating the MTUS would involve adopting more-recent versions of the ACOEM-based MTUS guidelines and integrating them with the new DWC opioid treatment guidelines and the ODG-based chronic pain guidelines. Because the MTUS predominantly comprises ACOEM guidelines, the administrative burden of developing and maintaining a California-specific MTUS formulary should not be significantly more administratively burdensome than adopting the ACOEM formulary. In addition to the investment needed to operationalize the ACOEM drug recommendations into a formulary drug listing with PR recommendations, any conflicts between applicable ODG and ACOEM recommendations for individual drugs would need to be resolved so that it is clear which guideline has precedence.4 However, the ongoing administrative burden is likely to be less if all guidelines draw from the same developer. The guidelines would already be internally consistent, so there would be no need to reconcile any differences in treatment recommendations and providers, and payers would only need to reference one guideline set. A hybrid approach would be to incorporate treatment guidelines from a single developer into the MTUS but to develop an MTUS formulary drug listing. The PR requirements would be derived from the MTUS guideline drug recommendations, but the drug listing would be tailored to the California WC context and maintained with the input of the Pharmacy and Therapeutics Committee. It would also allow DWC to incorporate other features into the drug listing, such as a first-fill policy and whether generic and over-the-counter versions of the drug are available that would enhance the accessibility and usability of the drug listing for patients, prescribers, pharmacists, and payers.


The MTUS guidelines should drive the decisions on the formulary structure so that both treatment guidelines and the formulary incorporate the evidence-based standards of care that best meet the needs of California's injured workers. Priority should be given to updating the MTUS guidelines. In doing so, the advantages and disadvantages of retaining the current multisource guideline structure should be weighed.

The formulary drug listing and PR requirements should be derived from the MTUS guidelines in effect as of the implementation date. Generally, PR should be waived for drugs that are first-line therapies or that are otherwise low-cost, low-risk drugs that are prescribed consistent with the MTUS guidelines. Condition-specific PR requirements should be imposed sparingly when there are significant differences in the drug recommendations.

Ancillary Implementation Policies

In addition to determining the formulary structure and ground rules, it will be important to establish, through rulemaking, ancillary policies governing how the formulary will be implemented and integrated with the medical necessity dispute-resolution process and the OMFS. Table 2 summarizes the implementation policies that will need to be addressed in the formulary rules or through modifications in existing regulations.

Table 2. Summary of Major Policy Development Steps

Step Description
Establish ancillary formulary policies Define how the formulary applies by setting and drug type; describe PR policies; address policies for special types of drugs (over-the-counter, brand-name versus generic, etc.); and describe the update process and pharmacy and therapeutics committee rules.
Make conforming changes to UR and independent medical review (IMR) rules Clarify how the formulary integrates with UR/IMR rules and the request-for-authorization process and consider policies that would reduce the UR/IMR time line for pharmaceuticals.
Make conforming changes to OMFS Review policies for formulary drugs that do not have OMFS prices.

Arguably, the most important formulary decisions pertain to deciding when PR will be required for a drug therapy. Currently, all drug therapies are subject to either prospective or retrospective UR. Waiving PR for first-line drug therapies and low-cost, low-risk drugs while strengthening the PR requirements for other drugs creates an incentive for providers to prescribe the first-line drug therapies before considering alternatives. As discussed earlier, these requirements should be derived from the MTUS guidelines and incorporated into the MTUS drug listing. In addition, consideration should be given to broader policies designed to encourage prescribing of medically appropriate drug therapies. The policies listed in Table 3 summarize our recommendations regarding the circumstances under which PR should or should not be required for drug therapies.

Table 3. Summary of Recommended PR Requirements

Drug Classification When is PR Required?
Preferred drug Only when
  • The drug is prescribed in a dosage or duration that exceeds MTUS guidelines.

  • The drug is not indicated in the MTUS guideline for the injured worker's compensable condition.

  • The drug is for a brand name affected by the generic drug policy.

Nonpreferred drug Always unless
  • First-fill policy is applicable.

  • Waived by payer under prior authorization rules.

Nonlisted drug Always unless waived by payer under prior authorization rules.
Other potential policies
  • Non--FDA approved drugs

    • Compounded drugs

    • Investigational or experimental

    • Over-the-counter combination drugs

    • Non--FDA intrathecal drugs

  • Certain physician-dispensed drugs.

Point-of-sale bill-processing screens should determine whether approval has been received for a nonpreferred drug before it is dispensed. Consistency with the MTUS and compliance with the PR requirements can be reinforced by continuing to allow retrospective review of the medical necessity of drugs that were dispensed without PR approval. If the review determines that the dispensed drugs are not medically necessary (i.e., inconsistent with the MTUS), the payer should not be obligated to pay for the drug.

In addition to PR policies to encourage prescribing and dispensing of medically appropriate drugs, other policies should be considered to meet the AB 1124 intent that DWC's formulary guidance “further the goal of providing appropriate medications expeditiously while minimizing administrative burden and associated costs.” Table 4 summarizes policies that DWC might consider in implementing the formulary that will facilitate achieving these objectives.

Table 4. Summary of Other Recommended Ancillary Policies

Topic Recommended Policy
First-fill policy Adopt a first-fill policy that waives PR for drugs prescribed immediately following injury, including a short course of opioid therapy for severe pain.
Physician dispensing Curtail physician dispensing by requiring PR for all drugs dispensed after the first-fill period.
Generic versus brand name Require PR if a brand name is prescribed when a generic equivalent is available at lower cost.
Therapeutic interchange of less costly drug with similar therapeutic effects Incorporate cost considerations into the drug formulary over time through pharmacy and therapeutic committee review during the update process.
UR/IMR policies Integrate drug medical necessity determinations into the existing dispute resolution process so that adverse UR decisions can be appealed for IMR.

As amended, Labor Code §5307.29 requires that the formulary be updated no less often than quarterly. Ideally, updates in the formulary drug listings should be driven by updates in the treatment recommendations, but the two updates may not happen concurrently because the Labor Code requires a lengthier process for updating the treatment guidelines (rulemaking) than the formulary (posting changes on the DWC website without rulemaking). To keep the formulary and guidelines consistent with best available evidence concerning drug therapy recommendations, DWC needs statutory authority to post changes in the MTUS treatment guidelines for drug therapies simultaneously with changes in the formulary without rulemaking.


Assembly Bill 1124 (Perea), Workers Compensation: Prescription Medication Formulary, California State Legislature, 2015.

other, California Labor Code, Division 4, Workers Compensation and Insurance, contents, undated.. As of August 10, 2016:

Nuckols, Teryl K., Laura Anderson, Ioana Popescu, Allison L. Diamant, Brian Doyle, Paul Di Capua, and Roger Chou, "Opioid Prescribing: A Systematic Review and Critical Appraisal of Guidelines for Chronic Pain," Annals of Internal Medicine, Vol. 160, No. 1, 2014, pp. 38–47.


  • 1 1 Each of these tools is already in place, but they are not used as effectively as they might. For example, UR is required for all drugs; PR waivers for first-line therapies can encourage physicians to prescribe these drugs before prescribing other drugs. If a brand-name drug is prescribed when a less costly generic equivalent is available, a pharmacist is required to dispense the generic unless the prescription notes “dispense as written.” No criteria specify when the use of the “dispense as written” notation is appropriate. Not all drugs prescribed for injured workers have OMFS prices.
  • 2 2 In addition to the four WC formularies that we reviewed, North Dakota and Delaware have WC formularies. We did not review the North Dakota formulary because it was not derived from evidence-based treatment guidelines using a transparent process. Instead, the formulary policies were developed by US Script, a pharmacy benefit management company, and approved by Workforce Safety and Insurance's Pharmacy and Therapeutics Committee. The Delaware formulary is derived from Delaware's Medicaid formulary. Instead of reviewing this formulary, we chose to review the Medi-Cal formulary. DWC bases its pharmaceutical fee schedule on the Medi-Cal pharmaceutical fee schedule.
  • 3 3 ACOEM-based clinical topics that have not been incorporated into the MTUS, and their ACOEM effective dates include Interstitial Lung Disease (2015), Occupational Asthma (2014), and Hip and Groin (2011). ODG has chapters on pulmonary, hip and pelvis, and hernia conditions. ODG also has chapters on mental health and stress-related conditions and head conditions. ACOEM does not currently have guidelines on these topics, but guidelines for traumatic brain injury and behavioral health are under development.
  • 4 4 Treatment recommendations that are at variance with each other can occur when an injured worker's condition is addressed by two different guidelines. For example, the low-back clinical topic is derived from the ACOEM guidelines, while the chronic pain chapter is derived from ODG guidelines. Treatment recommendations from these sources could be at variance for an injured worker with chronic back pain. Under the July 2016 revision to the MTUS chronic pain guidelines, the chronic pain guidelines would have precedence if a treatment for a patient with chronic pain were addressed in both the chronic pain MTUS and the clinical topics (e.g., low-back) section of the MTUS.

The research reported here was conducted in the RAND Institute for Civil Justice (ICJ), a part of the Justice Policy Program within RAND Justice, Infrastructure, and Environment.

RAND Health Quarterly is produced by the RAND Corporation. ISSN 2162-8254.