Goldstein: State's Proposed Topical Medication Bill Treats a Symptom, Not the Systemic Disease

Wednesday, March 18, 2026 | 0

Topical medications — gels, creams, ointments and patches applied to the skin — are commonly used to treat pain and typically contain lidocaine, menthol or diclofenac.

Cliff Goldstein

A decade ago, many topicals in workers’ compensation were compounded pain creams. Public scrutiny, prosecutions, lawsuits and regulatory actions largely eliminated these products. They have since been replaced by even more problematic drugs: single-ingredient products and “privately branded generics.”

The costs are extraordinary. Many employers and insurers report that 50% or more of total drug spending in workers’ compensation now goes to topical medications, with monthly charges often exceeding $3,000 for products that sell at retail for less than $50.

Some topicals are dispensed based on “prescriptions” even though they are simply existing over-the-counter drugs or minor variations of them. Others involve slight changes in potency without clinical justification. For example, 1% diclofenac, an FDA-approved pain treatment, is sold over the counter for about $12. Yet 3% diclofenac, which is not approved for pain and is indicated only for skin cancer, is frequently prescribed for pain and billed to workers’ compensation at more than $3,000 per month.

These extreme prices arise from a structure unique to Pennsylvania. The state has no workers’ compensation drug formulary, no fixed drug pricing schedule and no employer or insurer ability to select a pharmacy. Preapprovals are prohibited, physicians may steer prescriptions to pharmacies with which they have financial relationships, and most significantly, drug prices are based on Red Book Average Wholesale Price, or AWP.

Red Book AWP is a misnomer. The Pennsylvania Commonwealth Court has ruled that it does not reflect the average price pharmacies pay to acquire drugs. The Pennsylvania attorney general has similarly alleged that Red Book AWPs amount to fraud. Nonetheless, most workers’ compensation drug pricing in Pennsylvania still relies on this inflated benchmark.

The Pennsylvania General Assembly deserves credit for attempting to address excessive topical pricing. A newly introduced Senate bill, SB 1215, seeks to limit reimbursement for topical medications. However, the bill addresses only a small portion of the broader drug-pricing problem.

The bill begins by targeting compounded pain creams, even though these products now represent less than 1% of topical prescriptions in workers’ compensation. The main provision instead sets payment for noncompounded topicals at the lesser of 110% of AWP, the Medicare federal upper limit, or $250.

Although this appears reasonable, it leaves several critical problems unresolved.

First, the bill continues to reference AWP without defining it. The workers’ compensation statute does not define the term, and the Bureau of Workers' Compensation currently interprets AWP to mean Red Book AWP — a manufacturer-reported number that may be 10 times higher than the actual acquisition cost.

In the Federated v. Summit case, the Commonwealth Court held that Red Book AWP is not an accurate measure of pharmacy acquisition cost and banned its further use by the bureau. The Pennsylvania Supreme Court is now reviewing that decision.

The true average wholesale price is calculated by the federal government and published as the national average direct acquisition cost, or NADAC. For many generic drugs, Red Book AWP exceeds NADAC by a factor of 10.

Consider 3% diclofenac. Its NADAC price is about $70, yet its Red Book AWP exceeds $1,700. If the legislature simply defined AWP as NADAC, drug prices in Pennsylvania workers’ compensation would fall dramatically — not just for topicals, but for all medications.  

Instead, by referencing AWP without defining it, the bill risks reinforcing the continued use of Red Book AWP for non-topicals.

There may also be constitutional concerns. If AWP is interpreted to mean Red Book AWP, the statute effectively delegates the power to set workers’ compensation drug prices to a private, for-profit publisher. 

The bill may also create unintended consequences. For example, diclofenac comes in both topical and pill forms. If only topical diclofenac is subject to price limits, physicians may simply switch to the oral form, which would remain reimbursed at inflated Red Book AWP levels.

The bill also relies on Medicare FULs, but many topical products do not have FUL values because they are not covered by Medicare. In those cases, the bill defaults to the $250 cap — even when the retail price is under $20. For example, a cream containing 4% lidocaine and 1% menthol sells for about $12 at retail but could be reimbursed at $250 under the bill.

Other important issues remain unaddressed:

• Physicians steering prescriptions to workers’ compensation pharmacies with which they have financial relationships.
• Retroactivity of the new rules to the thousands of pending fee review cases.
• The lack of any stated rationale for the $250 reimbursement cap.
• Pricing of over-the-counter medications.
• Bureau regulations that still rely on Red Book AWP.
• The absence of any mechanism limiting reimbursement to usual and customary retail prices.

Pennsylvania’s workers’ compensation drug pricing problems clearly warrant legislative action. Some may view the topical bill as a useful first step. But by focusing narrowly on topical medications while leaving the underlying pricing mechanism untouched, the proposal addresses a symptom rather than the systemic disease. Real reform would eliminate reliance on inflated Red Book AWP and replace it with a reasonable pricing standard, such as NADAC. Only then will Pennsylvania meaningfully address the systemic drug-pricing abuses in workers’ compensation.

Cliff Goldstein, Esq., formerly the CEO and a Senior Litigator at Chartwell Law, has 35 years of experience in litigating complex workers' compensation cases. He now concentrates on addressing excessive pricing, fraudulent practices, abuse and waste regarding drugs used in workers' compensation cases. He can be reached at 215-588-4901 and cliffagoldstein@gmail.com.