OBJECTIVES: The billing practices of compounding drug ingredients makes overpayment likely. This study examines the current pattern of use and pricing of compounded drugs (CD) within California Workers’ Compensation System (CAWC), evaluates the effect of new pricing regulation, and provides an alternative pricing scheme. METHODS: CAWC claims database of all physician and pharmacy-dispensed CD from 2011-2013 were reviewed. Changes in CD use after the California Assembly Bill 378 (AB 378) was implemented were compared with t-tests. An alternative Colorado-based pricing scheme, which limits CD payment by four different pricing categories were employed to re-price California (CA) CDs. RESULTS: The database contains 4,153,588 pharmacy-dispensed claims with 112,523 ingredient entries and 16,944,271 physician-dispensed claims with 2,222,342 ingredient entries. The average amount paid per CD ingredient per year for pharmacy-dispensed CDs increased by 37% from 2011 to 2012 and 67% from 2012 to 2013, while physician-dispensed increased by 14% from 2011 to 2012 and 20% from 2012 to 2013.  The current CA AB 378 regulation does not significantly reduce CD cost, in fact the cost increased.  The change in cost of CD using the alternative Colorado pricing scheme is lower. In 2011, mean CA CD cost (pharmacy-dispensed after combining all ingredients) is currently $87 but would be $84 under Colorado pricing. In 2012, the price is currently $149, and $141 under Colorado pricing and in 2013, the price is currently $419, and $241 under Colorado pricing. CONCLUSIONS: The cost of CD in CAWC is increasing despite the current regulation to remedy the situation. An alternative solution may be to adopt the Colorado pricing scheme, which offers a disincentive to expand number of ingredients inflating prices.