OBJECTIVE: The California Workers' Compensation (WC) drug pricing system effective in 2004 tied payments to the Medi-Cal system, but 60% of National Drug Codes (NDC) in the WC System lacked an equivalent Medi-Cal NDC; and many were repackaged pharmaceuticals. A model of pharmaceutical distribution and claims processing of repackaged pharmaceuticals was defined. We assessed the cost and utilization of repackaged pharmaceuticals to determine potential lost savings to the California WC system. METHODS: We used 2002 data from the California Workers' Compensation Institute and Medi-Cal pharmacy expenditures. We described the extent of lost savings due to repackaged pharmaceuticals, compared the characteristics of repackaged pharmaceuticals in the WC using ANOVA, and identified predictors of repackaged pharmaceuticals using GLM regression. We also suggest alternative pricing systems for Medi-Cal non-equivalent repackaged NDCs. RESULTS: Repackaged pharmaceuticals represented 55% of the Medi-Cal non-equivalent NDCs used, but only 21% of total WC costs ($8,494,297) were attributed to repackaged pharmaceuticals. Approximately 88% of repackaged pharmaceutical costs were for generic medications. Companies most commonly associated with repackaged pharmaceutical costs were Southwood Pharmaceuticals (33.1%) and Pharma Pac (31.7%). Overall, compared to the $125 million in savings attributed to the Medi-Cal equivalent NDCs, an additional $8 million could be gained if repackaged pharmaceuticals were priced with a relevant Medi-Cal rate such as an average Estimated Acquisition Cost, an overall savings of 35.8%. On a per prescription basis, the practice of repackaging costs an additional $20 when compared to a Medi-Cal pharmacy dispensed reimbursement rate. CONCLUSION: This study informs new legislation being proposed to stop the generous pricing of repackaged pharmaceuticals due to non-equivalent NDCs. For the first time we describe the practice of repackaging pharmaceuticals and identify cost savings expected with alternative pricing systems, but also identify the value of repackaging pharmaceuticals for WC patients.