Compounding Pharmacies Should Expect Greater Scrutiny as Government Healthcare Budgets Get Squeezed

Merle M. DeLancey Jr.

As Congress continues to grapple over healthcare reform, there are many uncertainties. However, one thing is clear: as government healthcare funding shrinks, federal and state enforcement agencies will continue to target compounding pharmacies for potential fraud.

Compounded drug use and related government spending, particularly on topical creams and ointments, has skyrocketed. Many argue that drug compounding regulation remains murky, making it too easy to prosecute traditional compounders. Compounding advocates suggest regulation of compounders has been heavy-handed and ignores the multiple benefits associated with compounding. Arguably, these competing tensions have led to ineffective industry regulation. These tensions include:

  1. Who is responsible for regulating the industry? The FDA or State Pharmacy Boards?
  2. Who is considered a compounding pharmacy as opposed to a drug manufacturer?
  3. How can a regulatory scheme walk the fine line between patient safety and patient access to compounded drugs?
  4. Do compounded drugs serve as an effective counterbalance to what many consider out-of-control drug prices?

Addressing these policy issues is beyond the scope of this blog, but what is crystal clear is that compounding pharmacies must remain vigilant to avoid or defend a government enforcement action.

Drug Compounding

Drug compounding usually involves a pharmacist combining, mixing, or altering ingredients of a drug to create a medication tailored to the needs of an individual patient. Compounding can be as simple as a local pharmacy adding a flavor to amoxicillin to make it more palatable for your child, or as complicated as altering the potency of an infused therapy because a patient cannot tolerate a more potent dose. It started out as an independent pharmacy or physician’s office creating customized drug versions for individual patients on a small scale, but has morphed into production on a larger scale less tailored to individual specifics.

Largely unknown to the general public, compounding gained notoriety in 2012 with the news of 64 deaths and another 700 fungal infections resulting from New England Compounding Center’s (“NECC”) production of non-sterile compounded, injectable drugs. It became clear that in that case, the regulatory system had failed. While state regulators had cited NECC previously for multiple regulatory violations, NECC had continued to operate after the citation.

Since 2012, more attention has been focused on bringing this industry into compliance. In July, FDA Commissioner Scott Gottlieb announced recent actions taken by the FDA and regulators including:

  1. Enacting the Drug Quality and Security Act in November 2013;
  2. Inspecting over 400 compounders;
  3. Issuing more than 150 warning letters to compounders for significant regulatory violations;
  4. Referring over 50 inspection findings to state regulators;
  5. Overseeing 125 compounded drug recalls; and
  6. Coordinating civil and criminal enforcement with the Department of Justice.

Skyrocketing Utilization and Reimbursement of Compounded Drugs

Over the past several years, the use and cost of compounded drugs has grown steeply. The private sector and government, at both state and federal levels, have felt the pain.

Medicare Part D Hit Hard

From 2015 to 2016, Medicare Part D saw spending on compounded drugs increase 56%. From 2006 to 2015, the number of Medicare Part D beneficiaries using compounded drugs rose 281% and spending during the same time increased 625%. The fastest-growing compounds were topical pain creams and gels. From 2006 to 2015, Medicare Part D spending for topical compounds rose 3,466%, with the average cost per prescription rising from $40 million to $331 million. The Department of Health and Human Services, Office of Inspector General is reviewing Medicare Part D spending on compounded drugs and expects to issue a report in 2018.


TRICARE may have been the worst hit with these dramatic increases. For the first four months of 2015, TRICARE spent more than $1 billion on compounded drugs. While compounded drugs accounted for only 0.5% of the volume of medications reimbursed, they totaled 20% of the total costs. In May 2015, TRICARE changed its compounded drug reimbursement rules to cover only compounds with FDA-approved ingredients. As a result, TRICARE saw compounded drug claims drop by 74% and compound drug prescriptions went from approximately 105,200 per month to approximately 41,800. This translated into a $10 million per month decrease in spending.

Federal Workers Compensation

The Federal Worker’s Compensation Program (“FWCP”) saw compound spending go from $2.35 million in 2011 to $214 million in 2015. A March 2015 Department of Labor, Office of Inspector General Report suggested that the Postal Service, whose spending is included in the FWCP, had incurred over $81.5 million in excessive compound drug costs, and nearly $4.1 million in excessive administrative fees for past two fiscal years.

Private Insurance and State Programs

Utilization increases have not been limited to federal healthcare programs. Express Scripts reports that, while overall U.S. prescription drug spending increased 13.1% in 2014, compounded drug spending increased as much as 218% over the preceding two years. Increased utilization has caused some states to impose stricter compound drug reimbursement standards. Oklahoma, Texas, and Washington adopted closed drug formularies, while Ohio and Mississippi imposed compound drug reimbursement limits.

The Current Enforcement Climate

Increased utilization coupled with ambiguous regulations has led to regulation through investigation and litigation. FDA inspections of compounders have increased by 129% from 94 in 2014 to 215 in 2015. Between October 2012 and August 2016, FDA enforcement staff obtained four permanent injunctions against compounding pharmacies.

In addition to FDA enforcement, federal prosecutions of compounding pharmacies are on the rise. These include:

July 2017: A Mississippi pharmacist pled guilty to participating in a scheme whereby patients were provided unnecessary compounded drugs. The scheme involved selecting compounded drugs based on profitability, as opposed to what patients needed or what was most effective. The scheme is alleged to have involved $192 million in fraudulent claims submitted to TRICARE.

July 2017: A False Claims Act case is pending against Florida Pharmacy Solutions, five other compounding pharmacies, and numerous marketing companies, physicians, and nurses. The suit alleges a nationwide scheme to defraud TRICARE of hundreds of millions of dollars to submit fraudulently inflated reimbursement claims to the government by recruiting beneficiaries to sign up for compounded drugs that were loaded with expensive and medically unnecessary ingredients.

July 2017: The federal government intervened in a False Claims Act case against a Tampa, Florida, compounding pharmacy, alleging that the pharmacy charged government healthcare plans 2,000% to 2,100% more for compounded drugs than it charged cash customers.

June 2017: The owner and head pharmacist of previously discussed NECC was convicted of racketeering, racketeering conspiracy, mail fraud, and introduction of misbranded drugs into interstate commerce with the intent to defraud and mislead. He will serve nine years in prison.

May 2017: Six individuals pled guilty to a health insurance scheme which paid illegal kickbacks to doctors for writing compounded drug prescriptions, supplied pre-printed prescription pads to doctors, and used mass-marketing techniques and call centers to solicit patients. The individuals were sentenced to between two and five years in prison, forfeited more than $30 million in assets, and were ordered to pay more than $130 million in restitution.

March 2017: Eight individuals were charged in a $158 million healthcare fraud scheme involving the submission of fraudulent claims for compounded drugs. The individuals obtained control of a compounding pharmacy and submitted claims to the Department of Labor, Office of Workers’ Compensation obtaining reimbursement rates of up to $28,000 per container for compounded creams. The individuals are alleged to have made illegal payments in the form of promissory notes, free rent, and other inducements to physicians to refer patients, provided pre-printed prescription pads, and contacted patients to request refills from their doctors when not necessary.

These prosecutions cover a broad range of issues:

  • overbilling;
  • automatically refilling prescriptions without consent;
  • creating products with little or no medical value;
  • large-scale production without individual patient prescriptions;
  • using ingredients in compounds that have not been approved for use in the United States; and
  • creating copies of FDA-approved drugs.

As a result, compounding pharmacies should focus their resources on compliance.

Compounders Must Stay Vigilant

Drug compounders should take steps to lessen the likelihood of being investigated and/or becoming the subject of a prosecution:

  1. Review the prescriptions you are filling for high volumes from one doctor or practice.
  2. Review prescriptions for evidence of medical necessity.
  3. Review your expense reimbursement policy and prohibition on gifts and gratuities policies to ensure doctors are not receiving anything of value from your pharmacy in exchange for writing prescriptions.
  4. Avoid indicia of mass production and mass marketing of compounded drugs. These indicia include mass production with bulk ingredients, mass-marketing techniques, using call centers, and providing physicians with pre-printed prescription pads.
  5. Consistently collect patient copayments to avoid unnecessary prescriptions and defaulting to higher priced compounded drugs.
  6. Monitor public and private insurance claims for consistency. Public and private claims should seek the same amount for the same prescription. Further, insurance claims and cash payers should pay the same amount for the same prescription.
  7. Dispense the same or similar compounded drugs to patients with public and private insurance and cash payers. For example, do not simply change the name of a compounded drug and charge private or public insurance more as compared to the amount cash payers are charged for the same drug albeit with a different name.
  8. Do not use intermediate pharmacies which hide or disguise the identity of the compounding pharmacy.
  9. Monitor out-of-state prescriptions filled by your pharmacy. While not improper per se, many investigations and prosecutions involve compounding pharmacies filling a large percentage of out-of-state prescriptions.

Merle DeLancey is a partner in Blank Rome LLP’s Government Contracts practice. He routinely defends healthcare clients in connection with government healthcare program investigations and compliance with government healthcare program requirements.

This blog post was reprinted in the November 2017 edition of Pratt’s Government Contracting Law Report (Vol. 3, No. 11), an A.S. Pratt Publication, LexisNexis. 

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