New OIG Report Highlights Risk of Fraud and Abuse at Compounding Pharmacies and Recommends the Launch of Further Investigations

August 13, 2018

The U.S. Department of Health and Human Services (HHS), Office of Inspector General (OIG) released a new report  this month highlighting its concern with the enormous increase in Medicare Part D spending associated with compounded topical drugs.  Concerns over compounded topical product spending marks the latest in a series of ongoing OIG efforts to abate abuse and diversion of Part D drugs – particularly opioids and compounded products. Since 2015, the OIG has devoted significant resources to monitoring trends in Part D spending and identifying questionable billing practices by pharmacies. This report builds on that body of work. In 2016, OIG issued a report finding Part D spending had grown 625% overall from 2005 to 2015.  According to this new report, Part D spending for compounded topical drugs was 24 times higher in 2016 than it was in 2010.  In OIG’s words, this “explosive growth raises fraud, waste and abuse concerns about whether compounded topical drugs are being billed appropriately.”

OIG exercises its health care oversight role in a myriad of ways, including leading the line in federal criminal investigations into health care fraud, civil false claims act investigations, and exclusion actions whereby a provider can potentially be banned from participation in the Medicare and Medicaid programs.  Because the practice of pharmacy compounding involves a complex regulatory scheme at both the state and federal level, OIG works closely with the U.S. Department of Justice and state investigative agencies, such as Medicaid Fraud Control Units, typically housed in state Attorney General offices.  As part of its expanded scrutiny of compounding, OIG also plans to “determine the extent to which hospitals obtain compounded sterile preparations from compounders, including outsourcing facilities that have registered with the FDA.”

Each time a Medicare beneficiary fills a prescription under Part D, the prescription drug plan sponsor submits a summary record – the Prescription Drug Event (PDE) record – to CMS. OIG analyzed compounded topical drug PDE data for claims occurring between 2010 and 2016 as part of a broader overall examination of the use of and payment for compounded drugs.  For their analysis, OIG investigators and CMS created five measures to identify questionable billing practices.  These measures, based on common fraud schemes that OIG has investigated relating to compounding, are:

  1. Percent of beneficiaries for whom the pharmacy billed at least one compounded topical drug;
  2. Number of beneficiaries for whom the pharmacy billed for identical compounded topical drugs;
  3. Average dollar amount billed per compounded topical drug;
  4. Number of compounded topical drugs ordered by a single prescriber;
  5. Percent increase in total amount billed for compounded topical drugs from 2015 to 2016.

OIG analyzed the records of 2,388 pharmacies to identify questionable billing patterns where one or more of the five measures listed above was found to be an “extreme outlier.” OIG found that pharmacies with questionable billing mostly billed for topical drugs containing ingredients found in pain creams and that independent pharmacies were seven times more likely than chain pharmacies to have questionable billing.

This new report includes strong language regarding the pharmacies reviewed.  OIG concluded 547 pharmacies engaged in “questionable” billing, stating “[a]lthough some of this billing may be legitimate, all of these pharmacies warrant further scrutiny.” These 547 pharmacies billed Part D $300.3 million for compounded topical products in 2016, accounting for more than 90% of all Part D billing for these drugs nationwide.

OIG plans to work with CMS to “follow up” on the pharmacies and prescribers identified in their review, as well as to work with the FDA to examine pharmacies with compounding practices warranting “further scrutiny.”  OIG also recommended that Part D sponsors increase their efforts to detect and prevent fraud, waste, and abuse related to compounded topical drugs.

The report concluded with four recommendations, all which CMS has concurred.  Specifically, OIG recommended:

  1. Clarifying Part D policies for coverage of compounded topical drugs and use of utilization management tools;
  2. Conducting additional analysis on compounded topical drugs;
  3. Conducting training for Part D sponsors on fraud schemes and safety concerns related to compounded topical drugs; and
  4. Following-up on pharmacies with questionable Part D billing and the prescribers associated with these pharmacies.

If you have any questions about this report, about the potential for increased scrutiny of your pharmacy or prescribing practice, or are facing a review or investigation, please contact a member of our Life Sciences or Healthcare Investigations and Enforcement Actions Teams.


The information contained in this advisory is for general educational purposes only. It is presented with the understanding that neither the author nor Hancock, Daniel & Johnson, P.C., is offering any legal or other professional services. Since the law in many areas is complex and can change rapidly, this information may not apply to a given factual situation and can become outdated. Individuals desiring legal advice should consult legal counsel for up-to-date and fact-specific advice. Under no circumstances will the author or Hancock, Daniel & Johnson, P.C. be liable for any direct, indirect, or consequential damages resulting from the use of this material.

Print Friendly, PDF & Email