Department of Health and Human Services 
OFFICE OF 
   
INSPECTOR GENERAL 
 
 
 
 
 
 
 
 
C D U
OM  POUNDED  RUGS  NDER 
 
M P B: 
  EDICARE  ART    
 
P O
AYMENT AND  VERSIGHT 
 
Daniel R. Levinson   
Inspector General 
 
 April 2014 
OEI-03-13-00270   
   
EXECUTIVE SUMMARY:  COMPOUNDED DRUGS UNDER MEDICARE PART B:  
PAYMENT AND OVERSIGHT  
OEI-03-13-00270 
 
WHY WE DID THIS STUDY 
Compounded drugs are customized medications that meet specific needs of individual patients and are 
produced in response to a licensed practitioners prescription.  Compounded drugs that are 
contaminated pose a severe threat to public health and safety.  An outbreak of fungal meningitis and 
other fungal infections in late 2012 was linked to contaminated injectable compounded drugs.  As of 
October 2013, the Centers for Disease Control and Prevention had reported over 700 cases linked to 
this outbreak. Although certain compounded drugs can be eligible for coverage under Medicare Part 
B, Medicare does not pay for compounded drugs when the Food and Drug Administration  determines 
that an entity is producing compounded drugs in violation of the Federal Food, Drug, and Cosmetic 
Act (the Act). In light of the 2012 outbreak and increased scrutiny of compounded drugs, we sought to 
determine the extent to which Part B paid for compounded drugs and to examine Medicare 
Administrative Contractors (MAC) policies and procedures for reviewing and processing claims for 
compounded drugs. 
 
HOW WE DID THIS STUDY  
We surveyed Centers for Medicare & Medicaid Services (CMS) staff and Part B MACs to assess their 
oversight of Medicare claims for compounded drugs.  We asked CMS and MACs whether they track 
the number of claims and the amount paid for compounded drugs and to describe their policies and 
procedures for reviewing and processing claims for compounded drugs.   
 
WHAT WE FOUND 
We found that neither CMS nor MACs tracked the number of claims for compounded drugs under Part 
B or the corresponding amounts paid, and that Part B claims do not contain information that can be 
used to systematically identify claims for compounded drugs.  We also found that claims for 
compounded drugs do not identify the compounding pharmacy; however, this information may be 
included in documentation kept by the provider.  Finally, we found that most MACs manually 
reviewed Part B claims containing not otherwise classified codes, which can represent compounded 
drugs, to determine payment amounts.   
 
WHAT WE RECOMMEND  
The inability to track claims for compounded drugs and identify the compounding pharmacies that 
produce these drugs prevents CMS and MACs from taking steps to stop payments for compounded 
drugs that are produced in violation of the Act. Therefore, we recommend that CMS (1) establish a 
method to identify Part B claims for compounded drugs, (2) explore the possibility of requiring 
providers to identify on the Part B claim the pharmacy that produced the compounded drug, and 
(3) explore the possibility of conducting descriptive analyses of Part B claims for compounded drugs.  
CMS concurred with the first recommendation, did not concur with the second, and conditionally 
concurred with the third.  
   
TABLE OF CONTENTS 
Objectives ....................................................................................................1 

Background..................................................................................................1 

Methodology................................................................................................5 

Findings........................................................................................................7 

CMS and MACs did not track the number of claims or the            

amount paid for compounded drugs under Medicare Part B ...........7 

Most MACs manually reviewed Part B claims containing NOC 

codes, which can represent compounded drugs, to determine 

payment amounts .............................................................................8 

Conclusion and Recommendations ............................................................10 

Agency Comments and Office of Inspector General Response .....11 
 
Appendix....................................................................................................13 

Agency Comments.........................................................................13 

Acknowledgments......................................................................................15 

 
   
   
OBJECTIVES 
1. 	  To determine the extent to which Medicare Part B paid providers for 
compounded drugs in 2012. 
2.	   To determine Medicare Administrative Contractors (MAC) policies 
and procedures for reviewing and processing Part B claims for 
compounded drugs. 
BACKGROUND 
An outbreak of fungal meningitis and other fungal infections in late 2012 
was linked to contaminated injectable compounded drugs.  As of 
October 2013, the Centers for Disease Control and Prevention (CDC) had 
reported over 700 cases linked to this outbreak.  Compounded drugs that 
are contaminated pose a severe threat to public health and safety.  
Therefore, we determined the extent to which Part B paid for compounded 
drugs, and we examined MACs policies and procedures for reviewing and 
processing claims for compounded drugs.  
Compounded Drugs 
Pharmacy compounding is a practice in which pharmacists combine, mix, 
or alter ingredients to create a customized medication for an individual 
patient in response to a licensed practitioners prescription.  Compounding 
does not generally include mixing or reconstituting commercial products 
in accordance with the manufacturers instructions or the products 
approved labeling.1  Providers prescribe compounded drugs for various 
reasons, including: 
	   a noncompounded version of the medicine is discontinued or 
generally unavailable, 
 	  the patient is allergic to certain dyes or preservatives in the  

noncompounded version, 

 	  the patient has unique needs and requires tailored dosage strength 
(e.g., an infant), or 
 	  the pharmacist can combine several medications to increase 

compliance in taking the medications.2
  
 
1 Food and Drug  Administration (FDA), Limited FDA Survey of Compounded Drug  
Products. Accessed at http://www.fda.gov/Drugs/GuidanceComplianceRegulatory  
Information/PharmacyCompounding/ucm155725.htm on November 14, 2012.    
2 The International Academy of Compounding Pharmacists, What Is Compounding?   
Accessed at http://www.iacprx.org/displaycommon.cfm?an=1&subarticlenbr=1 on  
October 3, 2013. 
Compounded Drugs Under Medicare Part B:  Payment and Oversight (OEI-03-13-00270)   1 
   
   
The quality of a finished compounded-drug product can be affected by 
numerous factors, including (but not limited to) the quality of the active 
pharmaceutical ingredient used and the quality of the compounding 
practices of the pharmacy in which the product is created.3   
Pharmacy compounding is a vital service that helps many people, 
including those who are allergic to inactive ingredients in FDA-approved 
medicines and others who need medications that are not available 
commercially.4  However, poor compounding practices can result in 
contamination or medications that do not possess the strength, quality, and 
purity required, which may pose risks to patients.5    
Medicare Coverage of Compounded Drugs Under Part B and 
Part D 
Medicare Part B. Medicare Part B continues to cover a limited number of 
outpatient prescription drugs and biologicals (hereinafter referred to 
collectively as drugs). Part B-covered drugs generally fall into the 
following categories: drugs furnished incident to a physicians services 
(e.g., injectable drugs used in connection with the treatment of cancer); 
drugs explicitly covered by statute (e.g., some vaccines and oral anticancer 
drugs); and drugs used in conjunction with durable medical equipment 
(DME) (e.g., inhalation drugs).6  
MACs. The Centers for Medicare & Medicaid Services (CMS) contracts 
with MACs, which are private companies, to process and pay Medicare 
Part B claims, including those for prescription drugs.  As of 
December 2012, 9 MACs covering 13 Medicare Parts A and B 
jurisdictions were operational.7  Through Statements of Work, CMS 
assigns specific functions to MACs and also outlines performance 
standards for those functions. The functions performed by MACs include, 
but are not limited to, claims processing, provider enrollment, customer 
service for providers, medical review, and appeals.8    
 
3 FDA,  Report:  Limited FDA Survey of Compounded Drug Products.  Accessed at 
http://www.fda.gov/Drugs/GuidanceComplianceRegulatoryInformation/PharmacyCompo 
unding/ucm155725.htm on November 14, 2012. 
    
4 FDA,  The Special Risks of Pharmacy Compounding.  Accessed at 

http://www.fda.gov/ForConsumers/ConsumerUpdates/ucm107836.htm on  
              
November 20, 2013. 
 
5 Ibid.  
 
6  68  Fed.  Reg. 50428, 5042850429 (August 20, 2003). 
  
7 CMS originally proposed  15 A/B MAC jurisdictions, but as  of December 2013 the 
 
agency was consolidating these jurisdictions to  form 10  A/B MAC jurisdictions. 

8 The A/B MACs handle provider enrollment functions for their providers;  however,
  
DME MACs  do not because the National Supplier Clearinghouse handles enrollment for 

DME suppliers. 

Compounded Drugs Under Medicare Part B:  Payment and Oversight (OEI-03-13-00270)   2 
   
   
To obtain Part B reimbursement for covered outpatient prescription drugs, 
health care providers submit claims  to MACs using Healthcare Common 
Procedure Coding System (HCPCS) codes.9 In the case of prescription 
drugs, each HCPCS code defines the drug name and the amount of the 
drug represented by the HCPCS code, but does not specify the 
manufacturer or package size.  
Part B Coverage of Compounded Drugs. Generally, compounded drugs 
are eligible for coverage under Medicare Part B.10 However, when FDA 
determines that an entity is producing compounded drugs in violation of 
the Federal Food, Drug, and Cosmetic Act (the Act), Medicare does not 
pay for these drugs.11  For example, by compounding drugs on a large 
scale, an entity may be operating as a manufacturer without complying 
with the manufacturing requirements under the Act.12  Such companies 
may be manufacturing drugs that are subject to the new drug application 
(NDA) requirements of the Act, but for which FDA has not approved an 
NDA, or drugs that are misbranded or adulterated.13 If FDA has not 
approved the manufacturing and processing procedures used by these 
facilities, it has no assurance that the drugs these companies are producing 
are safe and effective.14    
In its Medicare Benefit Policy Manual, CMS stated that it will notify 
MACs when FDA has determined that compounded drugs are being 
produced in violation of the Act.  After the MAC receives subsequent 
instruction from CMS, it stops Medicare payment for compounded drugs 
produced in violation of the Act.15  However, there is no code or modifier 
on Part B claims that can be used to systematically identify compounded 
drugs. 
Medicare Part D. The Medicare prescription drug program, known as 
Medicare Part D, provides an optional prescription drug benefit to all 
Medicare beneficiaries entitled to Medicare Part A or enrolled in Medicare 
 
9 CMS uses  HCPCS codes to  provide a standardized coding system for describing the 
specific items  and services provided in the delivery of health care. 

10 This refers only to Part B-covered drugs described in the previous section.  
 
Section 1862(a)(1)(A) of  the Social Security Act (SSA) requires that drugs must be 

reasonable and necessary to be covered under Medicare Parts A and B.   Drugs and 

biologicals are defined in section 1861(t)  of the SSA.  Pricing for compounded  drugs is 

described in CMSs Medicare Claims Processing Manual, Rev. 2554, September 28, 

2012, ch. 17  20.1.2.   
  
11 CMS, Medicare Benefit Policy Manual, Rev. 170, May 10, 2013, ch. 15  50.4.7. 
  
12 Ibid.   

13 Ibid. 

14 Ibid. 

15 Ibid.   

Compounded Drugs Under Medicare Part B:  Payment and Oversight (OEI-03-13-00270)   3 
   
   
Part B.16  Part D plans are administered by private companies, known as 
plan sponsors, that contract with CMS to offer prescription drug coverage.  
For compounded drugs under Part D, only the components that satisfy the 
definition of a Part D drug are allowable costs under Part D.17, 18   Every 
time a beneficiary has a prescription filled under Part D, the plan sponsor 
must submit a prescription drug event (PDE) record.19   The PDE record 
contains drug cost, payment, prescribing, dispensing, and utilization data, 
as well as a code that indicates whether a prescription is for a compounded 
drug. To conduct oversight, in February 2013 CMS used this compound 
code to perform a number of descriptive analyses.20    
Concern About Compounded Drugs 
A late 2012 outbreak of fungal meningitis and other fungal infections was  
linked to contaminated injectable products compounded by the New 
England Compounding Center (NECC).  As of October 23, 2013, CDC 
had reported 751 cases and 64 deaths linked to this outbreak.21 In 
October 2012, FDA investigators found substantial problems with NECCs 
facilities, including mold and bacterial contamination and failure to 
maintain a sterile environment.22  Between the time of the NECC outbreak 
and a May 16, 2013, congressional hearing, 10 additional firms had 
conducted voluntary FDA-overseen recalls of sterile compounded or 
repackaged drug products.23   
FDA Authority. At the time of the NECC meningitis outbreak, FDA had 
limited authority to regulate compounding pharmacies and enforce 
 
16 The Medicare  Prescription Drug, Improvement, and Modernization Act of  2003,  
P.L. 108-173. 
17 CMS, Medicare Prescription Drug Benefit Manual, Rev.  10, February 19, 2010, ch. 6  
 10.4.   
18 In  general, 42  CFR   423.100 defines a Part  D  drug as a drug used for a medically 
accepted indication, dispensed upon a prescription, and approved  under the Act.  It also  
includes certain  biological products, insulin, medical supplies, and vaccines.   
19 SSA   1860D-15(c)(1)(C)  and (d)(2), 42  CFR   423.322. 
20 For all Part D  PDE claims for compounded drugs dispensed in 2012, CMS determined 
(among other things):  the percentage of all covered Part D  claims reported as being  
compounded; the average drug cost for covered compounded drugs per beneficiary; the  
top-billing pharmacies; and the top drugs. 
21 CDC, Multi-State Meningitis OutbreakCurrent Case Count.  Accessed at 
http://www.cdc.gov/hai/outbreaks/meningitis-map-large.html  on December 31, 2013. 
22 FDA,  FDA Form 483 for New England Compounding Center (Oct. 26, 2012).  
Accessed at http://www.fda.gov/downloads/AboutFDA/CentersOffices/ 
OfficeofGlobalRegulatoryOperationsandPolicy/ORA/ORAElectronicReadingRoom/UC 
M325980.pdf on  October 7, 2013.   
23 Janet  Woodcock, M.D., Director, Center for Drug Evaluation and Research, Statement 
 
Before the Subcommittee on  Health, Committee on  Energy  and Commerce May 23, 2013. 

Accessed at http://www.fda.gov/NewsEvents/Testimony/ucm353654.htm on 
                 
October 7, 2013.   

Compounded Drugs Under Medicare Part B:  Payment and Oversight (OEI-03-13-00270)   4 
   
   
compliance with safety standards.24   The agency normally asserted 
jurisdiction in situations in which pharmacies had moved from pharmacy 
compounding to pharmacy manufacturing.25  In November 2013, Congress 
clarified FDAs oversight authority of compounding pharmacies in the 
Drug Quality and Security Act.26    
METHODOLOGY 
Data Sources and Collection 
MAC Surveys. In June 2013, we surveyed the 9 Part B MACs that 
represented the 13 jurisdictions in effect as of December 2012.  The 
surveys asked about MACs policies and procedures regarding Medicare 
claims for compounded drugs, including the HCPCS code(s) that 
providers use for compounded drugs, the payment policies for 
compounded drugs, and any additional information that MACs require 
providers to include on Medicare claims for compounded drugs.   
Further, we asked MACs how they identify and review Part B claims for  
compounded drugs and whether they track the number of such claims or 
perform any oversight for such claims.  We also asked MACs whether 
they received instructions from  CMS to stop payment for certain 
compounded drugs and, if so, whether they did.  We asked MACs whether 
they were able to determine their Part B payments to providers for 
compounded drugs and, if so, to provide the total amount paid for these 
drugs in 2012. All MACs responded to our request.   
CMS Data. We obtained from CMS all relevant policies and procedures 
on the coverage of and payment for compounded drugs.  We surveyed 
CMS staff in the Hospital and Ambulatory Policy Group, within the 
Division of Ambulatory Services, about the agencys oversight of  Part B 
claims for compounded drugs.  Specifically, we asked these staff what 
instructions CMS provides MACs regarding Part B claims for 
compounded drugs, whether CMS notified MACs to stop payment for 
drugs produced in violation of the Act, and whether CMS received 
information from FDA on entities producing drugs in violation of the Act.  
 
24 Congressional Research Service, Federal Authority to  Regulate the Compounding  of  
Human Drugs (April 12, 2013).  Accessed at  https://www.fas.org/sgp/crs/misc/  
R43038.pdf  on December 31, 2013.   
25 FDA,  Compliance Policy Guidance for FDA Staff  and Industry,  Section 460.200,           
May 29, 2002.  Accessed at http://www.fda.gov/ICECI/ComplianceManuals/Compliance 
PolicyGuidanceManual/ucm074398.htm  on October 3, 2013.  On November 27, 2013, 
FDA withdrew this guidance because it was  no longer consistent with the agencys 
current thinking  on the issues it addressed.  78 Fed Reg. 7290172902 (December  4,  
2013).   
26  P.L. 113-54.   
Compounded Drugs Under Medicare Part B:  Payment and Oversight (OEI-03-13-00270)   5 
   
   
We also reviewed Part D policies related to compounded drugs and 
obtained CMSs report analyzing Part D claims for compounded drugs.   
Data Analysis  
MACs. We reviewed MACs survey responses to determine their policies 
and procedures for reviewing and processing claims for compounded 
drugs, including the procedure codes, payment policies, and other 
information required on Part B claims for compounded drugs.  From those  
responses, we determined whether MACs tracked (1) the number of 
claims for compounded drugs and (2) the amount that Part B paid 
providers for compounded drugs in 2012.       
CMS and MAC Oversight. We reviewed CMSs and MACs policies and 
procedures as well as CMSs report on its analysis of Part D claims data 
for compounded drugs.  We then analyzed responses from CMS and 
MACs to determine the extent of each entitys oversight.   
Limitations 
We did not verify the accuracy or completeness of the data provided by 
CMS or the MACs, or the MACs responses to our survey.  The scope of 
this review was limited to CMSs and MACs policies and procedures; we 
did not collect or analyze information from FDA.   
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspection and Evaluation issued by the Council of the Inspectors General 
on Integrity and Efficiency. 
   
Compounded Drugs Under Medicare Part B:  Payment and Oversight (OEI-03-13-00270)   6 
   
   
FINDINGS 
CMS and MACs did not track the number of claims or 
the amount paid for compounded drugs under 
Medicare Part B 
Part B claims do not contain information that can be used to systematically 
identify all claims for compounded drugs.  HCPCS codes for drugs 
represent specific drugs and dosage amounts; because compounded-drug 
products are unique combinations of pharmaceutical ingredients, they are 
not assigned unique HCPCS codes.  When billing for compounded drugs, 
or other drugs that are not associated with specific HCPCS codes, 
providers use not otherwise classified (NOC) codes.   
CMS reported that it did not track Part B claims for compounded drugs 
paid under NOC codes in 2012. Although some MACs reported that there 
are certain criteria specific to compounded drugs (e.g., providers are 
instructed to enter 1 billing unit, list the drug names, bill at the invoice 
price, etc.), they also do not track claims for these drugs, and therefore 
could not determine the total number of claims or amount paid for 
compounded drugs in 2012. 
Unlike claims submitted under Part B, those submitted under Part D 
contain a codethe compound codethat indicates whether a 
prescription is for a compounded drug.  Because this information is 
available on Part D claims, CMS recently conducted oversight by 
performing a number of descriptive analyses of Part D claims for 
compounded drugs. 
Claims for compounded drugs do not identify the 
compounding pharmacy; however, it may be included in 
documentation kept by the provider 
Part B claims for compounded drugs do not include the name or 
identification code of the compounding pharmacy from which the provider 
purchased the drugs. There is no requirement for providers to identify the 
compounding pharmacy on a Part B claim.  However, MACs representing 
eight jurisdictions indicated that the invoice or medical records generally 
include this information, meaning that the pharmacy name is included in 
the documentation kept by the provider, and could be obtained upon 
request.27  MACs representing the remaining five jurisdictions do not 
require providers to include the information identifying the pharmacies.  
Without the pharmacy name or a code that identifies the pharmacy, neither 
 
27 One of these MACs reported that it does not require the invoice, but that it could 
request the pharmacy information.    
Compounded Drugs Under Medicare Part B:  Payment and Oversight (OEI-03-13-00270)   7 
   
   
CMS nor MACs would be able to determine from the claim alone where 
the provider purchased the compounded drug.   
Most MACs manually reviewed Part B claims 
containing NOC codes, which can represent 
compounded drugs, to determine payment amounts 
MACs have the general authority for reviewing, pricing, and paying 
claims.28  MACs representing 10 jurisdictions reported that they manually 
review claims containing NOC codes, which can represent compounded 
drugs.29  For example, MACs that conduct manual reviews reported that 
claims with NOC codes are separated from the other claims and undergo 
an enhanced review.  Because these MACs review all claims with NOC 
codes and compounded drugs are billed for under NOC codes, these 
MACs thereby review all claims for compounded drugs.   
MACs that manually review claims for compounded drugs generally do so 
to determine the payment amount.  Unlike HCPCS codes for specific 
drugs, NOC codesincluding those for compounded drugsdo not have 
nationally established payment amounts.30  MACs representing several 
jurisdictions reported that when they manually review claims for 
compounded drugs, they assign payment amounts on the basis of  the 
description of the drugs that the provider enters on the claim.     
MACs have similar coding requirements but vary slightly in 
their payment and reporting processes for compounded drugs 
All MACs permitted providers to use the NOC code J3490 when billing 
for compounded drugs.  MACs representing 7 of the 13 jurisdictions 
reported that providers could also use other NOC codes, including J3590, 
J7799, and J9999.  Medicare and its beneficiaries spent $345 million on 
claims with these four NOC codes in 2012.31 Although MACs require 
providers to include specific billing codes, most MACs (those for 9 of 
 
28 For example, according to CMSs Medicare Benefit Policy Manual, MACs are to stop 
Medicare payment for compounded drugs  produced in  violation of the  Act only after  
MACs receive the appropriate instructions from CMS.  CMS reported that during 2012, it 
did not instruct the MACs to stop payment for compounded drugs because it did not 
receive any communication from FDA regarding pharmacies that FDA determined to 
have been  producing  drugs in  violation of the Act.  As we  previously stated, we did not  
collect any information from FDA. 
29 The manual review is in addition to the automated review and payment process for 
claims with HCPCS codes  for specific drugs.   

30 Although each NOC code does not have an established payment amount, MACs may 

use fee schedules that establish  payment amounts for individual drugs that are submitted 
 
under each NOC code. 
 
31 This total includes all claims containing one of these  four NOC codes, which includes 

claims both  for compounded and noncompounded  drugs.  Therefore, total expenditures 

for  only compounded drugs  would likely be lower.  
  
Compounded Drugs Under Medicare Part B:  Payment and Oversight (OEI-03-13-00270)   8 
   
   
13 jurisdictions) do not require providers to include specific diagnostic 
codes when submitting claims for compounded drugs.  MACs representing  
all but one jurisdiction require providers to include the names of each drug 
and the dosage amount on claims for compounded drugs.  For all of these 
12 jurisdictions, MACs require the drug name and dosage amount to be 
included in a general text field that allows providers to describe the 
compounded drug.  Although MACs representing most jurisdictions 
require drug names and dosage amounts, none of these MACs require 
providers to include the component drugs National Drug Codes, an 
11-digit code that identifies the manufacturer, drug product, and the 
package size.   
As for payment policies, MACs for 10 of the 13 jurisdictions paid 
providers in 2012 the invoice price for compounded drugs, i.e., the 
purchase price from the compounding pharmacy.  MACs covering the 
remaining three jurisdictions paid for compounded drugs using a specific 
fee schedule, i.e., they had developed payment amounts for the drugs 
commonly used in compounded products.  In addition to paying providers  
for the drug cost, MACs representing nine jurisdictions also paid providers 
for additional related costs including shipping, handling, a compounding 
fee, and tax. 
 
 
   
Compounded Drugs Under Medicare Part B:  Payment and Oversight (OEI-03-13-00270)   9 
   
   
CONCLUSION AND RECOMMENDATIONS 
Our findings indicate that neither CMS nor MACs track the number of 
claims or the amount paid for compounded drugs under Medicare Part B.  
Unlike Part D claims, which include a code that identifies claims for 
compounded drugs, Part B claims do not contain an indicator to identify 
these drugs. The inability to track claims for compounded drugs and 
identify the compounding pharmacies limits the ability of CMS and MACs 
to take steps that could stop payments for compounded drugs produced in 
violation of the Act. 
CMS grants MACs the authority to oversee, review, and pay claims for 
compounded drugs.  We found that most MACs manually review claims  
for compounded drugs to determine payment amounts because 
compounded drugs are billed under NOC codes that do not have nationally 
established payment amounts.  In other words, these claims undergo a 
manual review not because they are for compounded drugs, but because 
they are submitted using NOC codes. 
Therefore, we recommend that CMS: 
Establish a method to identify Part B claims for compounded 
drugs 
Unlike Part D, Part B does not offer a means of systematically identifying 
all claims for compounded drugs.  If CMS were to establish a method that 
specifically identifies compounded drug claims (e.g., a modifier) and were 
to require providers to include this information on all claims for 
compounded drugs, CMS and MACs could identify and track all Part B 
claims for compounded drugs.   
Explore the possibility of requiring providers to identify on the 
Part B claim the pharmacy that produced the compounded 
drug 
Claims for compounded drugs under Part B do not identify the pharmacy 
that produced the drug. As a result, CMS and MACs are unable to 
determine where these drugs are being produced.  If providers were 
required to include this information, it would enable CMS to work with 
MACs to stop payment for drugs produced in violation of the Act.   
Explore the possibility of conducting descriptive analyses of 
Part B claims for compounded drugs 
If claims data were to include information that identified  compounded 
drugs and the pharmacies that produce them, CMS and/or MACs would be 
able to conduct descriptive analyses of claims for compounded drugs 
under Part B, similar to the analysis that CMS conducted for such claims  
under Part D.   These analyses could include calculating how much Part B 
Compounded Drugs Under Medicare Part B:  Payment and Oversight (OEI-03-13-00270)   10 
   
   
is paying for compounded drugs; determining where compounded drugs 
are being produced; determining which compounded drugs are being 
billed for; and, if there are future outbreaks, identifying the claims for 
drugs produced by the pharmacies linked to these outbreaks.   
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL  
RESPONSE  
CMS concurred with our recommendation to establish a method to 
identify Part B claims for compounded drugs and noted that it may be 
possible to create a modifier or specific code that physicians would be 
required to use when billing for compounded drugs.  CMS stated that this 
approach may allow compounded drugs to be distinguished from other 
drugs that are billed under NOC codes, but that any issues related to public 
safety of compounded drugs should be addressed before the drugs are 
administered.   
CMS did not concur with our recommendation to explore the possibility of 
requiring providers to identify on the Part B claim the pharmacy that 
produced the compounded drug.  CMS stated that it does not need to 
identify the dispensing compounding pharmacy to pay the physician who 
is billing for the drugs. CMS noted that it is not clear that authority exists 
under the statute to collect the suggested information as that information is 
not necessary to determine the payment amount.  CMS also stated that 
changes to Medicare claims processing systems to accommodate the 
inclusion of dispensing pharmacy information would be significant and 
would compete for administrative resources with statutorily required 
payment methodology changes that necessitate system changes.  Further,  
CMS does not believe that stopping Medicare payment for compounded 
drugs produced in violation of the Act will be a reliable tool for addressing 
public safety issues regarding compounded drugs.   
CMS concurred with our third recommendation to explore the possibility 
of conducting descriptive analyses of Part B claims for compounded 
drugs. CMS stated that concurrence was conditional upon successful 
implementation of the first recommendation and it would undertake such 
analyses only if it were for a program-related purpose.   
We recommend that CMS explore the possibility of identifying the 
pharmacy that produced the compounded drug.  We acknowledge that 
claims analysis is retrospective and identifying the pharmacy on the claim  
would not by itself address public safety issues. We also recognize the 
challenges of including additional information on Part B claims.  
However, this additional information could supplement any descriptive, 
proactive analyses of Part B claims for compounded drugs, identify 
Compounded Drugs Under Medicare Part B:  Payment and Oversight (OEI-03-13-00270)   11 
   
   
pharmacies that may be producing compounded drugs in violation of the 
Act, and alert providers about pharmacies associated with those violations, 
which, in turn, could prevent future payments.    
We did not make any changes to the report on the basis of CMSs 
comments. For the full text of CMSs comments, see the Appendix. 
 
   
Compounded Drugs Under Medicare Part B:  Payment and Oversight (OEI-03-13-00270)   12 
  APPENDIX 
Agency Comments 
DEPARTh1ENT OF IJEALTH & HUMAN SERVICES  Cantors for Medteare & Medicaid Services 
Administrator 
Washington, DC 20201 
DATE: 
MAR 11 1014 
TO:  Daniel R. Levinson 
Inspector General 
FROM: 	 Marllyn Ta"\'enaer 
Administratou 
SUBJECT: 	 Ofllce of Inspector General (OIG) Draft Report:  Compounded Drugs Under 
Medicare Part B: Payment and Oversight (OEI-03-13-00270) 
The Centers for Medicare & Medicaid Services (CMS) appreciates the opportunity to review and 
comment on the above subject OIG draft report. OIG 's objectives were to detem1ine--( I) The 
extent to which Medicare Part B paid providers for compounded drugs in 20 12; and (2) Medicare 
Administrative Contractors' (MAC) policies and procedures for reviewing and processing Part B 
claims for compounded drugs. 
The OIG surveyed MAC policies and procedures for identifying, reviewing and processing Part 
8 claims for compounded drugs.  OIG also collected information about Part 8 policies for 
compounded drugs and oversight of payment for these drugs.  Finally. OIG reviewed Part D 
policies related to compounded drugs. 
The OJG found that neither CMS nor the MACs track the number of claims for compounded 
drugs or the amount paid for such claims. OJG pointed out that Part B claims do not contain 
information that would easily identify all claims for compounded drug, and also noted that Part B 
claims for compounded drugs do not identify the compounding phannacy from which the 
provider purchased the drugs.  OIG believes that information that identifies the source of the 
compounded drug is available from the provider.  The report also described claims processing 
and claims submission requirements at the MACs, finding that most MACs conducted enhanced 
manual reviews of compounded drug claims and that payments were usually based on the 
invoice.  OIG also compared claims infonnation in Part B to Part D, noting that infonnation on 
Part D claims identifies claims for compounded drugs. 
OIG Recommendation 
The OIG recommends that CMS establish a method to identify Part B claims for compounded 
drugs. 
CMS Response 
The CMS concurs with this recommendation. Currently, compounded drugs generally are paid 
under "not otherwise classified (NOC)'' codes.  These codes are used for all drugs that are not 
specifically described by other codes.  We believe that it may be possible to create a modifier or 
specific code that physicians would be required to use when billing for compounded drugs. 
While this approach may allow compounded drugs to be distinguished from other drugs that are 
Compounded Drugs Under Medicare Part B:  Payment and Oversight (OEl-03-13-00270)  13   
   
Agency Comments (continued) 
 
   
Compounded Drugs Under Medicare Part B:  Payment and Oversight (OEI-03-13-00270)  14 
   
   
ACKNOWLEDGMENTS 
This report was prepared under the direction of Robert A. Vito, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia 
regional office.  
Edward K. Burley served as team leader for this study.  Other Office of 
Evaluation and Inspections staff from the Philadelphia regional office who 
conducted the study include Kevin McAloon.  Central office staff who 
provided support include Meghan Kearns and Christine Moritz.  
Compounded Drugs Under Medicare Part B:  Payment and Oversight (OEI-03-13-00270)   15 
   
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The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as  
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