U.S.  Department of  Health  and  Human  Services  
Office of Inspector General  
 
 
Questionable  
Billing for 
Compounded 
Topical Drugs in 
Medicare Part D  
 
OEI-02-16-00440  
August 2018  
Daniel R. Levinson  
 
Inspector  General  
oig.hhs.gov   Report in Brief  U.S. Department of Health  and  Human Services  
August 2018 
Office   of  Inspector  General  
OEI-02-16-00440  
 
 
Questionable Billing for Compounded  Why OIG Did This  Review 
A dramatic increase  in Medicare  
Topical Drugs in Medicare Part D   
Part  D spending for compounded 
topical drugs, the emergence of fraud 
Part D spending for compounded topical 
What OIG Found  
cases,  and safety concerns led the OIG  
drugs grew exponentially from 2010  to 
Medicare Part D spending 
to conduct this review.  
for compounded topical  2016.  
In 2016, OIG called  attention to 
drugs  was 24  times higher   $323.5 
significant growth in spending for 
in 2016 than it was  in 2010.   
Compounded drugs are  ns  compounded drugs (e.g., customized 
customized medications  that  Millio $222.1  mtheadt iPcaartti oDn ss)p. e Snpdeincgifi cfoalrl yc,o OmIGpo fuonudnedd  
may be necessary for patients  n 
whose medical needs cannot   g i drugs grew by 625 percent from 2006 
be met  by commercially  din $107.3  to 2015 and spending for topical 
available drugs.  Medicare Part   pen $69.1  compounded drugssuch as  creams, 
D sponsors cover these drugs  S $13.2 $19.2 $30.3  gels,  and ointments  to, for example,  
relieve paingrew at an even faster  
under certain circumstances.  
pace.    
However, this explosive  2010  2011  2012  2013  2014  2015  2016 
growth raises  fraud, waste,   Source: OIG analysis of Part D data, 2017.   At the same time, OIG has been 
and abuse concerns  about   involved in an increasing number of 
whether  compounded  topical  drugs  are being  billed appropriately.    fraud  cases related to compounded 
drugsincluding  topical drugsin 
About  550  pharmacies had  questionable Part D billing for compounded topical 
Medicare and other health insurance 
drugs in 2016.  These pharmacies warrant  further scrutiny.  They each billed 
programs.  
extremely high amounts for  at least one of five measures  that OIG has  
developed as indicators of  possible fraud, waste,  or abuse.  For example, many   There are also safety and effectiveness 
of these pharmacies billed for compounded topical drugs for a high  proportion   concerns related  to compounded 
of their beneficiaries.  More  than one-quarter of these pharmacies were located  drugs, which are not FDA-approved.  
in four metropolitan  areas.   The quality standards for 
compounded drugs are generally 
In addition, 124 prescribers raise particular concern.   Each of these prescribers 
lower than for FDA-approved drugs, 
ordered large  amounts of compounded topical  drugs dispensed by  these 
leading to increased risks such as  
pharmacies  with questionable billing.   
production of products with the  
What OIG Recommends    wrong potency.   
We recommend that the Centers for Medicare & Medicaid Services  (CMS) 
How OIG Did This Review  
clarify Part D policies for coverage of compounded topical drugs and use of 
We  analyzed Prescription Drug Event 
utilization management tools.  Specifically, CMS should clarify that sponsors 
(PDE) records for compounded topical 
the private companies that  provide the Part D benefithave the  option to 
drugs from 2010 to 2016. With input  
cover compounded topical drugs through an exceptions process.   CMS  should 
from OIG investigators and CMS, we 
also  clarify that sponsors may apply utilization management tools to 
developed five measures to  identify  
compounded topical drugs,  even if individual ingredients would not be  subject 
pharmacies with questionable billing  
to utilization management tools when  dispensed  individually.   CMS  should also 
for these drugs.  We  also identified  
conduct additional analysis  on compounded topical drugs and conduct  training  
prescribers  associated with these 
for Part D sponsors  on  fraud  schemes and safety concerns.  Lastly, CMS should  
pharmacies who warrant further  
follow up on the  pharmacies and prescribers identified in this report.   CMS  
concurred with all four of our recommendations.    scrutiny.  
Full report can be found at  oig.hhs.gov/oei/reports/oei-02-16-00440.asp    
TABLE OF CONTENTS  
BACKGROUND   1  
Methodology   6  
   
FINDINGS    
Part D spending for compounded topical  drugs  was  24  times higher  in 2016 than it was in 2010   8  
About 550 pharmacies had questionable billing for compounded topical drugs   9  
More than one quarter of the pharmacies with  questionable billing were in the New York,   15  
Houston, Detroit, and Los Angeles areas   
124 prescribers associated with these pharmacies raise particular concern   15  
   
CONCLUSION AND RECOMMENDATIONS    
Clarify  Part D policies for  coverage of compounded topical drugs  and use  of utilization   17  
management tools  
Conduct additional analysis on compounded topical drugs   18  
Conduct  training  for Part  D sponsors  on  fraud schemes and safety concerns related to   18  
compounded topical drugs   
Follow up on pharmacies with questionable Part D billing and the prescribers associated with   19  
these pharmacies  
 
AGENCY  COMMENTS AND OIG RESPONSE   20  
APPENDICES    
A: Detailed Methodology   21  
B: Agency Comments   25  
ACKNOWLEDGMENTS   27  
 
   
BACKGROUND  
Objectives 
1.   To describe Medicare Part D spending for  compounded topical  
drugs.  
2.   To identify pharmacies with questionable billing for these drugs.  
3.   To identify prescribers associated with these pharmacies who  
raise  particular concern.  
The Office of Inspector General (OIG) recently  called attention to the 
dramatic growth in  Medicare Part D spending for compounded drugs,  
particularly compounded topical  drugs.  Compounded drugs are  
customized  medications that may be necessary for  patients  whose medical  
needs cannot be met by commercially available drugs.   From 2006 to 2015,  
spending for these drugs increased 625 percent and spending for  
compounded topical drugssuch as creams, gels,  and ointmentsgrew at 
an even faster pace.  Medicare Part D sponsors cover these drugs  under  
certain circumstances.   However, this explosive growth  raises  fraud, waste,  
and abuse  concerns  about whether  compounded topical  drugs  are being 
billed appropriately.1    
OIG has been involved in an increasing  number  of  investigations related to  
compounded drugsincluding compounded topical drugsin Medicare  
and other health insurance programs.   In some  cases,  pharmacies pay 
kickbacks to physicians.   In others,  pharmacies  bill  Part D for more expensive 
compounded drugs than  were actually dispensed.   In one  example, a  
pharmacy  owner, who was also the pharmacist, admitted to bribing  
physicians for prescriptions for compounded topical drugs.2   He was 
sentenced to 20 months in prison and ordered to pay more than $3 million 
in restitution and tax penalties. In another case, a pharmacy  compounded  
drugs with inexpensive  bulk powders, which are not covered under  
_______________________________________________  
1  OIG,  High Part D Spending on Opioids and Substantial Growth in Compounded Drugs Raise  
Concerns, OEI-02-16-00290, June 2016.  
2  Department of Justice (DOJ), U.S. States Attorneys Office,  District of  New Jersey.   
November  4, 2015.   Compounding Pharmacist Sentenced to 20  Months In Prison For Paying  
Kickbacks For Referrals, Health Care Fraud  [Press release].  Accessed at  
https://www.justice.gov/usao-nj/pr/compounding-pharmacist-sentenced-20-months-prison-
paying-kickbacks-referrals-health-care.  
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   1  
OEI-02-16-00440    
Medicare.3   The pharmacy  submitted falsified records  claiming  that the 
drugs were made from expensive tablets and  capsules.   The owner was  
sentenced to 6 months of house arrest and agreed  to pay a fine of  
$2.5  million  for submitting falsified documents.    
According to the U.S. Food  and Drug Administration (FDA), there are also  
safety and effectiveness concerns related to  compounded drugs.4   
Compounded drugs are not FDA-approved, meaning FDA  has not  
evaluated them for safety, effectiveness,  or quality before they are provided  
to patients.   FDA does  not oversee the day-to-day operations of most  
compounding pharmacies or ensure compliance with FDAs current good  
manufacturing practice  requirements.   In  addition, quality standards for  
compounded  drugs are generally  lower than for FDA-approved  drugs; 
therefore, compounded drugs can pose increased safety risks, such as being  
the wrong  potency (i.e., too strong or too weak),  being contaminated,  or 
being ineffective.   In addition to the New England Compounding Center  
case that led to a meningitis outbreak, there have been other examples of  
safety risks related to  compounded drugs.5  
   In  unrelated cases,  two  women died after applying compounded topical  
anesthetics to their legs to lessen the pain  of laser  hair removal.6    
   An individual who received compounded topical creams,  sold as a part  
of a prescription drug fraud  scheme, died  from toxicity related to the 
ingredients in the  creams.7   
FDA also raised concern that prescribers and patients may not be aware of  
the potential risksincluding the potential lack of effectivenessassociated  
with  certain  compounded topical drugs.8    
_______________________________________________  
3  DOJ, U.S. Attorneys Office,  Northern District of Alabama.  March 23,  2017.   NW Alabama  
Pharmacies Owner Sentenced to Six Months [sic] Home Confinement for Obstructing Medicare  
Audit; Ordered to Pay $2.5 million Fine  [Press release].  Accessed at  
https://www.justice.gov/usao-ndal/pr/nw-alabama-pharmacies-owner-sentenced-six-month-
s-home-confinement-obstructing-medicare.  
4  See FDA,  Compounding and the FDA:  Questions and Answers. Accessed  at  
http://www.fda.gov/Drugs/GuidanceComplianceRegulatoryInformation/PharmacyCompoundi 
ng/ucm339764.htm  on September 13, 2017.  
5  See DOJ,  New England Compounding Center Pharmacist Sentenced for  Role in Nationwide  
Fungal Meningitis Outbreak, January 31, 2018.  Accessed at   
https://www.fda.gov/ICECI/CriminalInvestigations/ucm594800.htm  on March 13, 2018.   
6  FDA, Public Health Advisory:  Life-Threatening Side Effects with the Use of Skin Products  
Containing Numbing Ingredients for Cosmetic  Procedures, February 6, 2007.  
7  DOJ,  Leader of $17 Million Health Insurance Fraud Scheme  Ordered to Prison, July 17, 2017.  
8  FDA, Statement  from FDA  Commissioner Scott Gottlieb, M.D.,  on agencys continued efforts  
relating to  compounded drugs for patients  who cannot use an FDA-approved drug  [Press 
Release].   Accessed  at 
https://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm612193.htm  on July  
31, 2018.  
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   2  
OEI-02-16-00440    
These safety issues, combined with the increases  in spending for  
compounded topical drugs and the emergence of  new fraud cases,  
highlight the need to further examine Part D billing for  these  drugs.  This 
study builds on  previous  OIG work. It describes Part D billing for  
compounded topical drugs and identifies pharmacies with questionable  
billing and associated prescribers  who  warrant further scrutiny.   
This study focuses on pharmacies that  compound drugs but  are not 
registered with FDA as outsourcing facilities.  Drugs compounded by  
pharmacies that register as  outsourcing facilities are subject to different  
requirements  and  are not the focus of this report.9    
Compounded Drugs 
Licensed pharmacists or licensed physicians create  compounded drugs  by  
combining, mixing, or altering drug ingredients.  Compounded drugs may  
be necessary for certain patients when  commercially available  drugs cannot  
meet  that patient's clinical needs.   For example, a patient who  is allergic to  
an inactive ingredient, such as a dye, in a commercially available  drug may 
require a special formulation to eliminate that ingredient.   
Unlike the drugs made by conventional manufacturers that require FDA  
approval, compounded drugs are not evaluated by FDA for safety,  
effectiveness, or quality before they are marketed.  Most compounded  
drugs are exempt from the new-drug approval process, current good 
manufacturing  practice, and other FDA requirements.  To be exempt, drugs  
must generally be compounded by a licensed pharmacist or licensed  
physician, for an identified individual patient, and  based on the receipt of a  
valid prescription.10   Compounded drugs that are essentially copies of  
commercially available drug products and compounded regularly or  in  
inordinate amounts are not exempt.11  
Medicare Part D Coverage of Compounded Drugs  
Part D is an optional  prescription drug benefit for  Medicare beneficiaries.   
Private companies, known as Part D sponsors, contract with the Centers for  
Medicare &  Medicaid Services (CMS) to  provide this benefit to beneficiaries  
_______________________________________________  
9  21  U.S.C.  353b.  
10  21 U.S.C.    353a(a).  Under certain circumstances, drugs may be compounded in  limited 
quantities prior to  the pharmacy receiving a valid prescription for an individual patient.   Also  
see FDA,  Pharmacy Compounding of Human Drug Products Under Section 503A of the Federal  
Food, Drug, and Cosmetic Act. Accessed  at  
https://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidanc 
es/UCM469119.pdf  on February 27,  2018.  
11  21  U.S.C.  353a(b)(1)(D). Also see  FDA, Compounded Drug  Products that Are Essentially  
Copies of a Commercially Available Drug Product Under Section 503A of the Federal  Food,  
Drug, and Cosmetic Act.  Accessed at  
https://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidanc 
es/UCM510154.pdf  on January 30,  2018.  
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   3  
OEI-02-16-00440    
who choose to enroll.  Sponsors also contract with  pharmacies to dispense 
prescription drugs to the beneficiaries enrolled  in their plans.  These 
pharmacies can be independently  owned or part of a chain.  
To  be covered under  Medicare Part D, prescription drugs must meet certain  
requirements.   For example, a drug must be FDA-approved and used for  
medically accepted indications.12   Compounded drugs are not FDA-
approved and, therefore,  do not meet the definition of a Part D covered  
drug.   However, CMS permits sponsors to  cover a  compounded  drug  if the 
compounded drug:  
   contains at least one active ingredient that meets the definition of a  Part 
D drugmeaning that it would be covered by  Part D if it were 
dispensed separately; and   
   does  not contain any  ingredients that would be covered  under Medicare  
Part B.13  
If a compounded drug meets these criteria, then the sponsor must 
determine whether  it will  treat the drug as on-formulary  (i.e., on  its list of  
covered drugs)  or non-formulary.   If the sponsor  opts to treat a  
compounded drug as on-formulary, the sponsor may use utilization  
management tools, such  as prior authorization.   If the sponsor opts to treat 
a compounded drug as non-formulary, the beneficiary may go through an  
exceptions  process to request coverage.   The sponsor can  choose to treat 
the compounded drug as non-formulary even if the individual  ingredients  
of the compounded drug  are on the sponsors formulary.   
In addition,  the sponsor  must follow certain guidelines  for  determining the  
amount  it will pay  for a compounded drug.  Specifically, CMS requires that 
the sponsor pay for all  ingredients that independently meet the definition of  
a Part D drug.14   Bulk powdersactive pharmaceutical ingredients for  
compoundingdo not meet  this definition and are not covered by  
_______________________________________________  
12  42 U.S.C.   1395w-102(e).  
13  CMS, Medicare Prescription Drug Benefit Manual, Chapter 6, Section 10.4.   Accessed at  
https://www.cms.gov/Medicare/Prescription-Drug-
Coverage/PrescriptionDrugCovContra/Downloads/Part-D-Benefits-Manual-Chapter-6.pdf  on  
September  13, 2017.   Also see 42 C.F.R 423.120(d).   For more information about  
compounded drugs covered under Part B,  see  OIG,  Compounded Drugs Under Medicare  
Part  B:   Payment and Oversight, OEI-03-13-00270, April 2014.  
14  42 CFR   423.120(d).  
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   4  
OEI-02-16-00440    
Part  D.15   Sponsors receive a list of all the ingredients in each compounded  
drug from the pharmacy.16  
Detecting and Deterring Part D Fraud, Waste,  and Abuse   
CMS relies on Part D sponsors to be the first line of defense against fraud,  
waste, and abuse.  Each sponsor is required to  implement a comprehensive 
compliance plan to identify and prevent Part D fraud, waste,  and abuse.17   
As a part of these compliance plans, CMS expects sponsors to monitor  
pharmacies.18   CMS also encourages sponsors to use data analysis to  
identify billing patterns that pose the greatest risk to the program.    
In addition, CMS contracts with a private company  to serve as the National  
Benefit Integrity  (NBI)  Medicare Drug Integrity Contractor (MEDIC) to detect 
and prevent fraud, waste, and abuse in  Part D.  The MEDICs responsibilities  
include identifying and investigating potential fraud and abuse and referring  
cases to law enforcement, as appropriate.  
Concerns about Topical Compounded Drugs in Other Programs   
The growth of  spending for  compounded drugs, including topicals,  has also  
raised concerns in other Federal programs.  TRICARE, the Department of  
Defenses military insurance program,  has had rapid increases in spending  
for compounded drugs.19   In response, TRICARE implemented new controls  
on payments for compounded drugs that reduced its costs.    
In addition, a U.S. Postal Service Office of Inspector  General  report found  
dramatic  increases in workers compensation costs for  compounded  drugs, 
the most common of which were topical drugs.20   The report called for the 
implementation of  controls to reduce  these costs.  
Related Work   
This report is part of  OIGs body of work  on  compounded drugs.  In a  
separate report, OIG plans to determine the extent to which  hospitals obtain  
_______________________________________________  
15  CMS, Medicare Prescription Drug Benefit Manual,  Chapter 6, Section 10.4.  Accessed at  
https://www.cms.gov/Medicare/Prescription-Drug-
Coverage/PrescriptionDrugCovContra/Downloads/Part-D-Benefits-Manual-Chapter-6.pdf  on  
September  13, 2017.    
16  76 Fed. Reg. 21521 (Apr. 15, 2011).  Accessed  at  https://www.gpo.gov/fdsys/pkg/FR-2011-04-
15/pdf/2011-8274.pdf  on  May 17, 2018.  
17  42  C.F.R.  423.504(b)(4)(vi).    
18  CMS, Prescription Drug Benefit  Manual,  Chapter 9,   40  and 50.6.9, January  2013. Accessed  
at https://www.cms.gov/Medicare/Prescription-Drug-
Coverage/PrescriptionDrugCovContra/Downloads/Chapter9.pdf  on September 13, 2017.  
19  U.S. Department of Defense Office of  Inspector General,  Controls Over Compound Drugs at  
the Defense Health Agency  Reduced Costs Substantially, but Improvements are Needed, 
DODIG-2016-105, July  2016.    
20  U.S. Postal Service Office of  Inspector General,  Workers Compensation Compound Drug  
Costs, HR-MA-16-003, March 2016.    
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   5  
OEI-02-16-00440    
compounded sterile preparations from  compounders, including outsourcing 
facilities that have registered with the FDA.21    
Scope 
Methodology  
This report focuses specifically on compounded topical drugs because of  
the extreme increases in  spending for these drugs that we identified  in  our  
prior work.  The analysis in this report on  questionable billing  does not  
include  entities  that registered with the FDA as outsourcing facilities  
because they  are subject to different  requirements.22     
Analysis 
We based this study  on an analysis of CMSs Prescription Drug Event (PDE)  
records.  Part D sponsors  submit a PDE record to CMS each time a drug is  
dispensed to a beneficiary enrolled in one of their  plans.    
We first analyzed all  PDE records with dates of service from January  1, 2010,  
to December  31, 2016.  We matched the National Drug Code (NDC)  on the 
PDE records to First DataBank to identify topical  compounded drugs  and 
other compounded drugs.  We then calculated the total spending for  
compounded  topical  drugs, for other types of  compounded drugs, and for 
all Part  D drugs for 2010 to 2016.    
Next, with  input from OIG investigators and CMS, we developed five  
measures to identify pharmacies with  questionable billing for compounded  
topical drugs  in 2016.  These measures  are based on  current fraud schemes  
involving compounded topical drugs that have been  uncovered  by OIG 
investigators.  Examples of  these schemes include pharmacies that pay 
kickbacks to physicians for prescribing unnecessary compounded topical 
drugs to patients and referring these patients to the pharmacies.  Other  
schemes involve pharmacies billing for more expensive ingredients than  are  
actually dispensed or pharmacies billing for the same compounded drug for  
multiple beneficiaries, even though compounded drugs are intended to  be 
customized medications  to meet individual patient needs.  
In total, we analyzed the  billing  of 2,388 pharmacies.23   Together, these 
pharmacies billed for 93 percent of all compounded topical drugs in 2016.   
We analyzed these data to identify pharmacies that have questionable  
_______________________________________________  
21  OIG,  Hospitals  Reliance on Drug Compounding Facilities, OEI-01-17-00090.  
22  As of  June 2017, 71  entities nationwide had registered as outsourcing facilities.   For more  
information, see FDA, Registered Outsourcing Facilities.   Accessed at  
https://www.fda.gov/drugs/guidancecomplianceregulatoryinformation/pharmacycompoundi 
ng/ucm378645.htm  on September 13, 2017.  
23  We focused our analysis on  2,388 pharmacies that billed for more than 10 compounded  
topical drugs and $1,000 for these drugs  in 2016.  As mentioned earlier, this analysis does not  
include pharmacies that registered with the FDA as outsourcing facilities because they are 
subject to different requirements.  
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   6  
OEI-02-16-00440    
Measures Indicating Possible Fraud or Abuse Related to  
Compounded Topical Drugs  
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.  
billing.  We determined that a pharmacy had questionable billing  if it was an  
extreme outlier on  one  or more of the  five  measures.  
Lastly, we identified prescribers who were associated with these pharmacies  
and prescribed  high amounts of  compounded  topical drugs.  These 
prescribers each ordered  more than $250,000  of compounded topical  drugs  
dispensed at  these pharmacies  in 2016.   
See Appendix A  for a detailed  description of the methodology.  
Limitations  
We did not independently  verify the data for this study, including the PDE 
records and other  data from CMS. Also, the PDE record  contains the NDC  
of the most expensive ingredient in each compound;  it  does  not contain a  
list of all ingredients used in each compounded drug.  As  a result, we were 
unable to determine how  the amounts billed to Part D were related to the  
individual ingredients  in each compounded drug.   In addition,  we designed  
this study to  identify pharmacies and  associated  prescribers who warrant  
further scrutiny.   None of the measures we analyzed confirms  that a  
particular pharmacy or  prescriber is engaging in fraudulent  or abusive  
practices.  
 
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.  
   
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   7  
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FINDINGS  
Part D  spending  for  Part D spending for compounded topical  drugs  increased 2,353 percent 
from 2010 to 2016, rising  from $13.2 million to $323.5  million.  Much of  this  
compounded topical 
growth occurred from 2014 to 2016, when spending increased  by more than 
drugs was  24  times 
$200 million.  See  Exhibit 1.  
higher  in  2016 than 
Compounded topical drugs  include creams, gels, and ointments that are 
it  was  in  2010   customized to meet specific needs of individual patients.  They  are intended  
for use by patients when  commercially available drugs do  not meet their  
clinical needs.   For example, a patient who is allergic to an  inactive 
ingredient, such as a dye, in a drug may require a special formulation to  
eliminate that ingredient.   However, the explosive growth of  compounded  
topical  drugs raises concerns that the drugs that were billed to Part D were 
not always dispensed  or  medically necessary.  This is of particular concern,  
as FDA does not approve  compounded drugs  or verify their safety or  
effectiveness.  
Exhibit 1:  Part D spending for compounded  topical drugs grew 
exponentially  from  2010  to  2016.  
$323.5 
s 
n
o $222.1 
Milli
n 
g i
n
di $107.3 
n
e
p $69.1 
S
$30.3 
$13.2  $19.2 
2010  2011  2012  2013  2014  2015  2016 
Source: OIG analysis of Part D data, 2017.  
 
Part D spending for compounded topical  drugs grew at a much faster rate 
than spending for all Part  D drugs and for other types of compounded 
drugs.  From 2010 to 2016, spending for compounded topicals increased  
2,353 percent while spending for all Part D drugs increased 89  percent and 
spending for other types  of compounded drugs, such as intravenous,  
injectable, and  oral  drugs, grew 225 percent.24     
_______________________________________________  
24  Note that these numbers and others presented in this report  are rounded.  Because our  
calculations  are based on unrounded numbers, they cannot always be recreated from the 
numbers presented in the report.  
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   8  
OEI-02-16-00440    
A main driver of the spending increase for compounded topicals appears to  
be the substantial  increase in the average cost  per drug.  In 2010, the  
average Part D cost  per  compounded topical was $54, but by 2016 it was  
$422.  This  increase of 676 percent significantly outpaced  the  cost  increases 
for all  drugs (41 percent)  and for  other types of compounded drugs 
(79  percent).    
Other  drivers of the spending increase appear to be growth in the number  
of beneficiaries receiving  compounded topicals  and growth in  the number  
of  compounded drugs billed to Part D.   The  number of beneficiaries  
increased 167 percent from 2010 to 2016, while the number  of  prescriptions  
for compounded topical  drugs  increased 216 percent.  The growth for  both 
outpaced  the growth  in the number of  beneficiaries and  prescriptions for all  
drugs and for other compounded drugs.    
 
About  550   A total  of 547 pharmacies had questionable billing for compounded topical  
drugs  in 2016.  These pharmacies each  billed extremely high amounts for at 
pharmacies had 
least one measure indicating possible fraud  or abuse.  See Exhibit 2  for 
questionable  billing 
these measures.  These pharmacies billed  Part D a total of $300.3  million for  
for compounded  compounded topicals  in 2016more than 90 percent of all Part D billing for  
these drugs  nationwide.   Although some of this  billing may  be legitimate, all  
topical  drugs  
of these pharmacies warrant further scrutiny.  
 
Exhibit 2:  547 pharmacies had questionable billing  on at least 1 measure,  indicating possible  
fraud or abuse related to compounded topical  drugs  in 2016.*  
Number of  
Threshold for  Pharmacies  
Measure   Median   Questionable  With  
Billing   Questionable 
Billing  
Percent of beneficiaries for  whom the pharmacy  billed at  
2%   38%   246  
least one  compounded topical drug    
Number of beneficiaries for  whom the pharmacy billed 
2   21   246  
for identical compounded topical drugs   
Average  dollar amount  billed  per  compounded topical  
$124   $934   222  
drug  
Number of compounded  topical drugs ordered by a 
14   131   204  
single prescriber  
Percent increase in total amount billed for compounded 
6%    483%   110  
topical drugs from 2015 to 2016  
Total Number of Pharmacies  with Questionable Billing   547**  
 
*This analysis includes pharmacies  that billed for more than 10 compounded topical drugs and $1,000 for  these drugs in 2016.   For more  
information, see Appendix A.   
** A  number of pharmacies exceeded thresholds for multiple measures.  As a result, the sum  does not  equal 547 pharmacies.  
Source: OIG analysis of Part D data, 2017.  
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   9  
OEI-02-16-00440    
 
Exhibit 3:  Many of the 547  More than half  these pharmacies277billed extremely high  
pharmacies had questionable  amounts for 2 or more measures.   Ten  pharmacies billed for  
billing  for  multiple measures.   extremely high amounts  for all  five  measures.25   See Exhibit 3.  
Pharmacies with questionable billing primarily billed for  
Number of   Number of  
Measures   Pharmacies with  compounded topical drugs containing ingredients  common in 
Questionable  pain creams.  Eight out of every ten compounded topical  drugs  
Billing   these pharmacies  billed for contained lidocaine-prilocaine,  
1   270   lidocaine,  or diclofenac sodium.   Lidocaine and lidocaine-
2   123   prilocaine are both anesthetics. Diclofenac sodium is a  
3   114   nonsteroidal anti-inflammatory drug.  OIG  has previously raised  
4   30   concern about potential fraud and  abuse related to both 
5   10   diclofenac  and lidocaine.26    
Total   547  
Compounded topical drugs containing these three ingredients  
Source: OIG analysis of Part D data, 2017.  
were, on average, more expensive than non-compounded topical  
drugs with these same  ingredients.   The difference is most striking with  
drugs containing diclofenac sodium.   On  average,  Medicare Part D paid  
$751 per compounded topical containing lidocaine, $276 per compounded 
topical  containing lidocaine-prilocaine,  and  $1,506 per compounded topical  
containing diclofenac sodium.  For non-compounded topical  drugs, Part D  
paid an average  of $445 for lidocaine, $59 for lidocaine/prilocaine, and $128 
for diclofenac sodium.    
Independent pharmacies were  about  seven  times more likely  than chain  
pharmacies to have questionable  billing for compounded topical  drugs.   
Specifically,  30  percent of  independent pharmacies that billed for  
compounded topicals had questionable billing for  these drugs, compared to  
only 4  percent of  chain pharmacies that billed for compounded topicals.   
OIG has previously raised  concerns  that independent pharmacies are more 
likely than chain pharmacies to have questionable  billing for Part D drugs.27  
Nearly 250 pharmacies billed for compounded topical drugs for an  
extremely high percentage of beneficiaries  
A total  of 246  pharmacies billed for  compounded topical  drugs for an  
extremely high  percentage of their Part D beneficiaries.  Each of these 
pharmacies billed for compounded topicals for more than 38 percent of the 
beneficiaries they served,  far higher than the median of 2 percent for 
_______________________________________________  
25  We considered pharmacies that were above the 75th  percentile plus three times the  
interquartile range on one or more measures to have questionable billing.  This means that  
these pharmacies were extreme outliers on one or more measures.   
26  In  2014, OIG raised concerns about diclofenac potassium, Solaraze (a brand-name version  
of diclofenac sodium gel),  and Lidoderm (a lidocaine patch).  These three drugs had  
significantly higher Medicare payments in certain geographic  areas compared to the Nation,  
pointing to potential fraud and  abuse.  OIG,  Questionable Billing and Geographic Hotspots  
Point to Potential Fraud and Abuse in Medicare  Part D,  OEI-02-15-00190, June 2015.  
27  OIG,  Retail Pharmacies with Questionable Part D Billing, OEI-02-09-00600, May  2012.  
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   10  
OEI-02-16-00440    
pharmacies  nationwide.  Further, 79 percent of these pharmacies194 of  
246billed for extremely  high amounts  on at least one other measure.   
When a pharmacy bills  for compounded topical  drugs for a high percentage  
of their beneficiaries it may mean that the pharmacy is billing for  
unnecessary compounded topical drugs or that it is billing for drugs that  
were not dispensed. It may also mean that the beneficiary  identification  
numbers  used to bill for  the drugs  had been stolen or sold.    
Among these pharmacies, 29 stand out.  Each billed for compounded  
topicals for more than 90 percent of the beneficiaries they served.  For these 
29 pharmacies billing to  be appropriate, almost  every one of  the Part D 
beneficiaries they served  would have had to have had  specific needs  that 
required  customized topical medications.  
 
Example of a pharmacy that billed for compounded topicals for a 
high percentage of its  beneficiaries   
One Oregon pharmacy billed for compounded topicals for 91  percent 
of its beneficiaries.  This pharmacy billed a total of $2.9  million for  
compounded topicals for 3,289 beneficiaries, averaging $891 per  
beneficiary.   Almost all of  these compounded topicals contained  
lidocaine-prilocaine cream.  This pharmacy also billed identical 
compounded topicals for an extremely  high number of beneficiaries  
and billed for an extremely high number of  compounded topical drugs  
ordered by a single prescriber.    
Close to  250 pharmacies billed for identical compounded topical  
drugs for an extremely high number of  their  beneficiaries  
A total  of 246 pharmacies billed for  identical compounded topicals for an  
extremely high number of beneficiaries.   These pharmacies each billed  
identical drugs for more than 21  different beneficiaries, far more than the 
median  of just 2 beneficiaries per pharmacy  nationwide.   Sixteen of the 
pharmacies are particularly noteworthy; each  billed  identical drugs for  
200  or more beneficiaries.   
Compounded drugs are meant to be customized  to meet an individual  
patients needs.  When a pharmacy bills for an identical  drug for many 
different beneficiaries, it raises questions as to whether the beneficiaries  
needed,  or even received,  the drug. It also raises questions as to whether  
the pharmacy was mass-producing these drugs  and  potentially marketing  
unapproved drugs  in violation  of the  Federal  Food, Drug, and Cosmetic  Act.  
Federal law  generally requires that pharmacies compound  drugs  only  for  
identified individual patients  and based on  the  receipt of a valid 
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   11  
OEI-02-16-00440    
prescription.28   This requirement helps ensure that pharmacies, which are  
not held to the same requirements as conventional manufacturers, 
compound drugs only for patients who have a medical need.  If a pharmacy 
provides the identical, mass-produced compounded topical drug to scores  
of beneficiaries, it would have far reaching consequences  if the drug  was  
unsafe or ineffective.   As  previously mentioned, FDA does not review the 
safety, effectiveness or quality of compounded drugs, which makes them  
higher-risk  than FDA-approved drugs.   
 
Examples of pharmacies that billed for identical compounded 
 
topicals for a high number of beneficiaries  
A Tennessee pharmacy billed for identical compounded topicals  for 
588 different Part D beneficiaries.  For each of these beneficiaries, the 
pharmacy billed for a 40-day supply of a compounded topical  
containing lidocaine-prilocaine cream.  Each prescription1,082 in  
allcost exactly $383.26.  These drugs were ordered by 564  different 
prescribers for  beneficiaries living  in 22 different States.  
In a similar example, a New York pharmacy  billed for identical  
compounded topicals for 535 different beneficiaries.  For each  of these 
beneficiaries, the pharmacy billed for a 30-day supply of a compound  
containing lidocaine 5%  ointment, costing exactly $643.96.  Raising  
additional concern, this pharmacy billed Part D $8.8 million for 
compounded topicals in 2016, the second  highest  amount  in the  
Nation.   
Over 200 pharmacies billed  extremely high  dollar amounts per  
compounded  topical  drug  
A total  of 222 pharmacies  each billed a  high  average  dollar amount  for  
compounded topical drugs.  They each billed more than  $934 per drug, on 
average,  far  more than the median of $124 per drug  for pharmacies  
nationwide.  Of note, 23 of the pharmacies billed  more than  $2,000 for each  
drug,  on average.  
Billing unusually high  amounts  for compounded topicals is another sign of  
possible fraud  or abuse. It may indicate that pharmacies are adding  
medically  unnecessary ingredients or using more expensive ingredients than  
necessary to increase reimbursement. It may also  indicate that pharmacies  
are billing for  different ingredients than those used  in the  compound.  For  
instance, pharmacies may be using low-cost bulk  powders  to make 
_______________________________________________  
28  Under certain circumstances, drugs may be compounded in limited quantities prior to the  
pharmacy receiving a valid prescription for an individual patient.  21 U.S.C.   353a(a).  Only 
entities registered  as outsourcing facilities, which are not included in this  analysis, may under  
certain circumstances, distribute compounded drugs without obtaining prescriptions for  
identified individual patients.  21 U.S.C.   353b.   
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   12  
OEI-02-16-00440    
compounds, but billing as if they used more expensive FDA-approved 
creams.  As noted earlier,  Part D does not pay for bulk powders.   
 
Examples of pharmacies that billed  high dollar amounts per  
compounded topical drug  
A pharmacy in Florida billed $1,752 per compounded topical  drug,  on  
average. In total, it billed  Part D $1.1 million for compounded topicals.   
This pharmacys top prescriber was a family medicine physician located  
over 180 miles away from  the pharmacy.  Raising additional concern,  
the pharmacy billed Part  D for compounded topical drugs for  
beneficiaries in 25 different States.  
A Texas pharmacy billed $2,447 per compounded topical  drug,  on  
average. In total, this  pharmacy billed Part D $1.1 million for  
compounded topicals.  Three-quarters of this pharmacys 
compounded topical drugs were prescribed by the same neurologist,  
and the majority  contained diclofenac sodium 3% gel.   
About 200 pharmacies  billed for an extremely  high number of  
compounded topicals from a single prescriber  
In total, 204 pharmacies billed for an extremely high number of  
compounded topicals ordered by a single prescriber.  Each pharmacy billed 
Part D for more than  131  compounded topicals from  a single  prescriber.  In  
contrast, the median for pharmacies was 14 compounded topicals from a  
single prescriber.  Eighteen of the pharmacies with  questionable billing raise 
particular  concern because each billed Part  D for over 1,000 prescriptions  
from a single prescriber.  
Billing for a high number  of  drugs  that are ordered  by a single prescriber  
may indicate that the pharmacy and  prescriber are working together to  bill  
for drugs that are medically unnecessary or  never provided to the 
beneficiary.   These schemes could involve kickbacks to the prescriber to  
induce  him or  her to write prescriptions for compounded topicals and to  
direct patients to fill them at a particular pharmacy.  Alternatively, this billing  
pattern could indicate that the pharmacy  is  using  a prescriber identification 
number  without the prescribers knowledge.  
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   13  
OEI-02-16-00440    
 
Examples  of pharmacies that billed a high number of  
compounded topical drugs from a single prescriber  
A pharmacy in New York billed Part D for 5,342 compounded  
topicalstotaling $1.6 millionordered by a single podiatrist in 2016.   
This pharmacy also  billed  for over 1,000 compounded topicals each 
from five other podiatrists. In total, the pharmacy billed  Part D 
$6.4  million for compounded topicals in 2016.  
A different New York pharmacy billed Part D for 2,775 compounded  
topicalstotaling $1.3 millionordered by a single podiatrist.  This  
pharmacy also billed for over 1,400 compounded topicals each from  
two  other podiatrists.  Of particular  concern, one of these podiatrists  
was also a top prescriber in the example above. In total, this pharmacy  
billed Part D $7.3 million for compounded topicals in 2016.  
More than 100 pharmacies greatly  increased the total  amount they 
billed for compounded topical drugs  from 2015 to 2016 
There were 110 pharmacies that greatly increased their billing for  
compounded topicals over the course of  just 1 year.  Each of these 
pharmacies increased their billing for these drugs by more than 483  percent 
from 2015 to 2016.  Of note, 20 of these pharmacies increased their billing  
by more than  10,000 percent.    
An extreme increase in a pharmacys billing may indicate fraud and abuse,  
especially when the spike is related to a particular type of drug.   This may  
indicate that the pharmacy is billing for drugs that are not medically 
necessary or never dispensed.  
 
Examples  of pharmacies  with  extreme increases in billing   
 
A California pharmacy billed Part D $7.2 million for  compounded  
  topicals  in 2016 after billing just $61,199 for these drugs in 2015.  This  
was an increase of over  11,600 percent in only  1 year.  Of great 
 
concern, this pharmacy was questionable on every  measure in our 
analysis.  
 
  A pharmacy in Florida billed Part D $1.8 million for compounded  
topical  drugs in 2016 after billing  just $7,468 for them in 2015, an  
 
increase of 24,000 percent. Almost every compounded topical billed  
to Part D by this pharmacy1,002 of 1,085was ordered by a nurse 
 
practitioner who  practiced 50 miles away.  
 
 
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   14  
OEI-02-16-00440    
More  than one   Of the 547 pharmacies with questionable billing for compounded topical 
drugs, 154  were located in the New York, Houston, Detroit, and Los Angeles  
quarter  of  the 
metropolitan areas.  These four metropolitan areas had the highest 
pharmacies with 
numbers of  pharmacies with questionable billing of any metropolitan areas  
questionable  billing  in the Nation.  
were in  the New   The New York area had 81 pharmacies  with questionable billing.  Together,  
York,  Houston,   these pharmacies billed $67.6  million for compounded topical drugs, which  
is 21 percent of  the total amount billed  in the Nation.   The majority  of the 
Detroit,  and  
pharmacies (51 of 81) each billed for an extremely high number of 
Los Angeles areas  
compounded topicals from a single  prescriber.     
The Houston area had 32 pharmacies with questionable billing.  These 
pharmacies accounted for two-thirds of the pharmacies in the area (32 of  
48) that billed for  compounded topicals.  Many of  the pharmacies  with  
questionable billing  (23 of 32)  billed for extremely  high  dollar amounts per  
compounded topical drug.    
The Detroit area had 22 pharmacies with questionable billing.   This  
represented almost half of the pharmacies (22 of 47) in the area that billed  
for compounded topicals.   Like Houston, many of the pharmacies billed for  
extremely  high prices.   In fact,  18  Detroit-area pharmacies  each  billed  more  
than $934  per compounded topical,  on average.    
The Los Angeles area had 19 pharmacies with  questionable billing.  This  
represented almost half of the pharmacies in the area that billed for  
compounded topicals (19  of 45).  Many  of these pharmacies (17 of 19) billed  
for a high number  of beneficiaries who received identical compounded 
topical drugs.  
 
124  prescribers   A total  of 124 prescribers  raise concern.  Each  of these prescribers ordered  
more than $250,000 of compounded topicals dispensed by  the pharmacies 
associated with 
identified  in this report as having  questionable billing, for a total of 
these  pharmacies  $73.1  million.29   This amount accounted for almost a quarter23 percent 
raise  particular  of all  Part D spending for  compounded topical drugs in 2016.  
concern   Although there  are  legitimate reasons for prescribing compounded topicals,  
the large amounts ordered by these prescribers at pharmacies with  
questionable billing raise  particular  concern.  When a prescriber is  
associated with pharmacies with questionable billing, it may indicate that a 
fraud scheme is occurring.  All these prescribers warrant further scrutiny.  
Some of these 124 prescribers also raise concerns about fraud and abuse for  
additional reasons.  Notably, one-fifth of these prescribers27 of the  124 
_______________________________________________  
29  These 124 prescribers represent 0.31 percent of all  39,666 prescribers who ordered at least  
one compounded topical drug  that was dispensed by  a pharmacy with questionable billing.   
The majority of the 39,666 prescribers ordered  less than $2,000 worth of compounded  
topicals dispensed by pharmacies with questionable billing.   
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   15  
OEI-02-16-00440    
each ordered compounded topicals for beneficiaries  in four  or more States.   
This raises concerns that the prescribers may not have had legitimate 
doctor-patient relationships with the beneficiaries. In addition, more than  
one-third of these prescribers43 of 124were podiatrists. It is worth  
noting that podiatrists account  for 35 percent  of  prescribers of particular 
concern, yet  make up  just 10 percent of all  prescribers who ordered  
compounded topicals dispensed by  pharmacies with questionable  billing.30    
 
Examples of prescribers who raise concerns  
A California podiatrist ordered 2,646  compounded topicals  dispensed 
at four pharmacies with questionable billing.  These drugs averaged  
$857 each. In total, Part D paid  nearly $2.3 million for them.  
A California family medicine physician  ordered $2.1 million worth  of  
compounded topicals dispensed at three pharmacies with  
questionable billing.  The  drugs1,193 in allwere ordered  for  
113  Part D beneficiaries.  On average, Part D paid nearly $18,500 per  
beneficiary for these drugs.   
A Texas podiatrist ordered compounded topicals for 319 Part D 
beneficiaries dispensed at two pharmacies with questionable billing.   
Every one of the 1,319 drugs that this podiatrist ordered contained  
lidocaine 5%  ointment.  These drugs averaged $1,061 each. In total,  
Part D paid $1.4 million for these drugs.    
 
   
_______________________________________________  
30  After podiatrists, the next most frequent specialty was internal  medicine.   A total of 13 of  
the 124 prescribers were internal medicine physicians.    
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   16  
OEI-02-16-00440    
CONCLUSION AND RECOMMENDATIONS  
Compounded drugs are meant to be customized for individuals whose 
needs cannot be met by commercially available drugs.   The explosive 
growth in Part D payments for compounded topical drugs is cause for 
concern.   Payments for these drugs were 24  times  higher in 2016 than in 
2010.  Nearly 550 pharmacies nationwide  have questionable billing for  
compounded topicals.  Each of these pharmacies billed extremely high  
amounts on one or more  measures that indicate possible fraud, waste,  or 
abuse.  For example, many billed for  identical compounded topicals for a 
high number of  beneficiaries or billed for high numbers of these drugs  
ordered by a single prescriber.  More than a quarter of the pharmacies with  
questionable billing were located  in four metropolitan areas: New York City,  
Houston, Detroit, and Los Angeles. In addition, 124 prescribers associated  
with these pharmacies raise particular concern.  Each of these prescribers  
ordered  high  amounts of  compounded topical drugs dispensed by  
pharmacies with  questionable billing.    
These pharmacies and the associated prescribers all warrant further scrutiny. 
The patterns  may indicate fraud, waste, and abuse.   They might include  
cases in which the  beneficiaries  or prescribers identification numbers were 
stolen or  used without their knowledge to  obtain drugs  that were  not  
needed or  not even received by the beneficiaries.   
OIG is committed  to  working with CMS to follow up on the pharmacies and  
prescribers identified in  this  review  as appropriate.  OIG will also work with  
FDA to follow  up on any  pharmacies that may have compounding  practices  
that warrant further scrutiny. In addition, CMS and  Part D sponsors  need to 
more effectively prevent fraud, waste, and abuse related to compounded  
topical  drugs, while also  ensuring access to needed  drugs.   
We recommend that CMS:  
Clarify  Part D  policies for  coverage of compounded topical 
drugs and use  of  utilization management tools 
CMS must ensure that sponsors cover only medically necessary 
compounded topical drugs.   To do this,  CMS should clarify  that sponsors 
have flexibility in their coverage of compounded topical drugs and use of  
utilization management tools, such as prior authorization and  quantity  
limits,  for these drugs.   This will also  help  sponsors limit fraud, waste, and  
abuse for  compounded topical  drugs and protect  beneficiaries safety.  CMS  
should also  work with sponsors to address any  questions related to these 
policies.   
Specifically,  CMS should  clarify  that sponsors  have the option to treat 
compounded  drugs as if they are on-formulary drugs or non-formulary  
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   17  
OEI-02-16-00440    
drugs.  CMS should also  clarify  that, even if  individual ingredients in the 
compound are on their formulary (i.e. their list of covered drugs), sponsors 
may still opt to treat a compound as non-formulary.  If the sponsor opts to  
treat a compounded drug as non-formulary, it does not need to  pay for  
the drug  unless the beneficiary goes through an exceptions process and  
their request is approved.     
In addition, CMS  should clarify that sponsors may apply utilization  
management tools to  compounded topical drugs, even if individual  
ingredients would not be subject to utilization management tools when  
dispensed individually.  Utilization management tools, such as prior  
authorization and quantity limits,  can help to  prevent fraud, waste, and 
abuse and ensure patient  safety.  Prior authorization requires additional  
information from a prescriber before a  Part D sponsor approves payment 
for a particular drug, allowing the sponsor to better determine if the drug  is  
medically necessary.   For example,  a  sponsor  could use the  prior 
authorization  process to ensure that the compound is being prescribed  
because the beneficiarys needs cannot be met by a commercially available  
drug.  Quantity limits cap the amount of a drug a beneficiary can receive, 
which can help reduce  overutilization and limit fraud, waste, and abuse.  
CMS  should  reiterate that, in order to be covered by Part D,  at least one of  
the ingredients must meet the definition of a  Part D covered drug and  none  
of the ingredients in a compounded  drug may  be covered  under Part B.  
CMS should also reiterate that Part D does not pay  for bulk powders.    
Conduct  additional  analysis on compounded topical  drugs 
To strengthen  its program integrity efforts for compounded topical drugs,  
CMS should instruct the  NBI MEDIC to  conduct  additional  analysis of  
compounded topical drugs.   The  NBI MEDIC  currently  conducts analysis of 
certain  pharmacies with a high risk  of billing fraud,  waste, and abuse  for 
compounded  drugs  and shares this information with Part D sponsors.  
Future analysis  should include  other pharmacy types and  the measures in  
this report, as well as others it deems appropriate, to identify  additional  
pharmacies and  prescribers with questionable patterns that warrant further  
scrutiny.  CMS should share the results of this analysis with sponsors and  
other partners, as appropriate.  These additional  data will allow sponsors 
and others to take action  on these pharmacies and  prescribers, which is 
critical to CMSs Part D program integrity efforts.   
Conduct training for Part D sponsors on  fraud schemes and 
safety concerns related to compounded topical drugs 
CMS should conduct training for Part D sponsors that informs them about 
the fraud schemes and the safety concerns related  to compounded topical  
drugs. It should also  reiterate  that sponsors have flexibility in their coverage 
of compounded topical drugs and  use of utilization management tools for  
these drugs, as described above.    
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   18  
OEI-02-16-00440    
More specifically, the training for  Part D sponsors should  include  how to 
monitor and  detect pharmacies with questionable  billing for compounded  
topical drugs.   It should include information  on  proactive data analysis as  
well as methods to  investigate pharmacies.   These methods  include 
scrutinizing all of the ingredients in compounded  topical  drugs and 
performing inventory audits, which compare the quantities of the drug  
ingredients that they billed for with the quantities that they purchased.   
These efforts can help to  reduce fraud, waste,  and  abuse related to  
compounded topical drugs under  Part D.   
Follow up on pharmacies with questionable Part D billing and 
the prescribers associated with these pharmacies  
In a separate memorandum, we will refer to CMS the pharmacies identified  
as having questionable Part D billing for  compounded topical drugs, as well  
as the associated prescribers identified in this report.  CMS should review  
this information in conjunction with its ongoing efforts  and take appropriate 
action.  
 
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   19  
OEI-02-16-00440    
AGENCY  COMMENTS AND OIG  RESPONSE  
In response to  the draft report,  CMS concurred with  all four  
recommendations.  
Specifically, CMS concurred  with  the first recommendation  to clarify Part D  
policies for coverage of  compounded topical drugs and use of  utilization  
management tools.  CMS states  that it will continue to work with  Part  D 
sponsors to  clarify the policies and use  of utilization  management tools.  
CMS concurred with the  second recommendation to conduct additional 
analysis  on compounded topical  drugs.  CMS  states  that it will continue to  
monitor the billing of  Part D drugs, including compounded topical  drugs, as  
well as take  additional measures as appropriate.   
CMS also  concurred with  the  third recommendation to  conduct training for  
Part D sponsors on fraud  schemes and safety concerns related to  
compounded topical drugs.  CMS states  that it will incorporate this training  
into  ongoing training programs.  
Lastly,  CMS concurred  with  the fourth recommendation to  follow up  on  
pharmacies with questionable Part D billing and the prescribers associated  
with these pharmacies.  CMS states  that it will review the referrals  and take 
action as appropriate. It may also share this information with plan  sponsors  
or make referrals to law enforcement.   
For the full  text of CMSs response, see Appendix B.   
 
 
 
   
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   20  
OEI-02-16-00440    
APPENDIX A: Detailed Methodology  
We based this study  on an analysis of CMSs PDE records.  Part D sponsors 
submit a PDE record to CMS each time a drug is dispensed to a beneficiary  
enrolled in one of their plans.  Each PDE record  contains information about  
the drug and  beneficiary, as well as the identification numbers for both the 
pharmacy and the prescriber. It also indicates if the drug was  
compounded.31   
Analysis of total drug spending for compounded drugs 
We analyzed all  PDE records with dates of service from January  1, 2010 to  
December  31, 2016.  This  amounts to  between 1.1 billion and 1.5  billion PDE  
records per year.  We used a field  on the PDE records to identify whether a  
drug was compounded.   Then, to  identify the type  of compounded drug 
e.g., topical, intravenous, injectable,  or oralwe matched the NDC in the 
PDE records to First Databank.32  
We then calculated the total drug spending for compounded topical drugs,  
other types of compounded drugs, and all Part  D drugs for each year from  
2010 to 2016.  To determine this amount, we summed four fields on the PDE 
recordsingredient cost,  dispensing fee, sales  tax, and the vaccine 
administration fee.  We also calculated the average  price  per drug  for 
compounded topicals, other types of compounded drugs, and all Part D  
drugs by  dividing the total spending for each group by the total  number  of  
PDE records.  Lastly, we calculated the total  number of beneficiaries who  
received at least one drug in each of these groups for each year.   
Analysis of  pharmacies and prescribers  
To identify pharmacies with questionable billing for compounded topical 
drugs, we developed a set of measures and analyzed PDE records for each  
pharmacy in our  analysis.    We included pharmacies  that billed  Part D for  
more than  10 compounded topical drugs and more than  $1,000 for these  
drugs.   In total, we analyzed the PDE records for 2,388 pharmacies.33   This  
_______________________________________________  
31  Compounded drugs often contain multiple drug ingredients.   The PDE record lists the NDC  
for only the most  expensive drug ingredient covered by Part  D included  in each  
compounded drug.  For more information, see 76 Fed. Reg. 21521 (Apr. 15, 2011).  Accessed 
at https://www.gpo.gov/fdsys/pkg/FR-2011-04-15/pdf/2011-8274.pdf  on September 13,  2017.  
32  The PDE records contain  a field that  indicates if  a drug is compounded.  To identify topical 
drugs, we used the route of administration listed  in First DataBank for the NDC on the PDE  
record.   In total, we identified a  total of 766,870 PDE records for compounded topical drugs  
in 2016.  The study did not include topical compounded drugs that were billed with NDCs  
with other routes of administration, such as an oral drug,  which is crushed and put into  a  
cream.   
33  A total of 15,290 pharmacies billed for  at  least one compounded topical drug in  2016.  
Questionable  Billing for Compounded Topical  Drugs in Medicare Part D   21  
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analysis is based on pharmacies that did not register with the FDA  as 
outsourcing facilities.34    
With input from OIG investigators and CMS, we developed five measures.   
These measures aim to capture current fraud schemes involving 
compounded topical drugs.    
For each pharmacy, we calculated the following measures:  
1.   Percent of beneficiaries for whom the pharmacy billed at least 
one compounded topical drug  
For each pharmacy, we determined the percent of  its Part  D 
beneficiaries for whom  it billed at least one compounded topical  
drug in  2016.35  
2.   Number of beneficiaries for whom the pharmacy billed for 
identical compounded topical drugs   
For each pharmacy, we calculated the total number  of its  
beneficiaries who received identical drugs.  We considered drugs to  
be identical if they had identical values for seven fields in the PDE 
recordsNDC, ingredient cost, dispensing fee, sales  tax, vaccine 
administration fee, days supply, and quantity dispensed.36   If a 
pharmacy billed  multiple  different  identical drugs for beneficiaries,  
we reported the largest number of beneficiaries for  whom the  
pharmacy  billed for an  identical compounded topical drug.  
3.   Average  dollar amount per compounded topical drug  
For each pharmacy, we calculated the average dollar amount  per  
drug.  To determine the amount  paid to the pharmacy at the point 
of sale, we summed four fields on the PDE recordingredient cost,  
dispensing fee, sales  tax, and vaccine administration fee.    
 
 
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34  These facilities  are subject  to different requirements related to  compounding.   To identify
outsourcing facilities, we used FDAs publically  available  list of  Registered Outsourcing  
Facilities  and CMSs online National Plan  & Provider Enumeration System (NPPES) National  
Provider Identifier (NPI) Registry.  
35  Because this measure is based  on a percentage of beneficiaries, we included pharmacies  
that had more than 100 beneficiaries who received  at least one topical compounded drug. In  
total, 2,276 of the 2,388 pharmacies met this criteria.  
36  We were not able to match  all  ingredients that were included in each compounded drug  
because the PDE record lists the NDC for only the most expensive drug ingredient covered  
by Part  D.  For more information, see 76 Fed. Reg. 21521 (Apr. 15, 2011).  Accessed at  
https://www.gpo.gov/fdsys/pkg/FR-2011-04-15/pdf/2011-8274.pdf  on September  13, 2017.  
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4.   Number of compounded topical drugs ordered by a single 
prescriber  
For each pharmacy, we determined the total number of  
compounded topical drugs ordered by each prescriber.  We then  
determined the highest number of compounded topical  drugs  
ordered by a prescriber.   
5.   Percent increase in total amount billed for compounded 
topical drugs from 2015 to  2016  
For each pharmacy, we determined the percent change in the total  
amount  billed for compounded topical drugs from 2015 to 2016.  37  
We calculated each of these five measures for each  of the pharmacies  in our  
review.  To identify pharmacies that had questionable billing for  
compounded topical drugs, we used a standard technique to identify  
outliers, known as the Tukey method.  We considered pharmacies that were 
outliers (i.e., above the 75th  percentile plus three times the interquartile 
range) on one or more measures to have questionable billing.   
Next, we determined  whether  pharmacies  with questionable  billing had 
certain characteristics in common.  To do this, we  matched each pharmacys  
NPI to data from the National Council for Prescription Drug Program  
(NCPDP).  We then determined the proportion  of pharmacies with  
questionable billing that were independent and the proportion that were 
part of a chain.  38   We also  determined whether the pharmacies with  
questionable billing were located in certain  metropolitan areas, i.e., Core 
Based  Statistical Areas  (CBSA).39    
Lastly, we identified prescribers associated with  pharmacies with  
questionable billing  who  raise concern.  We considered a  prescriber to  raise 
concern if  they  ordered more than $250,000 of compounded  topical drugs  
from pharmacies with  questionable billing.  We then determined total  
Part  D spending for compounded topicals ordered  by these associated  
prescribers at pharmacies with questionable billing.  Next,  we used  
_______________________________________________  
37  To be considered  to have questionable billing, the pharmacy  also had to have an increase 
of more than  $10,000 in Part  D  billing for topical compounded  drugs  from  2015  to  2016.  
38  For the purposes of the report, we used the definitions of chain and independent  
pharmacies from the  NCPDP.   Accordingly, chain pharmacies  are part of a group of four or  
more pharmacies under common ownership.  Independent pharmacies are one to three 
pharmacies under common ownership.   We included franchise pharmacies with  independent  
pharmacies because they  are independently owned.  For this analysis, we were unable to  
determine whether  82 pharmacies were independent or  chain.  An additional 27  pharmacies  
had other ownership types, such as government pharmacies.   These 109  pharmacies were 
included  in  a third category of  other for this analysis.    
39  A  CBSA is  a region  around an  urban center with at least 10,000 people.  See U.S.  Census  
Bureau,  Metropolitan and Micropolitan Statistical Areas.   Accessed at  
https://www.census.gov/programs-surveys/metro-micro/about.html  on November  8, 2017.  
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beneficiaries  ZIP  codes to  determine  where the each  prescribers 
beneficiaries were located.  We also determined the specialty of these 
prescribers using CMSs NPPES.40    
   
_______________________________________________  
40  NPPES contains information about prescribers, such as their name, address, and taxonomy.  
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APPENDIX B: Agency Comments  
 
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ACKNOWLEDGMENTS  
Miriam Anderson served  as the team leader for this study.  Others in  the  
Office of Evaluation and  Inspections who conducted the study include  
Margaret Himmelright and Jason Kwong.   Office of Evaluation and  
Inspections staff who provided support include  Kevin Farber and 
Meghan  Riggs.   
This report was prepared  under the direction of Jodi Nudelman, Regional 
Inspector General for Evaluation and Inspections in  the New York regional  
office, Nancy Harrison, Deputy Regional Inspector General, and  
Meridith  Seife, Deputy Regional  Inspector General.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
To obtain additional information concerning this report or to obtain copies,  
contact the Office  of Public Affairs at  Public.Affairs@oig.hhs.gov. 
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ABOUT THE OFFICE OF INSPECTOR GENERAL  
The mission of the Office  of Inspector General (OIG), as mandated by Public  
Law 95-452, as amended, is to protect the integrity  of the Department of  
Health and  Human Services (HHS) programs, as well as the health and  
welfare of beneficiaries served by those programs.   This statutory mission is 
carried  out through a nationwide network of audits, investigations, and  
inspections conducted by the following  operating components:  
Office of  Audit   The Office of Audit Services (OAS) provides auditing services for HHS, either  
by conducting audits with its own audit resources or by overseeing audit 
Services  
work done by others.  Audits examine the performance of  HHS programs  
and/or its grantees and contractors  in carrying  out their  respective 
responsibilities and are intended to provide independent assessments of  
HHS programs and  operations.  These assessments  help reduce waste,  
abuse, and mismanagement and promote economy and efficiency 
throughout HHS.  
Office  of  Evaluation   The Office  of Evaluation and Inspections (OEI) conducts national evaluations  
to provide HHS, Congress, and the public with timely, useful, and reliable 
and  Inspections  
information on significant issues.  These evaluations focus on preventing 
fraud, waste, or abuse and promoting economy, efficiency, and  
effectiveness of departmental programs.  To  promote impact, OEI reports  
also present practical recommendations for improving program operations.    
Office  of   The Office  of Investigations (OI) conducts criminal,  civil, and administrative  
investigations of fraud and misconduct related to  HHS programs,  
Investigations  
operations, and beneficiaries. With investigators working  in all 50 States  
and the District of Columbia, OI utilizes  its resources by actively
coordinating with the Department of Justice and  other Federal, State, and  
local law enforcement authorities.  The investigative efforts of OI often lead  
to criminal convictions, administrative sanctions, and/or civil monetary  
penalties.  
Office  of  Counsel  to   The Office of Counsel to the Inspector General (OCIG) provides general  
legal services to OIG, rendering advice and opinions on  HHS programs and 
the  Inspector 
operations and providing all legal support for OIGs internal operations.   
General  
OCIG represents OIG in all civil and administrative fraud and abuse cases  
involving HHS programs, including False Claims  Act, program exclusion, and 
civil monetary penalty  cases. In connection with these cases, OCIG also  
negotiates and monitors corporate integrity agreements.  OCIG renders  
advisory  opinions, issues compliance  program guidance, publishes fraud  
alerts, and provides other guidance to the health  care industry concerning  
the anti-kickback statute and other OIG enforcement authorities.