Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

MEDICARE’S OVERSIGHT OF 

COMPOUNDED 

PHARMACEUTICALS USED IN 

HOSPITALS 

Daniel R. Levinson 

Inspector General 

January 2015 

OEI-01-13-00400 
 

EXECUTIVE SUMMARY: MEDICARE’S OVERSIGHT OF COMPOUNDED 

PHARMACEUTICALS USED IN HOSPITALS 

OEI-01-13-00400 

WHY WE DID THIS STUDY 

A 2012 nationwide meningitis outbreak caused by contaminated injections, which were 

produced by a standalone compounding pharmacy, raised concerns about compounded 

sterile preparations (CSPs). Subsequent Office of Inspector General (OIG) work found 

that almost all acute-care hospitals use CSPs and most contract with standalone 

compounding pharmacies to provide at least some of these products. The Centers for 

Medicare & Medicaid Services (CMS) oversees the safety of CSPs prepared and used in 

Medicare-participating hospitals through the hospital certification process, in which State 

survey agencies or CMS-approved accreditors assess hospital compliance with 

requirements for drug compounding. This study provides information about the extent to 

which Medicare’s oversight of hospitals addresses recommended practices for CSPs. In 

2013, Congress passed the Drug Quality and Security Act, which clarifies the Food and 

Drug Administration’s authority over standalone compounding pharmacies. 

HOW WE DID THIS STUDY 

We reviewed the practices of the five entities that oversee hospitals that participate in 

Medicare—namely, CMS and the four hospital accreditors approved by CMS. Through 

consultation with experts in CSP oversight, OIG identified 55 recommended practices for 

CSP oversight in acute-care hospitals. Representatives from each oversight entity 

participated in a structured interview and completed a questionnaire about how their 

respective surveys of hospitals incorporate these recommended practices. We analyzed 

the data from the interviews and the questionnaire to determine the extent to which 

Medicare’s oversight addresses recommended practices for CSP oversight. 

WHAT WE FOUND 

Oversight entities address most of the recommended CSP-related practices at least some 

of the time. However, only one oversight entity always reviews hospital contracts with 

standalone compounding pharmacies. Oversight entities may also lack the human capital 

required to thoroughly review hospitals’ preparation and use of CSPs. Surveyors receive 

limited training specific to compounding, and most oversight entities do not routinely 

include pharmacists on hospital surveys. Finally, although most oversight entities are 

considering changes to how they oversee hospitals’ preparation and use of CSPs, none of 

them are considering changes to how they oversee hospitals’ contracts with standalone 

compounding pharmacies. 

WHAT WE RECOMMEND 

CMS should (1) ensure that hospital surveyors receive training on standards from 

nationally recognized organizations related to safe compounding practices and (2) amend 

its interpretive guidelines to address hospitals’ contracts with standalone compounding 

pharmacies. CMS concurred with both recommendations. 
TABLE OF CONTENTS 

Objective......................................................................................................1 

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

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

Findings........................................................................................................8 

Oversight entities address most of the expert-recommended 

practices related to CSPs at least some of the time .........................8 

Only one oversight entity always reviews hospitals’ contracts with 

standalone compounding pharmacies ............................................10 

Oversight entities may lack the human capital required to 

thoroughly review hospitals’ preparation and use of CSPs............11
 

Most oversight entities are considering changes to their oversight 

of hospitals’ preparation and use of CSPs ......................................12 

Conclusion and Recommendations ............................................................13 

Agency Comments and Office of Inspector General Response .....15 

Appendix....................................................................................................16 

A: Oversight Entity Responses to the Office of Inspector General 

Questionnaire on Recommended Practices for Hospital 

Compounding Oversight ................................................................16 

B: Agency Comments ...................................................................20 

Acknowledgments......................................................................................22 
 

 

 

 

 

OBJECTIVE 

To determine the extent to which Medicare’s oversight of hospitals 

addresses recommended practices for compounded sterile preparations. 

BACKGROUND 

A 2012 nationwide meningitis outbreak caused by contaminated injections 

that were compounded by the New England Compounding Center raised 

major concerns about compounded pharmaceutical products. The Centers 

for Disease Control and Prevention (CDC) reports that 751 cases of fungal 

infections and 64 deaths are linked to this outbreak.1 

Pharmaceutical compounding is the creation of a prescription drug tailored 

to meet the needs of an individual patient. For example, a compounding 

pharmacist may produce a version of a drug without an ingredient to 

which a patient may be allergic, or the pharmacist might create a liquid 

form of a drug for a patient who is unable to swallow a pill. Traditionally, 

pharmacies compounded a drug upon receipt of a prescription for an 

individual patient. However, recent trends in drug compounding have 

included the large-scale production of certain drugs by standalone 

compounding pharmacies to meet the needs of some hospitals.2 Hospitals 

may contract with multiple standalone pharmacies and may also 

compound drugs within their own pharmacies. 

Compounded Drugs 

There are two broad categories of compounded drugs: nonsterile 

preparations and sterile preparations, also known as compounded sterile 

preparations (CSPs). Nonsterile preparations—such as ointments applied 

to the skin or capsules or pills that a patient takes orally—are lower risk 

products. Standards for producing nonsterile preparations are less 

stringent than those for CSPs. 

CSPs are higher risk products that are generally administered to patients 

via injection or infusion. Preparation of CSPs requires more expertise and 

more extensive safety measures. CSPs may be prepared in a variety of 

settings, including a patient’s bedside for immediate use, a hospital 

pharmacy, or a contracted standalone pharmacy. Risks associated with 

CSP preparation include the use of the wrong medium or the wrong 

concentration for mixture, contamination with pathogens, and human 

____________________________________________________________ 

1

 CDC, Multistate Outbreak of Fungal Meningitis and Other Infections. Accessed at 

http://www.cdc.gov/hai/outbreaks/meningitis.html on November 26, 2014. 2

 S. Tavernise, “FDA Chief Seeks Expanded Authority to Improve Safety of Drug 

Compounders,” The New York Times, November 14, 2012. 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 1 
 

 

 

 

 

error. Among hospitals that participate in Medicare, 92 percent use CSPs.3 

Of these hospitals, almost 80 percent contract with at least one standalone 

compounding pharmacy to provide CSPs. 

United States Pharmacopoeia 

The United States Pharmacopoeia (USP) is an official compendium of 

drug standards in the United States.4 Chapter 797 of the USP 

Pharmaceutical Compounding—Sterile Preparations, commonly referred 

to as USP 797, provides product safety and quality standards for preparing 

CSPs.5 USP 797 includes standards for all risk levels of CSPs, including 

those prepared at a patient’s bedside for immediate use. Pharmacies 

engaged in compounding have widely adopted USP 797 standards, which 

28 States enforce to varying degrees.6, 7 The Centers for Medicare & 

Medicaid Services (CMS) requires the hospital pharmacy to be 

administered in accordance with accepted professional principles. The 

standards in USP 797 qualify as accepted professional principles. 

Other Guidelines Related to Sterile Compounding 

The Institute for Safe Medication Practices (ISMP) is a nonprofit 

organization that aims to educate the health care community and 

consumers about safe medication practices. In 2013, ISMP published 

guidelines for the safe preparation of CSPs. Experts developed these 

guidelines to provide procedures and safe practices for reducing errors in 

CSP preparation.8 Among other things, the guidelines address drug 

storage, compounding, product labeling, and staff management. 

____________________________________________________________ 

3

 OIG, Memorandum Report: High-Risk Compounded Sterile Preparations and 

Outsourcing by Hospitals That Use Them, OEI-01-13-00150, April 2013. 4

 The Federal Food, Drug, and Cosmetic Act §§ 201(j) and (g)(1)(A) (21 U.S.C. §§ 321(j) 

and (g)(1)(A)) (defining the terms “official compendium” and “drug”). 5

 The United States Pharmacopeial Convention. “USP-NF General Chapter 797 

Pharmaceutical Compounding—Sterile Preparations.” The United States Pharmacopoeia 

and the National Formulary, ch. 797 (2011).
 6

 American Society of Health Systems Pharmacists (ASHP), The ASHP Discussion Guide 

on USP Chapter <797> for Compounding Sterile Preparations. Accessed at 

https://www.ashp.org/s_ashp/docs/files/DiscGuide797-2008.pdf on November 26, 2014.
 7

 National Conference of State Legislatures, State Regulation of Compounding 

Pharmacies. Accessed at http://www.ncsl.org/research/health/regulating-compoundingpharmacies.aspx on November 26, 2014.
 8

 ISMP, Proceedings from the ISMP Sterile Preparation Compounding Safety Summit: 

Guidelines for SAFE Preparation of Sterile Compounds. Accessed at 

http://www.ismp.org/tools/guidelines/IVSummit/IVCGuidelines.pdf on 

November 26, 2014. 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 2 
 

 

 

 

 

 

In 2010, ASHP published guidelines on contracting for sterile 

compounding services.9 These guidelines provide factors for hospitals to 

consider when deciding whether to contract with a standalone 

compounding pharmacy, as well as suggested contract provisions. They 

also provide guidance on how to evaluate a standalone compounding 

pharmacy’s performance and how to address quality or performance issues 

with a standalone compounding pharmacy. 

Medicare’s Oversight of Hospitals 

Medicare’s quality oversight of hospitals is based on the Medicare 

Conditions of Participation (hereinafter referred to as the CoPs).10 The 

CoPs are baseline health and safety requirements that hospitals must meet 

to be eligible for participation in Medicare.11 They cover practices 

ranging from the credentialing and privileging of physicians to hospital 

management. Each CoP details specific standards that hospitals must 

meet. 

Hospital pharmaceutical compounding is addressed directly by the CoP for 

pharmaceutical services and indirectly in the CoPs for governing body and 

infection control.12 The pharmaceutical services CoP requires that all 

compounding be performed either by pharmacy personnel or under the 

supervision of pharmacy personnel.13 The governing body CoP applies to 

hospitals that contract with standalone pharmacies insofar as this CoP 

requires hospital executives to monitor contracted relationships.14 Finally, 

the infection control CoP mandates that hospitals maintain a sanitary 

environment that discourages the spread of infection through the facility.15 

Hospitals may choose to demonstrate that they meet the CoPs through an 

onsite inspection, typically called a survey, that is conducted by either an 

accreditor or a State survey agency (hereinafter State agency).16 Both 

accreditors and State agencies rely on surveys to determine whether 

hospitals newly enrolling in Medicare meet the CoPs, to reevaluate those 

____________________________________________________________ 

9

 ASHP, ASHP Guidelines on Outsourcing Sterile Compounding Services. Accessed at 

http://www.ashp.org/doclibrary/bestpractices/mgmtgdloutsourcingsterilecomp.aspx on
 

November 26, 2014.
 10 42 CFR pt. 482. 

11 Social Security Act, § 1861(e), 42 U.S.C. § 1395x(e); 42 CFR § 488.3(a)(2). 

12 42 CFR § 482.25 (Pharmaceutical Services); 42 CFR § 482.12(e) (Governing Body); 

42 CFR § 482.42 (Infection Control).
 13 CMS, State Operations Manual, Appendix A, A-0501. Accessed at 

http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/downloads
 

/som107ap_a_hospitals.pdf on June 24, 2014. 14 Ibid., A-0083. 

15 Ibid., A-0747 and A-0749. 

16 Social Security Act, § 1865, 42 U.S.C. § 1395bb; 42 CFR § 488.5(a). 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 3 
 

 

 

 

 

 

already in the Medicare program, and to respond to complaints and 

adverse events. Accreditors conduct surveys using their own survey 

protocols, whereas State agencies conduct surveys following the guidance 

outlined in the interpretive guidelines maintained by CMS.17 CMS 

reviews the results of these surveys to determine whether the hospital is 

eligible to participate in Medicare.18 

Pursuant to the Social Security Act, hospitals accredited by certain 

national accreditors may be deemed to meet the CoPs.19 Hospitals pay 

accreditors to go through their accreditation processes. Four organizations 

accredit hospitals for participation in Medicare: the Joint Commission, the 

American Osteopathic Association, Det Norske Veritas Healthcare, and the 

Center for Improvement in Healthcare Quality. The Joint Commission 

accredits the majority of accredited hospitals. 

Standalone Compounding Pharmacy Registration 

In November 2013, Congress passed the Drug Quality and Security Act, 

clarifying the Food and Drug Adminstration’s (FDA) oversight authority 

over standalone compounding pharmacies.20 This new law allows 

standalone compounding pharmacies to voluntarily register with FDA as 

CSP-outsourcing facilities. FDA inspects registered pharmacies according 

to a risk-based schedule, and these pharmacies must comply with FDA’s 

current good manufacturing practices, among other requirements.21 As of 

January 1, 2015, 26 standalone compounding facilities had registered with 

FDA.22

 ____________________________________________________________ 

17 CMS, State Operations Manual, Appendix A. Accessed at 

http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/downloads/
 

som107ap_a_hospitals.pdf on June 24, 2014. 18 42 CFR § 488.12
 19 Social Security Act, § 1865, 42 U.S.C. § 1395bb; 42 CFR § 488.12. 

20 P.L. No. 113-54, § 102.
 21 FDA, Compounding Quality Act. Accessed at http://www.fda.gov/drugs/
 

GuidanceComplianceRegulatoryInformation/PharmacyCompounding/ on June 4, 2014. 22 FDA, Registered Outsourcing Facilities. Accessed at http://www.fda.gov/Drugs/
 

GuidanceComplianceRegulatoryInformation/PharmacyCompounding/ucm378645.htm on
 

August 4, 2014. 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 4 
 

 

 

 

 

 

Related Office of Inspector General Work 

In 2013, OIG released a memorandum report on the extent to which 

Medicare-participating acute-care hospitals used CSPs and purchased 

them from standalone pharmacies.23 This study found that 92 percent of 

hospitals used CSPs and about 80 percent of these hospitals contracted 

with at least one standalone pharmacy to provide CSPs. 

In April 2014, OIG released a study that found that CMS does not track 

the number of claims for compounded drugs under Medicare Part B or the 

corresponding amounts paid.24 That study also found that Part B claims do 

not contain adequate information to identify compounded drugs and do not 

identify the compounding pharmacies that produced the drugs. 

METHODOLOGY 

We used three data sources in our review. First, we interviewed experts in 

the field of compounding oversight and reviewed guidance and 

recommendations from USP, ISMP, and ASHP. We then conducted 

structured interviews with CMS—as it provides the guidelines for State 

and accreditor surveys—and with the four CMS-approved hospital 

accreditors. (Hereinafter, we refer to CMS and the accreditors as 

“oversight entities.”) We also asked them to complete a questionnaire 

detailing the compounding-specific elements of their surveys. To the 

extent possible, we corroborated their responses by reviewing their survey 

policy and procedure manuals. 

Scope 

This study is national in scope. It examined the oversight activities of the 

five oversight entities. We examined CMS policies and procedures for 

State survey and certification agencies, but we did not examine the 

oversight activities of each individual State agency. This study focused on 

Medicare’s oversight of hospital use of CSPs because of the greater risk 

these may present to patients relative to those of nonsterile preparations, 

such as ointments and capsules. 

____________________________________________________________ 

23 OIG, Memorandum Report: High-Risk Compounded Sterile Preparations and 

Outsourcing by Hospitals That Use Them, OEI-01-13-00150, April 2013. 24 OIG, Compounded Drugs Under Medicare Part B: Payment and Oversight, 

OEI-03-13-00270, April 2014. 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 5 
 

 

 

 

 

 Data Collection 

Identifying Recommended Practices for Oversight of CSP Preparation and 

Use in Acute-Care Hospitals. Through consulting with experts in the 

oversight of CSPs, OIG identified 55 recommended practices for the 

oversight of CSP preparation and use in acute-care hospitals. These 

recommended practices include measures identified by USP, ISMP, ASHP, 

and other experts. For this analysis, we grouped the recommended 

practices into seven areas: 

(1) physical plant and environmental quality, 

(2) policies and procedures for compounding CSPs, 

(3) pharmacy personnel training and evaluation, 

(4) patient monitoring and adverse event reporting, 

(5) CSP storage, 

(6) compounding equipment use and maintenance, and 

(7) contracts with standalone compounding pharmacies. 

Structured interviews of oversight entities. We interviewed representatives 

from oversight entities to learn more about how Medicare oversight 

incorporates the recommended practices related to CSPs. During these 

interviews we asked oversight entities to describe: 

(1) the documents that surveyors review prior to hospital surveys, 

(2) the way in which surveyors learn about compounding in hospitals, 

(3) compounding-specific training that surveyors receive, 

(4) the way in which oversight entities cite hospitals for deficiencies 

related to compounding, and 

(5) any future plans that oversight entities have for changing the way 

that surveys address compounding in hospitals. 

We conducted four of these interviews over the phone and one in person. 

Questionnaire sent to oversight entities. We sent oversight entities a 

questionnaire about how their hospital survey processes incorporate 

recommended practices for oversight of sterile drug compounding. The 

questionnaire asked whether each recommended practice is “always,” 

“some of the time,” or “never” addressed during surveys of hospitals that 

use CSPs. We asked oversight entities to corroborate their responses by 

providing us with the relevant sections of their manuals on policies and 

procedures for surveys. See Appendix A for a complete inventory of 

questionnaire responses. 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 6
 

Data Analysis 

We analyzed the data from the questionnaire and the structured interviews 

to determine the extent to which Medicare’s oversight addresses the 

55 recommended practices we identified across 7 areas. We totaled the 

responses for each area to determine the extent to which Medicare’s 

oversight of hospitals addresses recommended practices for CSPs. To 

corroborate covered entities’ responses to the questionnaire, we reviewed 

the survey policy and procedure manuals that they provided to us. For 

added context, we aggregated the structured interview data and identified 

how oversight entities approach oversight of CSPs in hospitals. 

Limitations 

Medicare does not require that the recommended practices we identified 

be incorporated into hospital surveys. We did not evaluate the validity of 

hospital surveys conducted by the five oversight entities. Our review 

relied on self-reported data from the oversight entities. It was not feasible 

to independently verify these data. 

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. 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 7 
 

 

FINDINGS 

Oversight entities address most of the

expert-recommended practices related to CSPs at 

least some of the time 

Because they have limited time to assess hospitals’ entire operations, 

oversight entities may address some of the recommended practices for 

oversight of CSPs on a case-by-case basis. Oversight entities are more 

likely to address CSPs when a problem with CSPs is apparent during the 

current survey or was apparent during a prior survey. Although oversight 

entities reported not always asking hospitals directly about CSP 

preparation and use during hospital surveys, they generally reported that 

they assume hospitals prepare and use CSPs.25 

The six areas that oversight entities examine some of the time include 

physical plant and environmental quality, policies and procedures for 

compounding CSPs, pharmacy personnel training and evaluation, patient 

monitoring and adverse event reporting, CSP storage, and compounding 

equipment use and maintenance (see Figure 1 on the next page). 

Physical plant. Oversight of the physical area where compounding occurs 

includes assessing its cleanliness and appropriateness for the types of 

CSPs prepared, including hazardous CSPs (such as chemotherapy drugs). 

Most oversight entities reported that they always assess the environmental 

quality and control in hospital compounding areas and the appropriateness 

of the areas where hazardous CSPs are prepared. However, with regard to 

hospitals’ written policies and procedures related to maintaining the 

hospital compounding area, most oversight entities review these 

documents on some, but not all, surveys. Some oversight entities told us 

that surveyors prioritize observing hospitals’ maintenance practices in 

compounding areas and review written procedures only when necessary to 

confirm that hospital procedures comply with the oversight entity’s 

standards.

 ____________________________________________________________ 

25 Two oversight entities reported that they ask hospitals whether they prepare CSPs 

onsite. The three other oversight entities reported that they most often learn about CSP 

preparation while touring the pharmacy. With regard to use of CSPs, only one oversight 

entity reported asking each hospital directly about CSP use. Two of the oversight entities 

reported that they assume that all hospitals use CSPs, and two more reported that they 

observe CSP use during their tours of hospitals. 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 8 
 

 

 

Physical Plant
 

(13 recommended practices, 65 responses)
 

Area of Compounding Oversight Policies and Procedures for Compounding CSPs 

(12 recommended practices, 60 responses) 

Pharmacy Personnel Training and Evaluation
 

(5 recommended practices, 25 responses)
 

Adverse Events
 

(2 recommended practices, 10 responses)
 

CSP Storage
 

(3 recommended practices, 15 responses)
 

Compounding Equipment
 

(9 recommended practices, 45 responses)
 

Oversight Entities' Responses on Recommended Practices 

Always Some of the Time Never 

0% 25% 50% 75% 100%

Figure 1: Extent to Which the Five Oversight Entities Incorporate Recommended Practices 

for Each Area of Compounding Oversight Into Surveys 

Source: OIG analysis of responses to questionnaire by CMS and the four accreditors, 2014. 

Note: Responses represent the number of recommended practices multiplied by the five oversight entities. 

Policies and procedures for compounding CSPs. Recommended oversight 

of policies and procedures for preparing CSPs includes ensuring that 

hospitals’ policies and procedures address (1) the safety of staff when they 

are preparing hazardous CSPs and (2) the quality and sterility of CSPs. 

Most oversight entities reported that they always assess hospitals’ 

procedures for keeping staff safe when compounding hazardous CSPs. 

Additionally, on some, but not all, surveys, oversight entities generally 

review written policies and procedures for CSPs compounded onsite and 

for outsourcing CSPs. Most oversight entities told us that they would 

request these policies and procedures only if a surveyor discovered a 

noncompliant practice related to compounding CSPs. 

Pharmacy personnel training and evaluation. Oversight of pharmacy 

personnel training and evaluation includes assessing whether the hospital 

provides continuing education and competency evaluation to ensure that 

staff prepare CSPs in accordance with accepted standards. Most oversight 

entities always review the training and competency records of pharmacy 

personnel. However, most oversight entities delve into a hospital’s 

requirements for compounding-specific training and competency 

evaluation only on some surveys. Generally, they look more deeply into 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 9 
 

personnel training and evaluation for a sample of personnel or in instances 

when they identify a problem with personnel during the survey. 

Adverse events. We identified two recommended practices related to 

adverse events: (1) assessing hospitals’ feedback mechanisms for patients 

and caregivers to report CSP-related concerns and (2) determining 

whether hospitals track outsourced CSPs to the patient level. Most 

oversight entities reported that they always assess hospitals’ feedback 

mechanisms for patients and caregivers to report concerns about CSPs. 

Oversight entities vary as to how often they determine whether hospitals 

track outsourced CSPs to the patient level: four always or sometimes do 

this, while one does not do this at all. 

CSP storage. Oversight of CSP storage includes assessing whether 

hospitals store CSPs under the conditions necessary to maintain their 

sterility and stability. On some, but not all, surveys, most oversight 

entities assess whether hospitals store CSPs under proper conditions. Two 

oversight entities told us that surveyors always review medication storage. 

The other three oversight entities review this some of the time. 

Compounding Equipment. Recommended practices related to 

compounding equipment focus on reviewing hospitals’ procedures for 

equipment use and maintenance to ensure that CSPs are prepared safely 

and accurately. Two oversight entities consistently review hospitals’ 

preventative maintenance documentation for all equipment used to prepare 

CSPs. In general, oversight entities give surveyors the discretion to decide 

which equipment policies and procedures to assess. For instance, a 

surveyor might review policies and procedures related to equipment use 

only if related concerns arise through observation or interviews during the 

survey. 

Only one oversight entity always reviews hospitals’

contracts with standalone compounding pharmacies 

Four of the five hospital oversight entities either do not or only sometimes 

review hospital contracts with standalone compounding pharmacies during 

surveys. This review could include whether the terms of the contracts 

address CSP recall procedures, proper storage of CSPs while in transit, 

and quality assurance related to CSP sterility and potency, among others. 

All oversight entities request lists of hospitals’ contracted services during 

surveys. One oversight entity always reviews hospitals’ contracts with 

standalone pharmacies and assesses whether hospitals evaluate 

pharmacies’ compliance with the contracts. (See Figure 2 on the next 

page.) Most hospitals that use CSPs contract with one or more standalone 

pharmacies to produce some of their CSPs. In particular, hospitals tend to 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 10 
 

outsource the highest risk CSPs, such as the compounded injections 

responsible for the 2012 fungal meningitis outbreak. 

Figure 2: Extent to Which the Five Oversight Entities Incorporate Recommended Practices 

for Oversight of Contracts With Outside Contracting Pharmacies Into Surveys 

0% 25% 50% 75% 100%

Contracts With O utsid e Co mpounding Ph armacies 

(1 1 re co mme nde d pr actic e s, 55 r es po ns es) 

Ove rsight Entitie s' Re sponses on Re comme nded Practices 

Alwa ys Some of the Time Never 

Source: OIG analysis of responses to questionnaire by CMS and the four accreditors, 2014. 

Note: Responses represent the number of recommended practices multiplied by the five oversight entities. 

Finally, three oversight entities do not determine whether the standalone 

pharmacies that hospitals use have voluntarily registered with FDA as 

CSP-outsourcing facilities. The remaining two oversight entities 

sometimes take standalone pharmacies’ FDA registration status into 

account when they examine hospital contracts. Standalone compounding 

pharmacies that register with FDA are subject to FDA inspection. Because 

most hospitals do not inspect the standalone pharmacies with which they 

contract, a satisfactory FDA inspection might be the only indicator of the 

conditions at a standalone pharmacy. 

Oversight entities may lack the human capital required 

to thoroughly review hospitals’ preparation and use of 

CSPs 

We acknowledge that many of the recommended practices included in our 

review are highly technical and specific to compounding—one of many 

activities that hospital oversight entities must assess. In fact, experts we 

spoke with said that only a trained pharmacist would be able to perform a 

comprehensive review of these recommended practices. 

Pharmacists are not routinely involved in most hospital 

surveys, but surveyors can draw on pharmacists’ expertise 

when needed 

Only two oversight entities employ pharmacists as hospital surveyors; 

however, neither includes a pharmacist on every survey team. One of 

these oversight entities regularly sends pharmacists on hospital surveys 

and tries to include a pharmacist on surveys of larger hospitals with more 

complicated pharmacy operations. The other oversight entity with 

pharmacist surveyors does not regularly include them on surveys, but may 

include a pharmacist on complaint surveys related to alleged pharmacy 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 11 
 

 

problems. Surveyors at two other oversight entities have access to a 

pharmacist-consultant on an as-needed basis if a pharmacy-related 

problem arises during a survey. Finally, surveyors at one oversight entity 

do not have access to pharmacists during the survey process. 

Surveyors receive limited training specific to compounding 

Two oversight entities do not provide any compounding-specific training 

to their surveyors. The other three oversight entities vary in the 

compounding-specific training they provide, ranging from observation of 

compounding during training surveys to an online training module 

dedicated to USP 797. 

Most oversight entities are considering changes to 

their oversight of hospitals’ preparation and use of 

CSPs 

Three oversight entities are considering changing the way they address 

preparation of CSPs in hospitals, but they have not committed to doing so. 

For instance, one oversight entity is revising how it oversees drug 

compounding in home infusion pharmacies and may apply the changes it 

makes for this setting to hospitals. Potential changes include revising 

training for surveyors, so that they have the tools to consistently evaluate 

compounding practices and the compounding environment during surveys. 

Another oversight entity has created optional standards for hospitals 

related to CSPs and is considering applying these standards to all surveys. 

The remaining oversight entity is considering incorporating additional 

elements of USP 797 into its surveys. The other two oversight entities do 

not plan to change their oversight of CSP preparation in hospitals. 

Finally, despite outsourced compounded injections’ being responsible for 

the 2012 fungal meningitis outbreak, none of the oversight entities plan to 

change how their oversight addresses hospital contracts with standalone 

compounding pharmacies. 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 12 
 

 

CONCLUSION AND RECOMMENDATIONS 

CSPs are a complex and highly technical aspect of hospital operations. 

We identified 55 recommended practices for overseeing CSPs in hospitals 

by consulting with experts and reviewing standards from nationally 

recognized organizations. However, CSPs are only one of many areas of 

hospital operations that Medicare oversight entities must assess during 

onsite surveys. 

Accordingly, oversight entities must—and do—exercise their discretion 

when determining how they assess CSP-related hospital 

operations. Indeed, in this evaluation, we found that oversight entities 

follow most recommended practices at least some of the time and that 

their surveyors exercise discretion as to the scope and depth of their 

reviews on the basis of what they encounter at each hospital. 

To exercise their discretion most effectively in the oversight of CSPs, 

surveyors need the appropriate knowledge of this highly technical aspect 

of hospital operations. However, we found that oversight entities provide 

limited training specific to compounding to their surveyors. 

In addition, contracting with standalone pharmacies for CSPs gets limited 

attention from the oversight entities. Only one of the five oversight 

entities always reviews hospitals’ contracts with standalone pharmacies. 

Such a review could include whether contracts adequately address CSP 

recall procedures, proper storage of CSPs while in transit, and quality 

assurance related to CSP sterility and potency, among others. Finally, 

none of the entities plan to change how they assess these contracts in light 

of FDA’s new initiative to register and inspect standalone compounding 

pharmacies. 

Therefore we recommend that CMS: 

Ensure that hospital surveyors receive training on standards 

from nationally recognized organizations related to safe 

compounding practices 

CMS’s interpretive guidelines for hospital surveys state that 

pharmaceutical services must be administered in accordance with 

standards or recommendations promoted by nationally recognized 

professional organizations. We recognize that it is not reasonable to 

expect surveyors to be experts on the highly technical aspects of 

pharmaceutical compounding. However, CMS should work with experts 

and professional organizations, such as USP, ISMP, and ASHP, to develop 

surveyor training on standards for compounding from nationally 

recognized organizations. This training could help ensure that CMS and 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 13 
 

 

State agency surveyors have the basic competencies necessary to assess 

compounding in hospitals and to determine when they need to call on 

additional expertise beyond that of the survey team. When accreditation 

organizations apply or reapply for “deeming” authority, CMS should 

ensure that they have equivalent training in place for their surveyors. 

Amend the interpretive guidelines to address hospitals’ 

contracts with standalone compounding pharmacies 

Medicare’s pharmaceutical services CoP covers the compounding of 

medications, but it does not speak to hospitals’ contracts with standalone 

compounding pharmacies. Hospitals often contract with such pharmacies 

for high-risk CSPs, such as those that caused the 2012 meningitis 

outbreak. 

To improve oversight of hospitals’ contracts with standalone compounding 

pharmacies, CMS should amend the interpretive guidelines for hospital 

surveys. Specifically, within guidance on the pharmaceutical services 

CoP, CMS could instruct surveyors to assess hospitals’ management of 

contracts with standalone compounding pharmacies. This guidance could 

reference hospitals’ responsibility for overseeing their contracted services 

under the quality assessment and performance improvement (QAPI) CoP 

and the governing body CoP. The QAPI CoP requires hospitals to have an 

ongoing, data-driven performance improvement program that covers all 

hospital services, including those furnished under contract. The governing 

body CoP holds hospitals’ governing bodies accountable for all contracted 

services and requires governing bodies to use the QAPI program to assess 

services provided under contract. Referencing these requirements within 

the pharmaceutical services CoP could help to ensure that surveyors 

always review hospitals’ contracts with standalone compounding 

pharmacies. 

Additionally, within the interpretive guidelines, CMS could require that 

when surveyors assess hospitals’ management of contracts with standalone 

compounding pharmacies, they review whether these pharmacies have 

registered with FDA. We understand that CMS may need to seek 

additional authority to make this change. 

Finally, CMS should ensure that any changes it makes to the interpretive 

guidelines are reflected in accreditors’ survey procedures when they apply 

or reapply for “deeming” authority. 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 14 
 

 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

CMS concurred with both of our recommendations. 

In response to our first recommendation, CMS stated that surveyors could 

benefit from more training in assessing compounding practices in 

hospitals. It will explore developing online training materials for 

surveyors with State survey agencies and will explore ways to collaborate 

with national experts to develop this training. CMS also noted that 

approved hospital accreditors must have survey procedures comparable to 

those established for State survey agencies and that they use qualified 

surveyors. 

In response to our second recommendation, CMS stated that it will explore 

revising its interpretive guidelines to make surveyors aware that the CSPs 

used in hospitals are frequently handled by contracted compounding 

pharmacies. It further stated that because Medicare regulations do not 

require hospitals to contract with compounding pharmacies that have 

registered with FDA, surveyors would limit their assessments to how 

hospitals ensure that their contracted pharmacy services comply with 

regulations. 

OIG supports CMS’s efforts to improve Medicare’s oversight of 

pharmaceutical compounding in hospitals. We will monitor these efforts 

through our recommendations-tracking process. 

For the full text of CMS’s comments, see Appendix B. 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 15 
 

APPENDIX A 

Oversight Entity Responses to the Office of Inspector General 

Questionnaire on Recommended Practices for Hospital 

Compounding Oversight 

Table A1: Extent to Which Oversight Entity Surveys Incorporate 

Recommended Practices Related to the Hospital Physical Plant and 

Environmental Quality 

Recommended Practice 

Oversight Entities Responding 

Always Some of 

the Time Never 

Do surveyors request a copy of the hospital’s pharmacy cleaning logs? 1 4 0 

Do surveyors request a copy of the hospital’s pharmacy environmental 

sampling logs? 0 5 0 

If the hospital prepares CSPs onsite, do surveyors assess whether the area 

of preparation is appropriate for all CSP risk levels compounded at the 

hospital? 

2 3 0 

If the hospital prepares hazardous CSPs onsite, do surveyors assess the 

appropriateness of the physical area where hazardous CSPs are 

compounded? 

3 2 0 

If the hospital prepares CSPs onsite, do surveyors assess the environmental 

quality and control in the area of preparation? 3 2 0 

If always or some of the time, do surveyors assess the adequacy of the 

environmental quality and control for each risk level of CSP prepared at the 

hospital? 

2 3 0 

If the hospital prepares CSPs onsite, do surveyors review the hospital’s 

written procedures outlining the following:

 Cleaning and disinfecting of the compounding areas? 1 4 0 

 Personnel hand hygiene and garbing in compounding areas? 3 2 0 

 Employee aseptic technique in compounding areas? 2 3 0 

 Environmental sampling in compounding areas? 0 5 0 

 Facility and engineering control testing and certification in compounding 

areas? 0 4 1 

If the hospital prepares CSPs onsite, do surveyors assess the adequacy of 

personnel protective equipment for compounding CSPs, including applicable 

policies and procedures for personnel protective equipment? 

2 3 0 

For hospitals that prepare hazardous CSPs onsite, do surveyors assess the 

adequacy of personnel protective equipment for compounding hazardous 

CSPs, including applicable policies and procedures? 

2 3 0 

Source: OIG analysis of responses to questionnaire by CMS and the four accreditors, 2014. 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 16 
 

Table A2: Extent to Which Oversight Entity Surveys Incorporate 

Recommended Practices Related to Policies and Procedures for 

Compounding CSPs 

Oversight Entities Responding 

Recommended Practice Always Some of 

the Time Never 

Do surveyors request copies of all the hospital’s policies and procedures 

related to any pharmacy-compounded sterile preparations (CSPs)? 0 5 0 

Do surveyors request copies of all the hospital’s policies and procedures for 

outsourcing CSPs? 0 4 1 

Do surveyors request a copy of the hospital’s most recent USP 797 Gap 

Analysis? 0 3 2 

Do surveyors determine whether the hospital has a quality assurance plan in 

place to verify the accuracy and sterility of compounded CSPs? 3 2 0 

Do surveyors perform an assessment of the hospital’s pharmacy procedures 

for finished preparation checks? 2 3 0 

Do surveyors assess the hospital’s policies and procedures for maintaining 

CSP quality and purity until time of dispensing or beyond-use date? 1 4 0 

Do surveyors assess the extent to which the hospital’s policies and procedures 

for immediate use CSPs correspond with USP 797 in all areas of the hospital? 0 5 0 

Do surveyors review the hospital’s policies and procedures for establishing 

beyond-use dating? 1 4 0 

Do surveyors assess the appropriateness of beyond-use dates on opened or 

needle-punctured single-dose and multiple-dose containers in all areas of the 

hospital? 

2 3 0 

Do surveyors determine whether all orders entered into a computerized 

prescriber order-entry system at the hospital are verified by a pharmacist? 3 2 0 

Do surveyors review the hospital’s policies and procedures for compounding 

hazardous CSPs, such as chemotherapy drugs? 2 3 0 

If a hospital prepares radiopharmaceutical CSPs, do surveyors assess the 

hospital’s procedures to limit staff radioactivity exposure? 4 1 0 

Source: OIG analysis of responses to questionnaire by CMS and the four accreditors, 2014. 

Table A3: Extent to Which Oversight Entity Surveys Incorporate 

Recommended Practices Related to Pharmacy Personnel Training and 

Evaluation 

Oversight Entities Responding 

Recommended Practice Always Some of 

the Time Never 

Do surveyors request a copy of the hospital’s pharmacy personnel training and 

competency records? 3 2 0 

For hospitals that prepare CSPs onsite, do surveyors determine whether the 

hospital requires that personnel receive continuing education (e.g., annually) 

on compounding CSPs? 

1 4 0 

For hospitals that prepare CSPs onsite, do surveyors determine whether the 

hospital requires (e.g., annually) that personnel demonstrate competencies on 

compounding CSPs? 

1 4 0 

Do surveyors review past performance evaluations for pharmacy personnel? 0 4 1 

If surveyors always or sometimes review past performance evaluations for 

pharmacy personnel, do surveyors review how the hospital addresses 

pharmacy personnel performance issues? 

3 1 1 

Source: OIG analysis of responses to questionnaire by CMS and the four accreditors, 2014. 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 17 
 

Table A4: Extent to Which Oversight Entity Surveys Incorporate 

Recommended Practices Related to Patient Monitoring and Adverse Event 

Reporting 

Oversight Entities Responding 

Recommended Practice Always Some of 

the Time Never 

Do surveyors assess the hospital’s feedback mechanism for patients and 

caregivers to report concerns regarding CSPs or CSP-administration devices? 3 2 0 

Do surveyors determine if the hospital has a policy for tracking outsourced 

compounded medications to the patient level? 2 2 1 

Source: OIG analysis of responses to questionnaire by CMS and the four accreditors, 2014. 

Table A5: Extent to Which Oversight Entity Surveys Incorporate 

Recommended Practices Related to CSP Storage 

Oversight Entities Responding 

Recommended Practice Always Some of 

the Time Never 

Do surveyors assess whether the hospital stores CSPs under proper 

conditions for the specified beyond-use date on the label? 2 3 0 

If the hospital uses hazardous CSPs (i.e., chemotherapy), is there a separate 

assessment of the storage conditions for hazardous CSPs? 3 2 0 

Do surveyors review whether the hospital has documented justification if CSPs 

are stored longer than deemed appropriate for the beyond-use date and 

storage conditions per USP 797? 

0 2 3 

Source: OIG analysis of responses to questionnaire by CMS and the four accreditors, 2014. 

Table A6: Extent to Which Oversight Entity Surveys Incorporate 

Recommended Practices Related to Compounding Equipment Use and 

Maintenance 

Oversight Entities Responding 

Recommended Practice Always Some of 

the Time Never 

Do surveyors review whether routine preventive maintenance is documented 

for all equipment used during the compounding of CSPs? 2 3 0 

Do surveyors review whether routine calibration is documented for all 

equipment used during the compounding of CSPs? 2 1 2 

Do surveyors review whether certification of equipment and areas used during 

the compounding of CSPs is current and without lapse for one year? 1 3 1 

For hospitals that prepare CSPs onsite, do surveyors review hospitals’ written 

procedures outlining the following with respect to compounding equipment: 

Required equipment calibration? 1 3 1 

Routine (scheduled) equipment maintenance? 2 2 1 

Monitoring for proper equipment function? 1 3 1 

Procedures for equipment use? 1 3 1 

Equipment cleaning? 1 3 1 

Verifying the accuracy and precision of automated compounding devices for 

parenteral nutrition compounding? 0 3 2 

Source: OIG analysis of responses to questionnaire by CMS and the four accreditors, 2014. 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 18 
 

 

Table A7: Extent to Which Oversight Entity Surveys Incorporate 

Recommended Practices Related to Hospital Contracts With Standalone 

Compounding Pharmacies 

Oversight Entities Responding 

Recommended Practice Always Some of 

the Time Never 

Do surveyors determine whether the outside pharmacies that the hospital 

contracts with to provide CSPs are registered with FDA? 0 2 3 

Do surveyors review the hospital’s contracts with outside compounding 

pharmacies? 1 2 2 

If surveyors always or sometimes review contracts between the hospital and 

outside compounding pharmacies, do surveyors review whether the terms of 

the contracts address the following 

The hospital’s right to inspect the contracted compounding pharmacy? 0 1 4 

CSP recall procedures? 0 1 4 

Requirements for the contracted compounding pharmacy to submit quality 

reports to the hospital? 0 3 2 

Proper storage of CSPs while in transit? 0 2 3 

Quality assurance related to CSP sterility? 0 2 3 

Quality assurance related to CSP potency? 0 2 3 

Quality assurance related to CSP stability and expiration dating? 0 2 3 

If surveyors always or sometimes review contracts between the hospital and 

outside compounding pharmacies, do surveyors review whether the hospital 

documents each contracted pharmacy’s compliance with the terms of the 

contract? 

0 3 2 

If surveyors always or sometimes review contracts between the hospital and 

outside compounding pharmacies, do surveyors review whether the hospital 

evaluates each contracted pharmacy’s compliance with the terms of the 

contract? 

1 3 1 

Source: OIG analysis of responses to questionnaire by CMS and the four accreditors, 2014. 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 19 
APPENDIX 8 

Agency Comments 

,.,.........., 
 l-4-	DEPARTMENT OF HEALTH Centers for Medicare & Medicaid Services & HUMAN SERVICES 

Administrator 

Washington, DC 20201 

NOV Z 1 2014 

To: 	 Daniel R: Levinson 


Inspector General 


Office ofthe I~ector General 


From: 	 Iavenner 


Administrator 


Centers for Medicare & Medicaid Services 


Subject: 	 Medicare Exercises Discretion in Oversight ofPharmaceutical Compounding in 

Hospitals (OEI-0 1-13-00400) 

The Centers for Medicare & Medicaid Services (CMS) appreciates the opportunity to review and 

comment on the Office ofthe Inspector General's (OIG) draft report. CMS is committed to 

ensuring hospital compliance with requirements for drug compounding, including prevention of 

the spread ofinfections through proper compounding, particularly of compounded sterile 

preparations (CSPs) for intravenous use. CMS oversees hospitals through the certification 

process, which includes assessing hospital compliance with requirements for drug compounding, 

either via State Survey Agencies acting on CMS' s behalf or via accreditation under a eMSapproved Medicare accreditation program. CMS relies on the Food and Drug Administration 

(FDA) oversight ofmanufacturers to ensure safety of commercially available prescription drugs. 

CMS concurs with the OIG's fmdings that hospital oversight entities address most recommended 

practices related to CSPs, and that recommended oversight practices included in the review are 

highly technical and specific to compounding. 

OIG Recommendation 

The OIG recommends that CMS ensure that hospital surveyors receive training on national 

standards related to safe compounding practices. 

CMS Response 

CMS concurs with this recommendation. While it is not reasonable to expect hospital surveyors 

to be experts on the highly technical aspects of compounding, surveyors could benefit from more 

training to ensure their basic competencies in assessing compounding practices in hospitals. 

CMS will explore developing on-line training materials for surveyors with State Survey 

Agencies and ways to collaborate with national expert organizations in developing such training. 

With respect to CMS-approved Medicare hospital accreditation programs, the applicable 

regulations at 42 CFR 488.8(a)(2)(ii) require that they have survey procedures comparable to 

those established for State Survey Agencies, and that they use qualified surveyors. All renewal 

applications for these accreditation programs are routinely reviewed for their comparability to 

the survey process current as of the time ofthe renewal application. 

Medicare's Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 20 
 

 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 21 
 

ACKNOWLEDGMENTS 

This report was prepared under the direction of Joyce Greenleaf, Regional 

Inspector General for Evaluation and Inspections in the Boston regional 

office; Kenneth Price, Deputy Regional Inspector General; and 

Russell Hereford, Deputy Regional Inspector General. 

Jessica Fargnoli served as the team leader for this study, and Jesse Valente 

served as the lead analyst. Central office staff who provided support 

include Christine Moritz and Talisha Searcy. 

Medicare’s Oversight of Compounded Pharmaceuticals Used in Hospitals (OEI-01-13-00400) 22 
Office of Inspector General

http://oig.hhs.gov 

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 Services 

The Office of Audit Services (OAS) provides auditing services for HHS, either by conducting 

audits with its own audit resources or by overseeing audit 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 and Inspections 

The Office of Evaluation and Inspections (OEI) conducts national evaluations to provide 

HHS, Congress, and the public with timely, useful, and reliable 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 Investigations 

The Office of Investigations (OI) conducts criminal, civil, and administrative investigations 

of fraud and misconduct related to HHS programs, 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 Inspector General 

The Office of Counsel to the Inspector General (OCIG) provides general legal services to 

OIG, rendering advice and opinions on HHS programs and operations and providing all 

legal support for OIG’s internal operations. 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.