COMPOUNDED 

DRUGS

Payment Practices 

Vary across Public 

Programs and Private 

Insurers, and 

Medicare Part B 

Policy Should Be 

Clarified

Report to Congressional Requesters

October 2014

GAO-15-85

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-15- , a report to 

congressional requesters

85

October 2014

COMPOUNDED DRUGS

Payment Practices Vary across Public Programs and 

Private Insurers, and Medicare Part B Policy Should 

Be Clarified

Why GAO Did This Study

Drug compounding is a process 

whereby a pharmacist mixes or alters 

ingredients to create a drug tailored to 

the medical needs of an individual 

patient. Compounded drugs make up 

1 to 3 percent of the $300 billion 

domestic prescription drug market. 

Compounded drugs and some of their 

ingredients are not approved by FDA. 

Members of Congress have 

questioned whether federal health care 

programs’ payment practices create 

incentives for providers to prescribe 

these drugs.

GAO was asked to examine public 

programs’ and private health insurers’ 

payment practices for compounded 

drugs. GAO examined (1) Medicare’s, 

Medicaid’s, and private health insurers’ 

payment practices for compounded 

drugs and (2) the extent to which these 

payment practices for compounded 

drugs affect their use. GAO reviewed 

the payment policies of CMS, the five 

largest state Medicaid programs, five 

of the largest insurers that offer both 

Medicare and Medicaid managed care 

plans as well as private plans, and the 

two largest Medicare Part D-only 

sponsors. GAO also interviewed 

officials from these entities and from 

provider associations.

What GAO Recommends

GAO recommends that CMS clarify its 

Medicare Part B payment policy to 

either allow or restrict payment for 

compounded drugs containing bulk 

drug substances and align payment 

practices with this policy. HHS 

disagreed with this recommendation, 

stating that the Part B payment policy 

does not depend on drug ingredients. 

GAO maintains that the policy needs 

clarification.

What GAO Found

Medicare, Medicaid, and private health insurers have varying payment practices 

for compounded drugs, depending upon whether compounded drugs and their 

ingredients can be identified on health insurance claims, and Medicare’s Part B 

payment policy for these drugs is unclear.

• For drugs dispensed in pharmacy settings, claims contain sufficient 

information for public programs and private insurers to identify compounded 

drugs and their ingredients. These programs and plans use claims 

information to determine whether compounded drug ingredients are products 

approved by the Food and Drug Administration (FDA) or are bulk drug 

substances—usually raw powders—that are generally not approved by FDA. 

Two of the five insurers and one of the two Medicare Part D-only sponsors 

we spoke with generally do not pay for these substances in their Medicare 

Part D plans. Four of the five state Medicaid programs and three of the five 

insurers offering private health plans we spoke with generally do not pay for 

ingredients that are bulk drug substances in their respective plans. 

• For drugs administered in outpatient physician office settings, claims lack 

information to identify compounded drugs because there are no specific 

billing codes for most of these drugs. Therefore, Medicare, most state 

Medicaid programs, and most private health insurers pay for these 

compounded drugs. Some public programs and private health insurers 

conduct further claims reviews for compounded drugs billed under 

nonspecific codes, including obtaining information that can be used to 

determine FDA-approval status of compounded drug ingredients, and make 

payment decisions based on this information. 

• Additionally, the Centers for Medicare & Medicaid Services (CMS)—the 

agency within the Department of Health and Human Services (HHS) 

responsible for administering the Medicare program—has a national payment 

policy for compounded drugs under Medicare Part B, but this policy is 

unclear. The policy generally states that drugs must be FDA-approved to be 

paid for under Medicare. Payment may be available for compounded drugs, 

but the policy does not stipulate whether payment is available for ingredients

that are bulk drug substances, which are generally not FDA-approved. CMS 

contractors who process Part B claims do not collect information on the FDAapproval status of drug ingredients and, therefore, may be paying for 

ingredients that are not FDA-approved products. Thus, it is uncertain whether 

Medicare payments are inconsistent with Part B policy. 

Payment practices of public programs and private health insurers may affect the 

use of compounded drugs when specific payment exclusions exist, such as those 

for bulk drug substances; however, other factors also affect the use of 

compounded drugs. For example, insurers that restrict payment for compounded 

drugs dispensed in pharmacy settings in their private health plans to only 

ingredients that are FDA-approved products saw significant decreases in both 

the number of claims and the amount of payments for these drugs after they 

implemented these restrictions. Individual patient need, such as the need for 

custom dosages, and drug shortages also affect the use of compounded drugs.

View GAO-15- . For more information, 

contact John Dicken at (202) 512-7114 or 

dickenj@gao.gov.

85
Page i GAO-15-85 Public and Private Payment for Compounded Drugs

Letter 1 

Background 6

Medicare, Medicaid, and Private Health Insurers Have Varying 

Payment Practices for Compounded Drugs, and Medicare Part 

B Payment Policy Is Unclear 13

Payment Practices, among Other Factors, May Affect the Use of 

Compounded Drugs 24

Conclusions 26

Recommendation for Executive Action 27

Agency Comments and Our Evaluation 27

Appendix I Comments from the Department of Health and Human Services 31

Appendix II GAO Contact and Staff Acknowledgments 34

Related GAO Products 35

Figure

Figure 1: Number of New National Drug Codes for Bulk Drug 

Substances Added to First Databank’s Database, 2009 

through 2013 8

Contents
Page ii GAO-15-85 Public and Private Payment for Compounded Drugs

Abbreviations

AWP average wholesale price

CMS Centers for Medicare & Medicaid Services

FDA Food and Drug Administration

FDCA Federal Food, Drug, and Cosmetic Act

HCPCS Healthcare Common Procedure Coding System

HHS Department of Health and Human Services

NCPDP National Council for Prescription Drug Programs 

NDC national drug code

PBM pharmacy benefit manager

OIG Office of Inspector General

USP U.S. Pharmacopeial Convention

This is a work of the U.S. government and is not subject to copyright protection in the 

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without further permission from GAO. However, because this work may contain 

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Page 1 GAO-15-85 Public and Private Payment for Compounded Drugs

441 G St. N.W.

Washington, DC 20548

October 10, 2014

Congressional Requesters

Traditionally, drug compounding is the process by which a pharmacist or 

doctor combines, mixes, or alters ingredients to create a customized drug 

tailored to the medical needs of an individual patient upon receipt of a 

prescription. Drug compounding is typically used to prepare prescription 

drugs that are not commercially available; for example, a pharmacist may 

prepare a liquid formulation for a patient who has trouble swallowing pills 

or tailor a drug for a patient who is allergic to an ingredient in a 

commercially available prescription drug.1

Compounded drugs are not approved by the Food and Drug 

Administration (FDA)—the agency within the Department of Health and 

Human Services (HHS) responsible for assuring the safety and 

effectiveness of drugs and approving them for marketing in the United 

States. Compounded drugs may contain ingredients that are FDAapproved products. These drugs may also contain bulk drug 

substances—typically raw powders—that are generally not FDA 

approved.

Drug compounding is practiced 

in a variety of pharmacy settings, including retail pharmacies, mail-order 

pharmacies, and home infusion pharmacies, as well as hospital 

pharmacies. Compounded drugs may be dispensed directly to patients in 

pharmacy settings, or administered to patients in inpatient or outpatient 

settings, such as hospitals or physician offices.

2

 

1

Drug compounding does not generally include mixing or reconstituting approved products 

in accordance with the manufacturer’s instructions or the product’s approved labeling. 

Some pharmacies engage in repackaging of drugs, such as taking a multidose vial of a 

drug and transferring it to single dose vials or syringes. Repackaging of drugs was outside 

of the scope of our report.

Traditionally, the practice of drug compounding has been 

regulated by state pharmacy regulatory bodies (e.g., boards of 

pharmacies). FDA and others have raised concerns that some 

pharmacies are going beyond the traditional practice of preparing 

compounded drugs for individual patients by producing large quantities of 

2

FDA regulations define a bulk drug substance as any substance that is represented for 

use in a drug and that, when used in the manufacturing, processing, or packaging of a 

drug, becomes an active ingredient or a finished dosage form of the drug, but the term 

does not include intermediates used in the synthesis of such substances. 21 C.F.R. 

§ 207.3(4)(2014).
 

Page 2 GAO-15-85 Public and Private Payment for Compounded Drugs

compounded drugs without prescriptions for individual patients and selling 

those drugs to facilities in multiple states with no assurance of their 

having met the safety and legal requirements with which drug 

manufacturers must comply.3 In addition, in 2012, an outbreak of fungal 

meningitis linked to contaminated compounded drugs raised concerns 

about the safety and quality of compounded drugs. In July 2013, we 

reported on FDA’s oversight of entities that compound drugs and found 

that FDA’s oversight was limited.4

Questions have also been raised about the cost of compounded drugs. 

The International Academy of Compounding Pharmacists estimates that 

the compounding industry makes up 1 to 3 percent of the $300 billion 

retail prescription drug market in the United States in 2014.5 Pharmacy 

benefit managers (PBM)—companies that contract with health insurers to 

manage prescription drug benefits and process and pay claims—have 

expressed concerns that, while these drugs make up a small percentage 

of prescription drug claims, costs for compounded drugs, particularly 

those made with bulk drug substances, are increasing.6 For example, one 

PBM reports that the number of claims it received for compounded 

prescription drugs from retail pharmacies in one of its health insurer’s 

plans increased 35 percent over a 12-month period between 2012 and 

2013.7

 

3

In general, compounded drugs meeting certain criteria are exempt from certain 

requirements under the Federal Food, Drug, and Cosmetic Act (FDCA), including new 

drug approval, current good manufacturing, and certain labeling requirements. 21 U.S.C. 

§ 353a.

Additionally, members of Congress have raised questions about 

potential financial incentives for providers to prescribe or dispense these 

drugs that may be inadvertently created by the coverage and 

4

See GAO-13-702, Drug Compounding: Clear Authority and More Reliable Data Needed 

to Strengthen FDA Oversight, (Washington, D.C.: July 31, 2013).

5

In 2012, the International Academy of Compounding Pharmacists estimated that, of the 

more than 56,000 community-based retail pharmacies in the United States, approximately 

7,500 of these specialize in compounding services.

6

In addition to processing and paying prescription drug claims, PBMs are also responsible 

for developing and maintaining health plan formularies—lists of medications that health 

care providers are encouraged to prescribe—contracting with retail pharmacies, and 

negotiating rebates with drug manufacturers and discounts with retail pharmacies.

7

OptumRx, Compounding Pharmacies: A Costly Challenge, April 24, 2014, accessed 

August 1, 2014, http://www.optum.com/thought-leadership/compounding-pharmaciescostly-challenge.html. 
 

Page 3 GAO-15-85 Public and Private Payment for Compounded Drugs

reimbursement practices of public health care programs, such as 

Medicare and Medicaid, and private health plans.8 For example, in 2004, 

one congressional committee attributed the growth of the compounded 

drug industry to payments for these drugs under Medicare Part B—the 

part of the Medicare program that covers certain physician, outpatient 

hospital, laboratory and other services, and medical equipment and 

supplies.9 In addition, this committee raised concerns that the coverage 

and payment practices of Medicare Part D sponsors—that is, those health 

insurers that administer the Medicare Part D prescription drug benefit10—

might be interpreted the same way as Medicare Part B policies and lead 

to increased use of compounded drugs under the benefit. In 2006, 

another congressional committee raised similar concerns about Medicare 

Part B and Part D benefits.11

You asked us to examine public programs’ and private health insurers’ 

payment practices for compounded drugs, as well as any possible 

financial incentives created by these practices. This report examines 

(1) Medicare’s, Medicaid’s, and private health insurers’ payment practices 

for compounded drugs and (2) the extent to which these payment 

practices for compounded drugs may affect their use.12

 

8

Medicare is the federal program that provides coverage of health services for people 

aged 65 and older and certain other individuals. Medicaid is the joint federal-state program 

that provides coverage of health services for certain low-income individuals. The Centers 

for Medicare & Medicaid Services (CMS) is the federal agency responsible for 

administering the Medicare and Medicaid programs.

9

U.S. House of Representatives, Committee on Government Reform. New Medicare 

Rules May Increase Risk from Unregulated Compounded Drug Copies (Washington, D.C.: 

Sept. 28, 2004).

10Medicare Part D, established in 2006, provides a voluntary drug benefit for Medicare 

beneficiaries to obtain drugs through retail and mail-order pharmacies. 

11United States Senate, Committee on Finance. Chairman Grassley Questions CMS, FDA 

about Substituted Inhalation Drugs (Washington, D.C.: July 13, 2006).

12We examined payment practices for compounded drugs under TRICARE—the 

Department of Defense program that provides medical and prescription drug benefits to 

active duty personnel, military retirees, reservists and members of the National Guard, 

and their dependents—in a separate report. See GAO, Compounded Drugs: TRICARE’s 

Payment Practices Should Be More Consistent with Regulations, GAO-15-64

(Washington, D.C.: Oct. 2, 2014). 
 

Page 4 GAO-15-85 Public and Private Payment for Compounded Drugs

To examine Medicare’s, Medicaid’s, and private health insurers’ payment 

practices for compounded drugs, we reviewed information and 

interviewed officials from the Centers for Medicare & Medicaid Services 

(CMS), the HHS agency responsible for administering the Medicare and 

Medicaid programs; state Medicaid programs; health insurers; and other 

stakeholders. To select the state Medicaid programs, we used publicly 

available CMS data as of February 2014 to identify the five state Medicaid 

programs with the highest number of enrollees and spoke with officials 

from these five states.13 To select private health insurers, we used CMS 

data and information from insurers’ websites to select insurers that offer 

plans through Medicare Part C—that is Medicare managed care, known 

as Medicare Advantage—Medicare Part D, Medicaid managed care, and 

the commercial market.14 Specifically, we used publicly available CMS 

data as of February 2014 to identify the 10 insurers with the highest 

number of enrollees in Medicare Advantage and Part D plans and used 

information from insurers’ websites to determine whether they also offer 

Medicaid managed care and private health plans in the commercial 

market.15 Of these 10 insurers, we spoke with officials from 4 national 

insurers and 1 state insurer, each of which offers Medicare Advantage 

plans with Part D benefits, Medicaid managed care plans, and private 

health plans in the commercial market; and officials from 2 insurers that 

offer Medicare Part D plans only, referred to as Part D-only sponsors.16

 

13We used publicly available data from the Medicaid and CHIP Payment and Access 

Commission to identify state Medicaid programs by number of enrollees. The five state 

Medicaid programs are California, Florida, Illinois, New York, and Texas.

We interviewed officials from these entities to obtain information on public 

programs’ and private health insurers’ payment practices for compounded 

drugs in each market and how they calculate payment for these drugs. 

14CMS contracts with private health insurers that offer (1) medical benefits under 

Medicare through a managed care network, known as Medicare Advantage plans, 

(2) Medicare Advantage plans with Part D coverage, or (3) Medicare Part D prescription 

drug benefits only. State Medicaid programs also contract with health insurers to offer 

medical and prescription drug benefits through a managed care network.

15CMS’s data includes enrollment in Medicare Advantage-only plans, Medicare Advantage 

plans with Part D benefits, and Medicare Part D-only plans.

16The four national insurers are Aetna, Humana, Kaiser Permanente, and WellPoint. The 

state insurer is Blue Cross Blue Shield of Michigan. The two Part D-only plan sponsors 

are CVS Caremark and Express Scripts. CVS Caremark and Express Scripts also serve 

as pharmacy benefit managers for other health insurers. These seven insurers and 

sponsors accounted for about 48 percent of all Medicare Advantage and Part D enrollees 

as of February 2014.
 

Page 5 GAO-15-85 Public and Private Payment for Compounded Drugs

We analyzed available payment policies for compounded drugs and any 

related documents from CMS and each of the states, insurers, and 

sponsors we interviewed. In addition, we interviewed officials from three 

PBMs that process and pay prescription drug claims to obtain their 

perspectives on payment practices for compounded drugs in pharmacies, 

how claims for these drugs are processed, and how payments are 

calculated.17 We interviewed officials from two companies that publish 

national drug compendia for their perspectives on payments for 

compounded drugs.18 We also reviewed an April 2014 report from the 

HHS Office of Inspector General (OIG) on Medicare Part B payments for 

compounded drugs and interviewed officials from HHS OIG about their 

findings.19

To determine the extent to which public programs’ and private insurers’ 

payment practices for compounded drugs may affect their use, we 

reviewed information and interviewed officials from the entities identified 

above, as well as officials from provider associations and other relevant 

organizations. Specifically, we analyzed payment policies and related 

documents of CMS, states, and insurers to identify any characteristics of 

these policies that may affect the use of compounded drugs. We 

interviewed officials from 11 national and international associations 

representing health care providers—including physicians and 

We reviewed related documentation on how the CMS data are 

collected and determined that these data were sufficiently reliable for our 

purposes. However, the results of our analysis are intended to be 

illustrative; they are not generalizable to all state Medicaid programs; all 

private health insurers offering Medicare Advantage plans with Part D 

benefits, Medicaid managed care plans, and private health plans in the

commercial market; or all Part D-only sponsors.

 

17The three PBMs are CVS Caremark, Express Scripts, and OptumRx.

18These national drug compendia provide pharmaceutical information, including drug 

pricing data, to hospitals, physician practices, payers, retail pharmacies, state health 

programs and others for the purpose of medication decision support and negotiating 

reimbursement rates paid to pharmacies and other providers. The two companies are First 

Databank and Medi-Span.

19Department of Health and Human Services, Office of Inspector General, Compounded 

Drugs under Medicare Part B: Payment and Oversight, OEI-03-13-00270 (Washington, 

D.C.: April 2014). We coordinated with HHS OIG officials to obtain information about and 

avoid overlap and duplication with their evaluation. In addition, while we report on some of 

HHS OIG’s findings from its Medicare Part B assessment, we independently corroborated 

information in this report with CMS.
 

Page 6 GAO-15-85 Public and Private Payment for Compounded Drugs

pharmacists—who administer or dispense compounded drugs in 

inpatient, outpatient, or pharmacy settings; 2 pharmaceutical standardssetting organizations; and 2 associations representing private health 

insurers and PBMs to obtain their perspectives on the extent to which 

payment practices affect the use of compounded drugs.20

We conducted this performance audit from February 2014 through 

October 2014 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

Compounded drugs may include sterile and nonsterile preparations, 

which, like all drug products, are made up of active and inactive 

ingredients.21

 

20The 11 national and international associations representing health care providers are 

the American Academy of Dermatology, American Academy of Ophthalmology, American 

Hospital Association, American Pharmacists Association, American Society of HealthSystem Pharmacists, American Society of Parenteral and Enteral Nutrition, International 

Academy of Compounding Pharmacists, National Association of Chain Drug Stores, 

National Community Pharmacists Association, National Home Infusion Association, and 

Professional Compounding Centers of America. The 2 pharmaceutical standards-setting 

organizations are the National Council for Prescription Drug Programs and U.S. 

Pharmacopeial Convention (USP). The 2 associations representing private health insurers 

and PBMs are America’s Health Insurance Plans and Pharmaceutical Care Management 

Association, respectively.

The active ingredient or ingredients in a compounded drug 

21Compounded drugs include nonsterile preparations, such as capsules, ointments, 

creams, gels, and suppositories, which are typically dispensed in pharmacy settings. 

Sterile compounded preparations include intravenously administered fluids and injectable 

drugs, which are typically administered in both inpatient and outpatient settings. 

Compounded sterile drugs pose special risks of contamination if not made properly and 

require special safeguards to prevent injury or death to patients receiving them. Active 

ingredients include any drug component that is intended to furnish pharmacological 

activity or other direct effect in the diagnosis, cure, mitigation, treatment, or prevention 

of disease, or to affect the structure or any function of the body of man or other animals. 

An inactive ingredient, or excipient, is any component of a drug product other than the 

active ingredient, such as a dye or water for injection. See 21 C.F.R. § 210.3(b)(3), (7), (8) 

(2014).

Background

Drug Compounding
 

Page 7 GAO-15-85 Public and Private Payment for Compounded Drugs

may be one or more FDA-approved products or may be bulk drug 

substances. Bulk drug substances—usually raw powders—are generally 

not approved by FDA for marketing in the United States. Examples of 

bulk drug substances that may be used to make compounded drugs 

include baclofen, a muscle relaxer, and gabapentin, an anticonvulsant, 

both of which may be compounded for use in topical pain medications.

Active ingredients used to make a compounded drug—including bulk drug 

substances—are generally assigned national drug codes (NDC).22 FDA 

maintains a publicly available list of NDCs for FDA-approved products.23

NDCs for FDA-approved products and bulk drug substances are 

published in three national drug compendia, by First Databank, MediSpan, and Truven Health Analytics. In addition, these compendia include 

drug pricing data by NDC, such as the average wholesale price (AWP) of 

FDA-approved products and bulk drug substances.24 A single FDAapproved product or bulk substance may be distributed by multiple 

manufacturers, in different forms or strengths, and by varying package 

sizes and, hence, may have multiple NDCs associated with it. The 

number of bulk drug substances that First Databank has added to its 

database—which First Databank tracks using NDCs—has increased 

significantly over the last 5 years, with the number of new NDCs added 

from 2009 through 2013 representing an increase of approximately 

58 percent.25

 

22NDCs are three-segment numbers that are the universal product identifiers for drugs for 

human use. FDA assigns the first segment of the NDC, which identifies the labeler (i.e., 

the firm that manufactures, repackages, or distributes a drug). The labeler assigns the 

second and third segments. The second segment identifies a specific strength, dosage 

form, and formulation (e.g., 20 mg capsules), and the third segment identifies package 

size and type (e.g., 100 capsules in a bottle).

(See fig. 1 for the number of NDCs for bulk drug substances 

that have been added to First Databank’s database from 2009 through 

2013.)

23FDA’s list of drugs approved for marketing within the United States is published annually 

in the Approved Drug Products with Therapeutic Equivalence Evaluations, also known as 

the Orange Book.

24Average wholesale price (AWP) is the average of the list prices that the manufacturer 

suggests wholesalers charge pharmacies. AWP is obtained and published by Medi-Span 

and Truven Health Analytics.

25According to First Databank officials, manufacturers submit requests to First Databank 

to add NDCs for bulk drug substances to its database.
 

Page 8 GAO-15-85 Public and Private Payment for Compounded Drugs

Figure 1: Number of New National Drug Codes for Bulk Drug Substances Added to 

First Databank’s Database, 2009 through 2013

Note: According to First Databank officials, First Databank tracks the number of bulk drug 

substances—which are generally not approved by FDA for marketing—added to its database by 

national drug code (NDC). NDCs are three-segment numbers that are the universal product identifiers 

for drugs for human use. A single bulk drug substance may be distributed by multiple manufacturers, 

in different forms or strengths, and by varying package sizes and, hence, may have multiple NDCs 

associated with it. According to First Databank officials, manufacturers submit requests to First 

Databank to add NDCs for bulk drug substances to its database.

Under section 503A of the Federal Food, Drug, and Cosmetic Act 

(FDCA), a compounded drug is exempt from certain FDCA requirements, 

including new drug approval and certain labeling and current good 

manufacturing practice requirements, provided the compounded drug 

meets certain criteria.26

 

26Drug sponsors submit new drug applications to FDA when they believe there is enough 

evidence about the drug’s safety and effectiveness to meet FDA’s requirements for 

marketing approval. If FDA approves the application, the product may be marketed in the 

United States.

These criteria include that the drug is 

compounded by a pharmacist or physician based on a valid prescription 

for an identified individual patient or in limited quantities in anticipation of 

receiving a valid prescription based on historical prescribing patterns 
 

Page 9 GAO-15-85 Public and Private Payment for Compounded Drugs

(known as anticipatory compounding).27 The Drug Quality and Security 

Act of 2013 amended certain FDCA provisions as they apply to the 

oversight of compounded drugs to clarify the applicability of section 503A 

nationwide and to create a category of outsourcing facilities involved in 

sterile drug compounding under section 503B. Outsourcing facilities that 

register with FDA and provide information to the agency about the 

products that are compounded at the facility can qualify for exemptions 

from the FDCA’s new drug approval and certain labeling requirements.28

Outsourcing facilities, however, must comply with current good 

manufacturing practice requirements. In addition, the Drug Quality and 

Security Act requires FDA to develop lists of bulk drug substances that 

may be used for compounding and lists of drugs that present 

demonstrable difficulties to compound, among others. To develop these 

lists, FDA has issued requests for nominations of bulk drug substances 

that pharmacists and outsourcing facilities may use to make compounded 

drugs.

29

 

2721 USC § 353a, as amended by Pub. L. No. 113-54, § 106, 127 Stat. 587, 598 (Nov. 27, 

2013).

According to FDA, inclusion of a bulk drug substance on an FDA 

list does not indicate that FDA has approved the drug; rather, inclusion on 

the list means that a pharmacist or outsourcing facility may qualify for 

28An outsourcing facility is a facility at one geographic location or address that is engaged 

in the compounding of sterile drugs, has elected to register as an outsourcing facility with 

FDA, and complies with all of the requirements of section 503B of the FDCA. These 

requirements include that the facility must comply with current good manufacturing 

practice requirements and must meet certain other conditions, such as reporting adverse 

events and providing FDA with certain information about the products it compounds. An 

outsourcing facility can qualify for exemptions from the FDA approval requirements and 

the requirement to label products with adequate directions for use but not for an 

exemption from the current good manufacturing practices requirements.

29FDA initially published in the Federal Register two separate requests for nominations for 

inclusion on these lists in December 2013—one list to be used by individual physicians 

and pharmacists to compound in accordance with section 503A of the FDCA, and one list 

to be used by outsourcing facilities to compound in accordance with section 503B of the 

FDCA. To obtain more information concerning the substances nominated, the agency 

issued revised requests for nominations in July 2014. 79 Fed. Reg. 37747 (July 2, 2014) 

and 79 Fed. Reg. 37750 (July 2, 2014). The notices request interested parties submitting 

nominations to provide certain information about the bulk drug substances and the drug 

products that will be compounded with the bulk drug substance, such as the drug’s 

historical use and information published in reports in peer-reviewed medical literature. The 

public was provided 90 days to nominate bulk drug substances in response to these 

notices.
 

Page 10 GAO-15-85 Public and Private Payment for Compounded Drugs

exemptions from certain requirements of the FDCA if they compound 

using bulk drug substances included on the lists.30

Several organizations develop standards and guidelines for compounded 

drugs and pharmacy transactions, adherence to which may be required 

by law. The U.S. Pharmacopeial Convention (USP) publishes 

professional standards and guidelines for preparing compounded drugs.31

According to the National Association of Boards of Pharmacy, 28 states 

had laws requiring full adherence to USP standards for preparing sterile 

compounds, as of 2013.32

 

30To qualify for the FDCA exemptions provided under section 503A of the act, a 

pharmacist or physician also may compound using bulk drug substances that comply with 

the standards of an applicable monograph or that are components of FDA-approved 

drugs. 21 U.S.C. § 353a(b)(1)(A).

 In addition, to qualify for the exemption under 

section 503A of the FDCA, a drug product must be compounded in 

compliance with these standards. The National Council for Prescription 

Drug Programs (NCPDP) develops standards for electronic pharmacy 

prescribing and billing transactions. These standards include version D.0, 

which allows pharmacies to submit, and insurance plans to see, the NDC 

for and quantity of each ingredient used to make a compounded drug on 

the pharmacy claim, as well as the pharmacy-submitted price per 

ingredient. In 2009, HHS issued a regulation requiring entities subject to 

the Health Insurance Portability and Accountability Act, including 

pharmacies and health insurers, to use version D.0 for electronic 

31USP is a scientific nonprofit organization that sets standards for the identity, strength, 

quality, and purity of medicines, food ingredients, and dietary supplements. USP’s current 

suite of General Chapters for compounding includes, among others, Chapter 797 

Pharmaceutical Compounding—Sterile Preparations, which provides procedures and 

requirements for compounding sterile preparations; and Chapter 795 Pharmaceutical 

Compounding—Nonsterile Preparations, which provides guidance on applying good 

compounding practices in the preparation of nonsterile compounded formulations for 

dispensing or administration to humans or animals.

32The National Association of Boards of Pharmacy is a professional association that 

assists its member state boards of pharmacy and jurisdictions in developing, 

implementing, and enforcing uniform standards for the purpose of protecting the public 

health.
 

Page 11 GAO-15-85 Public and Private Payment for Compounded Drugs

pharmacy transactions.33 These entities were required to be fully 

compliant with version D.0 by January 1, 2012.34

Medicare Part A, Medicare’s inpatient medical benefit, provides benefits 

for drugs administered in inpatient settings, such as hospitals. Medicare 

Part B, Medicare’s outpatient medical benefit, provides limited benefits for 

drugs administered to patients in outpatient settings, such as physician 

offices.35 Medicare uses contractors to process and pay Part A and Part B 

claims.36 Medicare Part C—Medicare’s managed care benefit, also known 

as Medicare Advantage—offers beneficiaries plans that provide inpatient 

and outpatient drug benefits (Part A and Part B, respectively) through a 

network of managed care organizations. In addition, some Medicare 

Advantage organizations offer plans with pharmacy benefits similar to 

those provided under Medicare Part D. Medicare Part D provides a 

voluntary pharmacy benefit for Medicare beneficiaries. Beneficiaries may 

choose Medicare Part D plans from among those offered by private 

Part D-only sponsors. Part D beneficiaries may obtain drugs through retail 

and mail-order pharmacies.

 

3374 Fed. Reg. 3296, 3302 (Jan. 16, 2009) (codified at 45 C.F.R. Part 162).

34Prior to the implementation of the updated standard, providers typically submitted claims 

for compounded drugs based on the primary—and, typically, the most expensive—

ingredient.

35Medicare Part B also provides benefits for certain vaccines, such as influenza; drugs 

administered in hospital outpatient settings, such as part of emergency department 

services; and drugs administered using durable medical equipment. For the purposes of 

this report, when we discuss outpatient settings, we are referring to drugs administered in 

physician offices incident to physician services.

36CMS established the Medicare contractors as multistate, regional contractors 

responsible for administering both Medicare Part A and Medicare Part B claims. For more 

information on Medicare contractors, see GAO, Medicare: Contractors and Private Plans 

Play a Major Role in Administering Benefits, GAO-14-417T (Washington, D.C.: Mar. 4, 

2014).

Drug Benefits under Public 

Programs and Private 

Health Plans

Medicare
 

Page 12 GAO-15-85 Public and Private Payment for Compounded Drugs

States establish and administer their own Medicaid programs within broad 

federal guidelines. Medicaid programs vary from state to state, but all 

state Medicaid programs provide inpatient and outpatient medical 

benefits, which include benefits for drugs administered in inpatient 

hospital and outpatient physician office settings. In addition, all state 

Medicaid programs provide a prescription drug benefit under which they 

pay pharmacies for drugs dispensed to Medicaid beneficiaries.37 States 

report these payments to CMS, which provides federal matching funds to 

states to cover a portion of these costs.38

Private health plans in the commercial market provide medical benefits, 

which include benefits for drugs administered in inpatient hospital and 

outpatient physician office settings, and pharmacy benefits. Private health 

plans offered in the commercial market include individual and group 

market plans. Participants in the individual market purchase health 

insurance directly from an insurer, through a broker, or through a state 

health insurance exchange. Group market participants generally obtain 

health insurance through a group health plan, usually offered by an 

employer. These plans can include fee-for-service, preferred provider 

organization, and health maintenance organization options.

States may provide Medicaid 

benefits using a fee-for-service or managed care delivery system. In a 

managed care delivery system, states typically contract with managed 

care organizations to provide some or all Medicaid covered services to 

beneficiaries.

39

 

37Prescription drug coverage is an optional Medicaid benefit; however, all state Medicaid 

programs have elected to include it in their Medicaid benefit packages.

38The federal government matches state Medicaid expenditures for services according to 

a state’s federal medical assistance percentage, which is based on a statutory formula 

under which the federal share of a state’s Medicaid expenditures may range from 50 to 

83 percent.

39Health maintenance organizations and preferred provider organizations are insurance 

products that generally rely on providers to control service utilization, and they provide 

financial incentives to encourage patients to use network providers who have agreed to 

accept fee discounts.

Medicaid

Private Health Plans
 

Page 13 GAO-15-85 Public and Private Payment for Compounded Drugs

Medicare, Medicaid, and private health insurer payment practices for 

compounded drugs dispensed in pharmacy settings allow for the payment 

of FDA-approved products but vary in whether they allow payment for 

bulk drug substances in these compounds. As a result of version D.0 of 

NCPDP’s standard for pharmacy transactions, officials from the states, 

insurers, and Part D-only sponsors we spoke with told us that claims for 

compounded drugs dispensed in pharmacy settings contain sufficient 

information to identify when a compounded drug is dispensed and the 

ingredients used to make the drug by NDC.40

Officials from CMS, the five state Medicaid programs, four of the five 

insurers, and the two Part D-only sponsors provided us with information 

on their payment practices for compounded drugs, including those made 

with bulk drug substances. Of the five insurers we spoke with, one insurer 

owns and operates its pharmacies. Officials from this insurer told us that 

the insurer purchases drugs and drug ingredients, including some bulk 

drug substances used to make compounded drugs; therefore, the 

insurer’s payment practices in pharmacy settings differ from the other four 

Therefore, these public 

programs and private health insurers are able to use NDC information 

from national drug compendia to determine whether the ingredients in the 

compounded drug are FDA-approved products or bulk drug substances.

 

40The prior NCPDP standard, version 5.1, contained an indicator for compounded drugs 

but allowed for the inclusion of only the primary—and, typically, the most expensive—

ingredient used to make the compounded drug on the claim.

Medicare, Medicaid, 

and Private Health 

Insurers Have Varying 

Payment Practices for 

Compounded Drugs, 

and Medicare Part B 

Payment Policy Is 

Unclear

For Compounded Drugs 

Dispensed in Pharmacy 

Settings, Medicare, 

Medicaid, and Private 

Health Insurers Have 

Varying Payment Practices
 

Page 14 GAO-15-85 Public and Private Payment for Compounded Drugs

insurers across the insurer’s Medicare Part D, Medicaid, and private 

health plans.41

• Under Medicare Part D, federal payments are not available for nonFDA-approved products—including bulk drug substances—and 

inactive ingredients used to make a compounded drug.42 However, 

insurers that offer Medicare Part D benefits and Part D-only sponsors 

may choose to pay for bulk substances but may not submit these 

payments as part of the Part D transaction data CMS uses to 

determine federal payments to Part D plans.43 Officials from two 

insurers offering Medicare Advantage plans that include Part D drug 

benefits and one Part D-only sponsor we spoke with told us that they 

generally pay pharmacies for each ingredient in the compounded drug 

that is an FDA-approved product and is otherwise eligible for payment 

under Part D and thus do not pay for bulk drug substances.44

 

41Officials from this insurer told us that because it purchases drugs and drug ingredients 

directly from manufacturers for its pharmacies, it does not generally process pharmacy 

claims in any of its public or private plans. However, this insurer submits beneficiaries’ 

prescription information to its PBM using the D.0 standard in order for the PBM to 

determine a beneficiary’s share of the cost of the prescription.

Officials 

from the remaining two insurers and one Part D-only sponsor we 

spoke with told us that they pay pharmacies for bulk drug substances 

but do not include these payments as part of the Part D transaction 

data they submit to CMS. However, in July 2014, the Part D-only 

42In general, under Medicare Part D, federal payments are unavailable for drugs not 

approved by FDA, drugs not available by prescription for purchase in the United 

States, and drugs for which payment would be available under Parts A or B of Medicare. 

42 U.S.C. § 1395w-102(e).

43CMS’s final rule for the Medicare Part D contract year 2012 notes that, while Part D 

sponsors may pay for non-Part D-covered ingredients without reporting these costs to 

CMS, Part D sponsors are prohibited from billing beneficiaries for the uncovered 

ingredients. 76 Fed. Reg. 21432, 21523 (Apr. 15, 2011). Of the five insurers and two 

Part D-only sponsors, only one insurer has specific written policies in place beyond what 

was stated in the CMS regulation.

44Officials from one of the two insurers that do not pay for bulk drug substances told us 

that the insurer will process claims and pay only for any ingredients in the compounded 

drug that are FDA-approved, provided that the FDA-approved ingredient is the primary 

ingredient; otherwise, this insurer will reject claims with a bulk drug substance that is the 

primary ingredient. Officials from the other insurer told us that the insurer will pay for bulk 

drug substances in compounded drugs in rare circumstances and only after it has deemed 

a prescription to be medically necessary. This insurer and the Part D-only sponsor will 

process claims with a bulk drug substance that is the primary ingredient but pay only for 

the ingredients that are FDA-approved products.
 

Page 15 GAO-15-85 Public and Private Payment for Compounded Drugs

sponsor that currently pays pharmacies for bulk drug substances 

announced its plans to discontinue payments for most of these 

substances by March 2015. This decision to cease paying for bulk 

drug substances was a result of the sponsor’s internal analyses 

showing that pharmacies have been increasing their billed amounts 

for the ingredients not covered by Part D, including bulk drug 

substances, used to make compounded drugs; as a result, the 

sponsor’s costs for these ingredients began to exceed its costs for the

ingredients covered by Part D in compounded drug claims in early 

2014.45

• Under Medicaid, CMS provides federal matching dollars to states that 

opt to pay for compounded drugs under the prescription drug benefit, 

including those that contain bulk drug substances, and has issued a 

notice to the states informing them of this policy.46 Officials from four 

of the five state Medicaid programs and two insurers that offer 

Medicaid managed care plans we spoke with told us that they 

generally do not pay for bulk drug substances used to make 

compounded drugs under the prescription drug benefit.47

 

45The Part D-only sponsor will cease paying for hundreds of bulk drug substances 

typically used to prepare compounded topical medications; sponsor officials told us that 

these substances accounted for 95 percent of the sponsor’s increased costs. In addition to 

discontinuing payment for most bulk drug substances in its Medicare Part D plans, this 

sponsor also plans to cease paying for over a thousand bulk drug substances in the plans 

for which the sponsor contracts with plan insurers as the PBM. According to sponsor 

officials, insurers will be able to opt out of this payment exclusion.

The fifth 

state Medicaid program and the remaining two insurers pay for only 

46States that offer a prescription drug benefit are required to provide coverage for those 

drugs for which manufacturers pay rebates to state Medicaid agencies under the federal 

Medicaid drug rebate program. See 42 U.S.C. § 1396r-8. CMS has clarified that bulk drug 

substances are not subject to the drug rebate program’s requirements and, therefore, 

states are not required to cover such compounded drugs under their prescription drug 

benefit. However, states may opt to do so. Department of Health and Human Services, 

Centers for Medicare & Medicaid Services, Medicaid Drug Rebate Program Notice, 

Release No. 158 (Baltimore, Md.: July 13, 2011).

47Officials from two of these state Medicaid programs and the two insurers told us that 

they will pay for bulk drug substances in compounded drugs only after they have deemed 

a prescription to be medically necessary, which likely occurs in rare circumstances only. 

Of the four state Medicaid programs and two insurers that do not pay for bulk drug 

substances, only one insurer has specific written policies stating this payment exclusion.
 

Page 16 GAO-15-85 Public and Private Payment for Compounded Drugs

those bulk drug substances that are listed on their formulary.48

• For private health plans offered in the commercial market, officials 

from three insurers we spoke with told us that they generally do not 

pay for bulk drug substances used to make compounded drugs and 

pay only for those ingredients in the compound that are FDAapproved products under their prescription drug benefit.

Officials from the fifth state Medicaid program told us that pharmacies 

may request to add a bulk drug substance to the state formulary, and 

the state will evaluate the request and the need to do so. However, 

these officials also told us that the state has received no such 

requests in at least the last 4 to 6 months.

49 Officials 

from one of these three insurers told us that the insurer requires prior 

authorization for all compounded drug prescription claims;50 officials 

from the other two insurers told us that they require beneficiaries to 

obtain prior authorization only for compounded drug claims over a 

certain dollar amount, regardless of whether the drug’s ingredients are 

FDA-approved products or bulk drug substances.51

Once states, insurers, and sponsors determine which ingredients they will 

pay for in compounded drugs dispensed in pharmacy settings, they 

typically calculate the amount of the payment based on common drug 

The fourth insurer 

pays for bulk drug substances as well as FDA-approved products, 

provided that the bulk drug substance is not listed as the primary 

ingredient on the claim.

 

48A formulary is a list of medications, grouped by therapeutic class, that a health care 

system’s providers are encouraged to use when prescribing medications. A therapeutic 

class describes a group of drugs that are similar in chemical structure, pharmacological 

effect, or clinical use.

49Of the three insurers that do not pay for bulk drug substances, two insurers have 

specific written policies stating this payment exclusion.

50According to officials from this insurer, this insurer may pay for bulk drug substances 

used to make compounded drugs in rare circumstances and only after the insurer has 

deemed a prescription to be medically necessary.

51Prior authorization requires the provider to obtain approval from a health plan before a 

prescription drug is administered or dispensed. The need for prior authorization for 

prescription drugs dispensed at retail pharmacies is typically determined at the point of 

sale. Insurers’ claims processing systems have triggers built in to automatically request 

prior authorization for electronic claims submitted by pharmacists. Depending upon the 

insurer and the plan, either the pharmacist or the patient would request prior authorization 

from the prescribing clinician, including any forms or supporting documentation, and 

submit it with the claim.
 

Page 17 GAO-15-85 Public and Private Payment for Compounded Drugs

pricing benchmarks.52 These pricing benchmarks apply to both FDAapproved products and bulk drug substances used to make compounded 

drugs. Officials from the states, insurers, and Part D-only sponsors we 

spoke with told us that they generally calculate payments to pharmacies 

based on a negotiated price for each ingredient, such as AWP, wholesale 

acquisition cost, or maximum allowable cost.53 Some states, insurers, and 

one Part D-only sponsor calculate the price of each ingredient according 

to the pricing benchmarks and then pay pharmacies the lesser of the total 

calculated price for all included ingredients, the price submitted by the 

pharmacy, the usual and customary charge, or other payment 

calculations.54

Medicare, Medicaid, and private health insurers generally have similar 

payment practices for compounded drugs administered in outpatient 

settings, which are affected by the lack of specific billing codes for these 

drugs on claims. As a result, most of these public programs and private 

health insurers pay for compounded drugs, including both the FDAapproved products and bulk drug substances that comprise these drugs, 

because they may be unable to identify whether compounded drugs were 

administered and what individual ingredients were used to make the 

compounded drugs. For drugs administered in outpatient settings, public 

programs and private health insurers generally rely on specific codes for 

individual drugs in the Healthcare Common Procedure Coding System 

(HCPCS)—a standardized coding system used by public programs and 

private health insurers to help ensure medical claims are processed in a 

 

52The insurer that owns and operates its healthcare facilities pays the price set by the 

manufacturer for drugs and drug ingredients.

53State Medicaid programs are generally required to pay pharmacies the lower of (a) the 

state’s estimate of the drug’s acquisition cost to the pharmacy, based on a statedetermined formula, plus a dispensing fee, or (b) the pharmacy’s usual and customary 

charge to the general public. See 42 C.F.R. 447.512 (2013). For certain multiple-source 

outpatient prescription drugs with three or more therapeutically and pharmaceutically 

equivalent versions, CMS will provide federal matching funds for reimbursements only up 

to a maximum amount—known as a federal upper limit. 42 U.S.C. § 1396r-8(e)(4). 

Wholesale acquisition cost is the manufacturer’s list price for wholesalers before rebates 

and discounts and is published on a weekly basis. The maximum allowable cost is the 

maximum allowable payment established by each insurer or Part D sponsor.

54The usual and customary fee is the cost of the drug the beneficiary would pay without 

insurance. Other payment methodologies may include estimated acquisition cost, which is 

the estimated cost to purchase the drug.

For Compounded Drugs 

Administered in Inpatient 

and Outpatient Settings, 

Medicare, Medicaid, and 

Private Health Insurers 

Generally Have Similar 

Payment Practices, Which 

Are Affected by Lack of 

Specific Billing Codes on 

Claims
 

Page 18 GAO-15-85 Public and Private Payment for Compounded Drugs

consistent manner—to indicate whether a beneficiary received a 

prescription drug, including a compounded drug, on an insurance claim. 

However, for the majority of compounded drugs administered in 

outpatient settings, no specific HCPCS codes exist; rather, providers 

typically bill for compounded drugs administered in outpatient settings 

using HCPCS codes for “not otherwise classified” drugs.55 Nonspecific 

HCPCS codes may also be used to bill for noncompounded drugs that 

lack specific HCPCS codes. Public programs and private health insurers 

may conduct further reviews of outpatient claims to determine whether 

the drug billed under a nonspecific HCPCS code is a compounded drug 

and to identify its ingredients in order to make payment decisions. Given 

the difficulty in identifying these drugs on insurance claims, the insurers 

we spoke with generally do not have specific written policies regarding 

payment allowances or limitations for any FDA- or non-FDA-approved 

ingredients used to make compounded drugs administered in outpatient 

settings. In addition, while CMS has a national policy for payment of 

compounded drugs under Medicare Part B, the agency does not have 

any policies regarding federal Medicaid payments for compounded drugs 

administered in outpatient settings and likely provides some federal 

matching dollars to states to pay for compounded drugs, including those 

that contain bulk drug substances.56

CMS, the five state Medicaid programs, and four of the five insurers 

provided us with information on whether they review outpatient claims, 

including requesting and reviewing additional documentation, with drugs 

billed under the nonspecific code. Of the five insurers we spoke with, 

officials from one insurer told us that because the insurer owns and 

operates its health care facilities and purchases drugs and drug 

ingredients—including some non-FDA-approved bulk drug substances 

used to make compounded drugs—the insurer is able to determine 

whether drugs administered to beneficiaries in outpatient settings are 

compounded drugs and what ingredients were used to make them. This 

State Medicaid programs may 

develop their own payment policies for these drugs.

 

55Specific HCPCS codes exist for some compounded drugs used with durable medical 

equipment, such as nebulizers used to administer inhalational drugs.

56CMS contractors responsible for processing outpatient (Medicare Part B) claims develop 

their own policies in accordance with national Medicare policy. These contractors may be 

able to identify compounded drugs depending on what kind of information they require 

providers to submit on claims. We did not examine Medicare contractors’ claims 

processing policies in our review.
 

Page 19 GAO-15-85 Public and Private Payment for Compounded Drugs

insurer’s payment practices for reimbursing its health care facilities differ 

from the other four insurers across the insurer’s Medicare Advantage, 

Medicaid, and private health plans.

• Under Medicare Part B, CMS contractors manually review claims and 

any additional documentation, such as invoices for compounded 

drugs purchased by the provider. Most of the contractors do not 

require providers to submit NDCs for compounded drug ingredients to 

determine whether these ingredients are FDA-approved products or to 

obtain pricing information. Officials from two of the insurers we spoke 

with that offer Medicare Advantage plans told us that they review all 

claims with compounded drugs billed under the nonspecific code and 

request additional information. Officials from one of these insurers told 

us that the insurer requires providers to submit NDCs for each 

ingredient to determine which ingredients are FDA-approved products 

and does not pay for bulk drug substances, unless the insurer 

determines that they are medically necessary. Officials from the other 

insurer told us that the insurer requires providers to submit supporting 

documentation, including invoices that list the name and amount of 

each ingredient in the compounded drug. A third insurer reviews 

claims and requests additional documentation only when the amount 

for a drug billed under the nonspecific HCPCS code on a claim 

exceeds a certain dollar amount but does not require NDCs to 

determine which ingredients are FDA-approved products. For these 

claims, the insurer uses NDCs primarily to calculate payments, likely 

for all ingredients in the compounded drug.57

• Under Medicaid, officials from two state Medicaid programs told us 

that these states require providers to submit NDCs for each ingredient 

in compounded drugs billed under the nonspecific code and review 

the claims and the NDCs to determine medical necessity. However, 

neither state uses NDCs to determine which ingredients are FDAapproved products. Both states pay for compounded drugs, including 

those that contain bulk drug substances, if they determine the drugs 

are medically necessary. Officials from two other state Medicaid 

programs told us that the states require providers to submit NDCs for 

The fourth insurer does 

not review claims with the nonspecific HCPCS code or collect 

additional information and pays for all ingredients in the compounded 

drug.

 

57For claims below the specified dollar amount, this insurer also likely pays for all 

ingredients in the compounded drug.
 

Page 20 GAO-15-85 Public and Private Payment for Compounded Drugs

every HCPCS drug code and not just the nonspecific code, and 

providers may not submit more than one NDC with the nonspecific 

code.58 For one of these states, officials told us that providers may not 

bill compounded drugs as single line items on claims; rather, 

providers must bill each ingredient with the nonspecific code and the 

ingredient’s NDC. This state uses the NDCs to determine which 

ingredients are FDA-approved products and does not pay for bulk 

drug substances. Officials from the other state told us that the state 

assigns a short list of NDCs for FDA-approved products to the 

nonspecific HCPCS code and updates it annually when CMS updates 

the HCPCS code database. Officials told us that the state’s claims 

processing system will automatically reject those claims with the 

nonspecific code that are accompanied by an NDC that is not on the 

state’s list. Two insurers offering Medicaid managed care plans 

process claims for compounded drugs billed under nonspecific 

HCPCS codes in a similar manner as they do for compounded drugs 

billed in their Medicare Advantage plans. One insurer that collects 

NDCs for drugs billed under nonspecific HCPCS codes for claims 

exceeding a certain dollar amount in its Medicare Advantage plans 

does not do so in its Medicaid managed care plans; rather, in its 

Medicaid managed care plans, this insurer collects information from 

the provider, either on the claim or in additional information submitted 

by the provider, about why a compounded drug is being 

administered.59

• For private health plans offered in the commercial market, the four 

insurers require information about compounded drugs administered in 

outpatient settings and review claims in a similar manner as they do 

for compounded drugs billed in either their Medicare Advantage or 

their Medicaid managed care plans.

Medicare Part B, the states, and the insurers vary in how they calculate 

payments for compounded drugs billed under nonspecific HCPCS codes 

on outpatient claims depending upon whether these entities review these 

claims. Medicare contractors calculate payments for compounded drugs 

 

58Officials from the fifth state Medicaid program did not provide us with information on 

whether it reviews outpatient claims to identify compounded drugs or its payment 

practices for these drugs.

59Officials from the fourth insurer did not provide us with information on whether it reviews 

outpatient claims to identify compounded drugs billed under nonspecific HCPCS codes or 

its payment practices for these drugs.
 

Page 21 GAO-15-85 Public and Private Payment for Compounded Drugs

based on the invoice price submitted by the provider, which may also 

include taxes and shipping fees. Officials from the state Medicaid 

program that requires NDCs for each ingredient and pays only for FDAapproved products told us that they calculate payment based on either 

the Medicare Part B rate or the pharmacy rate of reimbursement for each 

FDA-approved product.60

In inpatient hospital settings, drugs, including compounded drugs, are 

generally not billed separately from the rest of the services the beneficiary 

received but are bundled together as part of the overall charge for the 

hospital stay or inpatient admission.

The state that allows for the use of the 

nonspecific HCPCS code with only certain NDCs calculates payment 

based on the wholesale acquisition cost. Four insurers that offer Medicare 

Advantage, Medicaid managed care, and private health plans calculate 

payments based on either (1) the provider-submitted price for the drug, 

which may include payment for non-FDA-approved bulk drug substances; 

(2) common drug pricing benchmarks, such as wholesale acquisition cost, 

for the NDC of each FDA-approved product; or (3) the state Medicaid 

program’s fee schedule. These insurers’ payment calculations may 

depend on whether the plan is public or private and whether the insurer 

reviews claims and additional information. The insurer that owns and 

operates its healthcare facilities pays the price set by the manufacturer for 

drugs and drug ingredients.

61

 

60The current Medicare Part B rate of reimbursement is the average sales price of a drug 

plus 6 percent. The pharmacy rate of reimbursement, when the Part B rate is not 

available, is defined in this state at the time this report was published as the lower of 

(1) AWP minus a negotiated percentage, (2) the federal upper limit, or (3) the maximum 

allowable ingredient cost. The federal upper limit is the maximum amount of matching 

federal funds that CMS will provide to states for certain multiple-source prescription 

drugs—that is, those drugs with three or more versions that either produce the same 

clinical effect and have the same safety profile or that contain the same active 

ingredient(s) in the same dosage form and meet strength and other applicable standards. 

42 U.S.C. § 1396r-8(e)(4). The maximum allowable cost is the maximum allowable 

payment established by the state Medicaid program.

Because these drugs are bundled, 

officials from CMS, all five states, and all but one of the insurers we spoke 

with told us that they cannot determine whether a beneficiary received a 

compounded drug. Medicare Part A, Medicaid, and private health insurers 

61Costs for drugs provided in inpatient settings are typically accounted for in the rate set 

for the overall charge for the hospital stay, such as under a per diem charge or a 

diagnosis-related group—a system that classifies inpatient stays according to both 

beneficiaries’ clinical conditions (the primary diagnosis along with any secondary illnesses 

and complications developed during the stay) and the procedures beneficiaries receive.
 

Page 22 GAO-15-85 Public and Private Payment for Compounded Drugs

generally pay a preset rate for the cost to deliver inpatient services, 

including any compounded drugs administered as part of the services;62

the use of a particular drug—including a compounded drug—would not 

generally change the inpatient payment rate for a given service.

Medicare’s Part B national payment policy for compounded drugs is 

unclear. The policy notes that federal law requires that drugs be 

reasonable and necessary in order to be covered under Medicare Part B 

and indicates the agency’s view that, to be considered reasonable and 

necessary, FDA must have approved the drug for marketing.63

Accordingly, the policy instructs Medicare contractors and insurers that 

offer Medicare Advantage plans to deny payments for drugs that have not 

received final marketing approval by FDA. The policy also indicates that 

payment is available for compounded drugs; however, it does not 

stipulate whether payment is available for ingredients in compounded 

drugs that are FDA-approved products only or whether it is also available 

for those ingredients that are bulk drug substances that have not been 

approved by FDA.64

 

62Officials from the remaining insurer told us that because the insurer purchases drugs 

and drug ingredients for its health care facilities directly from manufacturers, it is able to 

determine whether a compounded drug was administered to a beneficiary as part of the 

inpatient service.

As noted above, most of the Part B contractors do 

not require providers to submit NDCs for compounded drug ingredients to 

determine whether these ingredients are FDA-approved products or bulk 

drug substances and, therefore, may be paying for ingredients that are 

not FDA-approved. Because Medicare Part B policy for compounded 

drugs is unclear, it is uncertain whether payment for such ingredients is 

consistent with that policy.

63Centers for Medicare & Medicaid Services, Medicare Benefit Policy Manual, Chapter 15 

– Covered Medical and Other Health Services (Baltimore, Md.: May 10, 2013).

64Medicare’s Part B payment policy may not apply to certain compounded drugs, such as 

infusion drugs administered through implantable pumps, because these drugs can be paid 

for under the Part B durable medical equipment benefit or under Part D. Infusion therapy 

is the administration of medication through a needle or catheter, such as intravenously. 

Infusion drugs may need to be compounded because commercially available drugs may 

not be available in necessary doses for infusion therapy. We previously examined 

Medicare’s and private insurers’ policies for home infusion drugs. See GAO, Home 

Infusion Therapy: Differences between Medicare and Private Insurers’ Coverage, 

GAO-10-425 (Washington, D.C.: June 7, 2010).

Medicare’s Payment 

Policy for Compounded 

Drugs under Part B Is 

Unclear
 

Page 23 GAO-15-85 Public and Private Payment for Compounded Drugs

In addition to having unclear policies, CMS does not know how much it 

has paid for compounded drugs under Part B, the number of 

compounded drug claims it paid, or whether compounded drugs paid for 

under Part B were made using bulk drug substances. Having access to 

such information may help ensure that payment for such drugs is 

consistent with CMS policy. CMS lacks this information because the 

agency does not collect any information that the contractors responsible 

for processing Medicare Part B claims obtain during their review of claims 

with the nonspecific HCPCS code, including amounts paid to providers for 

compounded drugs based on the invoice price, which CMS officials 

attributed to limitations in claims processing systems. In April 2014, HHS 

OIG reported on payments for compounded drugs in Medicare Part B and 

found that neither CMS nor its contractors track compounded drug claims 

and confirmed what CMS officials told us about neither the agency nor 

the contractors being able to determine the total number of these claims, 

or CMS’s payments, for compounded drugs. HHS OIG recommended that 

CMS establish a method specifically to identify compounded drugs on 

those Part B claims that contain the nonspecific HCPCS code in order to 

track compounded drug claims, as these claims undergo manual review 

because of the code and not because they are for compounded drugs. 

HHS OIG also found that, while most Medicare contractors require 

providers to list the individual ingredients that made up a compounded 

drug billed under the nonspecific HCPCS code in a text field on a claim, 

they do not require NDCs for these ingredients. NDCs could be used to 

(a) identify whether an ingredient is an FDA-approved product or a bulk

drug substance and (b) help determine ingredient price for the purposes 

of calculating payment.65

 

65Department of Health and Human Services, Office of Inspector General, Compounded 

Drugs under Medicare Part B: Payment and Oversight. In addition, HHS OIG found that 

Medicare Part B contractors representing 10 of the 13 Part B regions paid providers based 

on invoice price of the drug or the purchase price set by the compounding pharmacy that 

made the drug, rather than according to common drug pricing benchmarks. To conduct its 

work, HHS OIG surveyed and asked for supplemental information from the nine

contractors responsible for processing Medicare Part B claims in CMS’s 13 regions as of 

December 2012; all nine contractors responded to HHS OIG’s request for information.

In August 2014, CMS officials told us that the 

agency was working to implement HHS OIG’s recommendation regarding 

a compounded drug indicator for Part B claims. Without specific 

information indicating whether a beneficiary received a compounded drug 

in an outpatient setting or what ingredients made up the compounded 
 

Page 24 GAO-15-85 Public and Private Payment for Compounded Drugs

drug, CMS may be may be paying for such drugs in a manner that is 

inconsistent with its policy.66

Officials from the public programs and private health insurers we spoke 

with generally agreed that payment practices for compounded drugs may 

affect the use of these drugs. Officials from CMS, one state Medicaid 

program, three of the five insurers, the two Part D-only sponsors, and the 

three PBMs with whom we spoke stated that payment practices for 

compounded drugs did affect their use, specifically when public programs 

and private health insurers excluded payments for bulk drug substances 

in retail pharmacy settings. In most cases, payment exclusions for bulk 

drug substances resulted in a decreased use of compounded drugs in 

these insurers’ plans, particularly for compounded drugs dispensed in 

pharmacy settings. For example, according to CMS, a 2012 analysis of 

Part D data showed that compounded drugs comprised less than one 

percent of all Part D claims in that year, which is likely due at least in part 

to Part D drug rules that exclude payment for bulk drug substances. CMS 

officials told us that the small number of claims for compounded drugs is 

a result of the law limiting Medicare Part D payment to FDA-approved 

drugs. The Part D sponsor that pays for bulk drug substances in 

compounded drugs saw its costs for these bulk drug substances increase 

significantly between January 2012 and March 2014 and, as a result, will 

cease payments for these substances by March 2015. In contrast to this 

sponsor, officials from two insurers that do not pay for bulk drug 

substances in their Medicare Advantage plans that include Part D 

benefits told us that payments for compounded drugs have remained 

generally steady, with no significant increases or decreases. The 

experiences of the Part D sponsor and the two insurers suggest that 

Part D payment practices may affect the use of compounded drugs. 

Further, officials from one of the three insurers that pay for ingredients 

that are FDA-approved products only and do not pay for bulk drug 

substances in their private health plans in the commercial market told us 

that these practices have resulted in a decrease in compounded drug 

 

66Federal internal control standards call for agencies to have the information they need in 

a form that enables them to carry out internal control and other responsibilities and, on a 

day-to-day basis, to make operating decisions and allocate resources. GAO, Standards 

for Internal Control in the Federal Government, GAO/AIMD-00.21.3.1 (Washington, D.C.: 

November 1999). Internal control is synonymous with management control and comprises 

the plans, methods, and procedures used to meet missions, goals, and objectives.

Payment Practices, 

among Other Factors, 

May Affect the Use of 

Compounded Drugs
 

Page 25 GAO-15-85 Public and Private Payment for Compounded Drugs

claims and payments. For example, officials from one of the insurers told 

us that, in 2011, the insurer’s payments for compounded drugs decreased 

by 205 percent in the quarter after it ceased paying for bulk drug 

substances.

Officials from one insurer that limits payment to only FDA-approved drugs 

in its private health plans in the commercial market and officials from one 

PBM expressed concern that manufacturers of bulk drug substances and 

outsourcing facilities are inflating the AWP of the bulk drug substances 

used to make compounded drugs. Further, these officials, as well as 

officials from two other PBMs, told us that outsourcing facilities are 

actively marketing their products to physicians, who may not know what 

ingredients these products contain or be sure of the compounded 

products’ clinical benefits. Officials from one PBM said several of these 

outsourcing facilities are pushing certain compounded drugs onto the 

market through partnerships they have established with physicians who 

own shares in these facilities.

Officials from the majority of associations representing health care 

providers we spoke with cited factors other than payment practices that 

affect the use of compounded drugs—primarily individual patient need 

and drug shortages. Officials from CMS and some of the states and 

insurers we spoke with also told us that these factors affected the use of 

compounded drugs. For example, officials from CMS, 11 associations, 

3 insurers, and 2 pharmaceutical standards-setting organizations told us 

that physicians primarily prescribe compounded drugs due to individual 

patient needs such as (1) the lack of a commercially available product for 

a patient’s specific treatment needs; (2) a patient’s allergy to an inactive 

ingredient, such as a dye or a filler, in an available FDA-approved drug; 

(3) a patient’s need for a different delivery format for the drug, such as a 

patient who cannot swallow pills and needs a liquid formulation; or (4) a 

patient’s need for custom dosage requirements, such as a pediatric 

patient who needs a lower dosage of a commercially available drug. In 

addition to individual patient need, officials from 7 of the 11 associations 

and 2 state Medicaid programs we spoke with also cited shortages of 

certain FDA-approved drugs as a significant factor contributing to the 
 

Page 26 GAO-15-85 Public and Private Payment for Compounded Drugs

need to prescribe and use compounded drugs.67 For example, officials 

from one association told us that nutrition drugs that need to be 

administered intravenously are frequently in shortage. Patients who need 

these nutrition drugs sometimes require a combination of more than 20 

drugs, all of which are FDA-approved. However, according to officials 

from this association, many of these FDA-approved nutrition drugs have 

been in shortage since 2010 and, therefore, clinicians have to use 

compounded intravenous nutrition drugs made with bulk drug substances 

instead.

Compounded drugs account for a small but likely growing percentage of 

all prescription drugs dispensed in retail pharmacies, but the number of 

these drugs administered in outpatient settings—as well as how much 

public programs and private health insurers are paying for them—is 

unknown. The lack of information about use and payments results from 

the fact that, unlike retail claims, outpatient health insurance claims, 

including Medicare Part B claims, may not contain information specific 

enough to identify whether a compounded drug was administered or what 

ingredients were used to make it. Medicare Part B policy for payment for 

compounded drugs is also unclear and instructs CMS contractors to deny 

payment for non-FDA-approved drugs but is silent with respect to whether 

payment is available for ingredients—namely, bulk drug substances—in a 

compounded drug that are not FDA-approved. In addition, CMS may be 

unable to appropriately apply Medicare payment policy because CMS’s 

Medicare contractors do not collect information needed to determine 

whether each ingredient used to make a compounded drug administered 

in an outpatient setting is FDA-approved. As a result, CMS may have paid 

for compounded drugs containing bulk drug substances in outpatient 

settings inconsistently with its payment policy and incurred additional 

expenses in the process. In April 2014, HHS OIG recommended that 

CMS establish a method to identify Part B claims for compounded drugs, 

which could also help CMS to appropriately apply its payment policy.

 

67We previously reported on drug shortages in February 2014 and found that shortages 

are primarily due to quality problems resulting in supply disruptions, coupled with 

constrained manufacturing capacity. See GAO-14-194, Drug Shortages: Public Health 

Threat Continues, Despite Efforts to Help Ensure Product Availability, (Washington, D.C.: 

Feb. 10, 2014).

Conclusions
 

Page 27 GAO-15-85 Public and Private Payment for Compounded Drugs

To help ensure that Medicare Part B is able to appropriately apply its 

payment policy for compounded drugs, we recommend that the Secretary 

of Health and Human Services direct the Administrator of the Centers for 

Medicare & Medicaid Services to clarify the Medicare Part B payment 

policy for compounded drugs and, as necessary, align payment practices 

with the policy. For example, CMS should consider updating the Medicare 

Part B payment policy to either explicitly allow or restrict payment for 

compounded drugs containing bulk drug substances and, as appropriate, 

develop a mechanism to indicate on Medicare Part B claims both whether 

a beneficiary received a compounded drug and the drug’s individual 

ingredients in order to properly apply this policy and determine payment.

We provided a draft of this report to HHS for review, and its comments 

are reprinted in appendix I. In its comments, HHS disagreed with our 

recommendation that CMS clarify the Medicare Part B payment policy 

and align payment practices with the policy as necessary. HHS also 

provided technical comments, which we incorporated as appropriate.

In disagreeing with our recommendation to clarify the Medicare Part B 

payment policy, HHS stated that it did not believe that clarifying the policy 

to specifically address payments for bulk drug substances was necessary 

at this time. HHS commented that the Part B payment policy does not 

currently distinguish between compounded drugs that contain bulk drug 

substances and compounded drugs that contain FDA-approved products 

but, rather, recognizes differences between compounded drugs and FDAapproved manufactured drugs. According to HHS, the policy allows for 

payment for compounded drugs prepared in a manner that does not 

violate the FDCA and does not permit payment for drugs manufactured or 

otherwise prepared in a manner that is inconsistent with the FDCA. As we 

state in the report, the Part B policy indicates the agency’s view that, to 

be eligible for Medicare coverage, FDA must have approved the drug for 

marketing, while at the same time indicating that payment is available for 

compounded drugs. We also note that neither bulk drug substances nor 

compounded drugs, regardless of their ingredients, are generally 

approved by FDA. Based on HHS’s comments, CMS does not consider 

the FDA-approval status of compounded drug ingredients in making 

Part B payment determinations and focuses on whether the drug was 

prepared in a manner consistent with the FDCA. We appreciate HHS’s 

explanation of this distinction; however, we maintain that the Part B policy 

should be clarified to explicitly contain this exception for compounded 

drugs.

Recommendation for 

Executive Action

Agency Comments

and Our Evaluation
 

Page 28 GAO-15-85 Public and Private Payment for Compounded Drugs

With regard to HHS’s comment that payment is not made for drugs 

manufactured or otherwise prepared in a manner that is inconsistent with 

the FDCA, including cases in which FDA has determined that a company 

is producing compounded drugs in violation of the FDCA—such as a 

company compounding drugs on a large scale that resembles 

manufacturing—the extent to which CMS ensures compliance with this 

policy is unclear. As noted by HHS OIG in its April 2014 report on 

Medicare Part B payments for compounded drugs, Medicare contractors 

generally review claims for compounded drugs to determine payment 

amounts and assign payments on the basis of the description of the drug 

given by the provider on the claim. The HHS OIG report was silent on 

whether the contractors also review these claims to determine who 

produced the compounded drug but noted that CMS contractors, whose 

specific policies and requirements for claims vary, do not necessarily 

require providers to submit this information. As we note in the report, and 

as the HHS OIG report confirmed, CMS does not collect information from 

the Medicare contractors on payments for compounded drugs, and 

neither CMS nor its contractors track claims or payment amounts for 

these drugs. Therefore, CMS does not know what compounded drugs the 

contractors paid for or whether the contractors were able to determine 

whether the company that produced the compounded drug had been 

found by FDA to be in violation of the FDCA for the purposes of denying 

payment in adherence with the Part B policy. In addition, it is unclear 

whether CMS contractors are collecting sufficient information to identify 

specific bulk drug substances used to make compounded drugs. This 

information will be necessary for the contractors to make payment 

determinations when FDA finalizes its lists of bulk drug substances that 

may or may not be used for compounding under the FDCA.

In addition, HHS commented on the limitations of the Part B claims 

systems that would prevent CMS from collecting detailed information, 

such as NDCs of drug ingredients, from claims. However, HHS noted that 

CMS concurred with the HHS OIG recommendation to develop a modifier 

or other mechanism to identify claims for compounded drugs, which is 

consistent with our recommendation. In light of CMS’s inability to obtain 

detailed information about compounded drug ingredients collected by its 

contractors, we remain concerned that the agency is unable to ensure 

that payments are made in accordance with the Part B policy.
 

Page 29 GAO-15-85 Public and Private Payment for Compounded Drugs

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the Secretary of Health 

and Human Services. In addition, the report will be available at no charge 

on the GAO website at http://www.gao.gov. If you or your staffs have any 

questions about this report, please contact me at (202) 512-7114 or 

dickenj@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. 

GAO staff who made key contributions to this report are listed in 

appendix II. 

John Dicken

Director, Health Care
Page 30 GAO-15-85 Public and Private Payment for Compounded Drugs

List of Congressional Requesters

The Honorable Henry A. Waxman

Ranking Member

Committee on Energy and Commerce

House of Representatives

The Honorable Sander M. Levin

Ranking Member

Committee on Ways and Means

House of Representatives

The Honorable Frank Pallone, Jr.

Ranking Member

Subcommittee on Health

Committee on Energy and Commerce

House of Representatives

The Honorable Diana DeGette

Ranking Member

Subcommittee on Oversight and Investigations

Committee on Energy and Commerce

House of Representatives

The Honorable Jim McDermott

Ranking Member

Subcommittee on Health

Committee on Ways and Means

House of Representatives
Appendix I: Comments from the Department of 

Health and Human Services

Page 31 GAO-15-85 Public and Private Payment for Compounded Drugs

Appendix I: Comments from the Department 

of Health and Human Services
Appendix I: Comments from the Department of 

Health and Human Services

Page 32 GAO-15-85 Public and Private Payment for Compounded Drugs
Appendix I: Comments from the Department of 

Health and Human Services

Page 33 GAO-15-85 Public and Private Payment for Compounded Drugs
Appendix II: GAO Contact and Staff 

Acknowledgments

Page 34 GAO-15-85 Public and Private Payment for Compounded Drugs

John Dicken, (202) 512-7114 or dickenj@gao.gov

In addition to the contact named above, Rashmi Agarwal, Assistant 

Director; Shana R. Deitch; Sandra George; Jyoti Gupta; and 

Laurie Pachter made key contributions to this report.

Appendix II: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments
Related GAO Products

Page 35 GAO-15-85 Public and Private Payment for Compounded Drugs

Compounded Drugs: TRICARE’s Payment Practices Should Be More 

Consistent with Regulations. GAO-15-64. Washington, D.C.: October 2, 

2014. 

Prescription Drugs: Comparison of DOD, Medicaid, and Medicare Part D 

Retail Reimbursement Prices. GAO-14-578. Washington, D.C.: June 30, 

2014.

Medicaid Prescription Drugs: CMS Should Implement Revised Federal 

Upper Limits and Monitor Their Relationship to Retail Pharmacy 

Acquisition Costs. GAO-14-68. Washington, D.C.: December 19, 2013.

Drug Compounding: Clear Authority and More Reliable Data Needed to 

Strengthen FDA Oversight. GAO-13-702. Washington, D.C.: July 31, 

2013.

Related GAO Products

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