Department of Health and Human Services 

 OFFICE OF 

INSPECTOR GENERAL 

COMPOUNDED DRUGS UNDER 

MEDICARE PART B: 

PAYMENT AND OVERSIGHT 

Daniel R. Levinson 

Inspector General

 April 2014 

OEI-03-13-00270 
 

EXECUTIVE SUMMARY: COMPOUNDED DRUGS UNDER MEDICARE PART B: 

PAYMENT AND OVERSIGHT 

OEI-03-13-00270 

WHY WE DID THIS STUDY 

Compounded drugs are customized medications that meet specific needs of individual patients and are 

produced in response to a licensed practitioner’s prescription. Compounded drugs that are 

contaminated pose a severe threat to public health and safety. An outbreak of fungal meningitis and 

other fungal infections in late 2012 was linked to contaminated injectable compounded drugs. As of 

October 2013, the Centers for Disease Control and Prevention had reported over 700 cases linked to 

this outbreak. Although certain compounded drugs can be eligible for coverage under Medicare Part 

B, Medicare does not pay for compounded drugs when the Food and Drug Administration determines 

that an entity is producing compounded drugs in violation of the Federal Food, Drug, and Cosmetic 

Act (the Act). In light of the 2012 outbreak and increased scrutiny of compounded drugs, we sought to 

determine the extent to which Part B paid for compounded drugs and to examine Medicare 

Administrative Contractors’ (MAC) policies and procedures for reviewing and processing claims for 

compounded drugs. 

HOW WE DID THIS STUDY 

We surveyed Centers for Medicare & Medicaid Services (CMS) staff and Part B MACs to assess their 

oversight of Medicare claims for compounded drugs. We asked CMS and MACs whether they track 

the number of claims and the amount paid for compounded drugs and to describe their policies and 

procedures for reviewing and processing claims for compounded drugs. 

WHAT WE FOUND 

We found that neither CMS nor MACs tracked the number of claims for compounded drugs under Part 

B or the corresponding amounts paid, and that Part B claims do not contain information that can be 

used to systematically identify claims for compounded drugs. We also found that claims for 

compounded drugs do not identify the compounding pharmacy; however, this information may be 

included in documentation kept by the provider. Finally, we found that most MACs manually 

reviewed Part B claims containing “not otherwise classified” codes, which can represent compounded 

drugs, to determine payment amounts. 

WHAT WE RECOMMEND 

The inability to track claims for compounded drugs and identify the compounding pharmacies that 

produce these drugs prevents CMS and MACs from taking steps to stop payments for compounded 

drugs that are produced in violation of the Act. Therefore, we recommend that CMS (1) establish a 

method to identify Part B claims for compounded drugs, (2) explore the possibility of requiring 

providers to identify on the Part B claim the pharmacy that produced the compounded drug, and 

(3) explore the possibility of conducting descriptive analyses of Part B claims for compounded drugs. 

CMS concurred with the first recommendation, did not concur with the second, and conditionally 

concurred with the third. 
TABLE OF CONTENTS 

Objectives ....................................................................................................1 

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

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

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

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

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

Most MACs manually reviewed Part B claims containing NOC 

codes, which can represent compounded drugs, to determine 

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

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

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

Appendix....................................................................................................13 

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

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

 

 

OBJECTIVES 

1.	 To determine the extent to which Medicare Part B paid providers for 

compounded drugs in 2012. 

2.	 To determine Medicare Administrative Contractors’ (MAC) policies 

and procedures for reviewing and processing Part B claims for 

compounded drugs. 

BACKGROUND 

An outbreak of fungal meningitis and other fungal infections in late 2012 

was linked to contaminated injectable compounded drugs. As of 

October 2013, the Centers for Disease Control and Prevention (CDC) had 

reported over 700 cases linked to this outbreak. Compounded drugs that 

are contaminated pose a severe threat to public health and safety. 

Therefore, we determined the extent to which Part B paid for compounded 

drugs, and we examined MACs’ policies and procedures for reviewing and 

processing claims for compounded drugs. 

Compounded Drugs 

Pharmacy compounding is a practice in which pharmacists combine, mix, 

or alter ingredients to create a customized medication for an individual 

patient in response to a licensed practitioner’s prescription. Compounding 

does not generally include mixing or reconstituting commercial products 

in accordance with the manufacturer’s instructions or the product’s 

approved labeling.1 Providers prescribe compounded drugs for various 

reasons, including: 

	 a noncompounded version of the medicine is discontinued or 

generally unavailable, 

	 the patient is allergic to certain dyes or preservatives in the 

noncompounded version, 

	 the patient has unique needs and requires tailored dosage strength 

(e.g., an infant), or 

	 the pharmacist can combine several medications to increase 

compliance in taking the medications.2
 

1

 Food and Drug Administration (FDA), Limited FDA Survey of Compounded Drug 

Products. Accessed at http://www.fda.gov/Drugs/GuidanceComplianceRegulatory 

Information/PharmacyCompounding/ucm155725.htm on November 14, 2012. 2

 The International Academy of Compounding Pharmacists, What Is Compounding? 

Accessed at http://www.iacprx.org/displaycommon.cfm?an=1&subarticlenbr=1 on 

October 3, 2013. 

Compounded Drugs Under Medicare Part B: Payment and Oversight (OEI-03-13-00270) 1 
 

 

 

 

 

 

 

 

 

 

The quality of a finished compounded-drug product can be affected by 

numerous factors, including (but not limited to) the quality of the active 

pharmaceutical ingredient used and the quality of the compounding 

practices of the pharmacy in which the product is created.3 

Pharmacy compounding is a vital service that helps many people, 

including those who are allergic to inactive ingredients in FDA-approved 

medicines and others who need medications that are not available 

commercially.4 However, poor compounding practices can result in 

contamination or medications that do not possess the strength, quality, and 

purity required, which may pose risks to patients.5 

Medicare Coverage of Compounded Drugs Under Part B and 

Part D 

Medicare Part B. Medicare Part B continues to cover a limited number of 

outpatient prescription drugs and biologicals (hereinafter referred to 

collectively as drugs). Part B-covered drugs generally fall into the 

following categories: drugs furnished incident to a physician’s services 

(e.g., injectable drugs used in connection with the treatment of cancer); 

drugs explicitly covered by statute (e.g., some vaccines and oral anticancer 

drugs); and drugs used in conjunction with durable medical equipment 

(DME) (e.g., inhalation drugs).6 

MACs. The Centers for Medicare & Medicaid Services (CMS) contracts 

with MACs, which are private companies, to process and pay Medicare 

Part B claims, including those for prescription drugs. As of 

December 2012, 9 MACs covering 13 Medicare Parts A and B 

jurisdictions were operational.7 Through Statements of Work, CMS 

assigns specific functions to MACs and also outlines performance 

standards for those functions. The functions performed by MACs include, 

but are not limited to, claims processing, provider enrollment, customer 

service for providers, medical review, and appeals.8 

3

 FDA, Report: Limited FDA Survey of Compounded Drug Products. Accessed at 

http://www.fda.gov/Drugs/GuidanceComplianceRegulatoryInformation/PharmacyCompo 

unding/ucm155725.htm on November 14, 2012.
 4

 FDA, The Special Risks of Pharmacy Compounding. Accessed at 

http://www.fda.gov/ForConsumers/ConsumerUpdates/ucm107836.htm on 

November 20, 2013.
 5

 Ibid.
 6 68 Fed. Reg. 50428, 50428–50429 (August 20, 2003). 

7

 CMS originally proposed 15 A/B MAC jurisdictions, but as of December 2013 the
 

agency was consolidating these jurisdictions to form 10 A/B MAC jurisdictions. 

8

 The A/B MACs handle provider enrollment functions for their providers; however,
 

DME MACs do not because the National Supplier Clearinghouse handles enrollment for 

DME suppliers. 

Compounded Drugs Under Medicare Part B: Payment and Oversight (OEI-03-13-00270) 2 
 

 

 

 

 

 

To obtain Part B reimbursement for covered outpatient prescription drugs, 

health care providers submit claims to MACs using Healthcare Common 

Procedure Coding System (HCPCS) codes.9 In the case of prescription 

drugs, each HCPCS code defines the drug name and the amount of the 

drug represented by the HCPCS code, but does not specify the 

manufacturer or package size. 

Part B Coverage of Compounded Drugs. Generally, compounded drugs 

are eligible for coverage under Medicare Part B.10 However, when FDA 

determines that an entity is producing compounded drugs in violation of 

the Federal Food, Drug, and Cosmetic Act (the Act), Medicare does not 

pay for these drugs.11 For example, by compounding drugs on a large 

scale, an entity may be operating as a manufacturer without complying 

with the manufacturing requirements under the Act.12 Such companies 

may be manufacturing drugs that are subject to the “new drug application” 

(NDA) requirements of the Act, but for which FDA has not approved an 

NDA, or drugs that are misbranded or adulterated.13 If FDA has not 

approved the manufacturing and processing procedures used by these 

facilities, it has no assurance that the drugs these companies are producing 

are safe and effective.14 

In its Medicare Benefit Policy Manual, CMS stated that it will notify 

MACs when FDA has determined that compounded drugs are being 

produced in violation of the Act. After the MAC receives subsequent 

instruction from CMS, it stops Medicare payment for compounded drugs 

produced in violation of the Act.15 However, there is no code or modifier 

on Part B claims that can be used to systematically identify compounded 

drugs. 

Medicare Part D. The Medicare prescription drug program, known as 

Medicare Part D, provides an optional prescription drug benefit to all 

Medicare beneficiaries entitled to Medicare Part A or enrolled in Medicare 

9

 CMS uses HCPCS codes to provide a standardized coding system for describing the 

specific items and services provided in the delivery of health care. 10 This refers only to Part B-covered drugs described in the previous section.
 

Section 1862(a)(1)(A) of the Social Security Act (SSA) requires that drugs must be 

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

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

described in CMS’s Medicare Claims Processing Manual, Rev. 2554, September 28, 

2012, ch. 17 § 20.1.2. 

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

13 Ibid. 

14 Ibid. 

15 Ibid. 

Compounded Drugs Under Medicare Part B: Payment and Oversight (OEI-03-13-00270) 3 
 

 

 

 

 

 

 

 

 

 

 

Part B.16 Part D plans are administered by private companies, known as 

plan sponsors, that contract with CMS to offer prescription drug coverage. 

For compounded drugs under Part D, only the components that satisfy the 

definition of a Part D drug are allowable costs under Part D.17, 18 Every 

time a beneficiary has a prescription filled under Part D, the plan sponsor 

must submit a prescription drug event (PDE) record.19 The PDE record 

contains drug cost, payment, prescribing, dispensing, and utilization data, 

as well as a code that indicates whether a prescription is for a compounded 

drug. To conduct oversight, in February 2013 CMS used this “compound 

code” to perform a number of descriptive analyses.20 

Concern About Compounded Drugs 

A late 2012 outbreak of fungal meningitis and other fungal infections was 

linked to contaminated injectable products compounded by the New 

England Compounding Center (NECC). As of October 23, 2013, CDC 

had reported 751 cases and 64 deaths linked to this outbreak.21 In 

October 2012, FDA investigators found substantial problems with NECC’s 

facilities, including mold and bacterial contamination and failure to 

maintain a sterile environment.22 Between the time of the NECC outbreak 

and a May 16, 2013, congressional hearing, 10 additional firms had 

conducted voluntary FDA-overseen recalls of sterile compounded or 

repackaged drug products.23 

FDA Authority. At the time of the NECC meningitis outbreak, FDA had 

limited authority to regulate compounding pharmacies and enforce 

16 The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, 

P.L. 108-173. 17 CMS, Medicare Prescription Drug Benefit Manual, Rev. 10, February 19, 2010, ch. 6 

§ 10.4. 

18 In general, 42 CFR § 423.100 defines a Part D drug as a drug used for a medically 

accepted indication, dispensed upon a prescription, and approved under the Act. It also 

includes certain biological products, insulin, medical supplies, and vaccines. 

19 SSA §§ 1860D-15(c)(1)(C) and (d)(2), 42 CFR § 423.322. 

20 For all Part D PDE claims for compounded drugs dispensed in 2012, CMS determined 

(among other things): the percentage of all covered Part D claims reported as being 

compounded; the average drug cost for covered compounded drugs per beneficiary; the 

top-billing pharmacies; and the top drugs. 

21 CDC, Multi-State Meningitis Outbreak—Current Case Count. Accessed at 

http://www.cdc.gov/hai/outbreaks/meningitis-map-large.html on December 31, 2013. 22 FDA, FDA Form 483 for New England Compounding Center (Oct. 26, 2012). 

Accessed at http://www.fda.gov/downloads/AboutFDA/CentersOffices/ 

OfficeofGlobalRegulatoryOperationsandPolicy/ORA/ORAElectronicReadingRoom/UC 

M325980.pdf on October 7, 2013. 23 Janet Woodcock, M.D., Director, Center for Drug Evaluation and Research, Statement
 

Before the Subcommittee on Health, Committee on Energy and Commerce May 23, 2013. 

Accessed at http://www.fda.gov/NewsEvents/Testimony/ucm353654.htm on 

October 7, 2013. 

Compounded Drugs Under Medicare Part B: Payment and Oversight (OEI-03-13-00270) 4 
 

 

 

 

 

 

 

compliance with safety standards.24 The agency normally asserted 

jurisdiction in situations in which pharmacies had moved from pharmacy 

compounding to pharmacy manufacturing.25 In November 2013, Congress 

clarified FDA’s oversight authority of compounding pharmacies in the 

Drug Quality and Security Act.26 

METHODOLOGY 

Data Sources and Collection 

MAC Surveys. In June 2013, we surveyed the 9 Part B MACs that 

represented the 13 jurisdictions in effect as of December 2012. The 

surveys asked about MACs’ policies and procedures regarding Medicare 

claims for compounded drugs, including the HCPCS code(s) that 

providers use for compounded drugs, the payment policies for 

compounded drugs, and any additional information that MACs require 

providers to include on Medicare claims for compounded drugs. 

Further, we asked MACs how they identify and review Part B claims for 

compounded drugs and whether they track the number of such claims or 

perform any oversight for such claims. We also asked MACs whether 

they received instructions from CMS to stop payment for certain 

compounded drugs and, if so, whether they did. We asked MACs whether 

they were able to determine their Part B payments to providers for 

compounded drugs and, if so, to provide the total amount paid for these 

drugs in 2012. All MACs responded to our request. 

CMS Data. We obtained from CMS all relevant policies and procedures 

on the coverage of and payment for compounded drugs. We surveyed 

CMS staff in the Hospital and Ambulatory Policy Group, within the 

Division of Ambulatory Services, about the agency’s oversight of Part B 

claims for compounded drugs. Specifically, we asked these staff what 

instructions CMS provides MACs regarding Part B claims for 

compounded drugs, whether CMS notified MACs to stop payment for 

drugs produced in violation of the Act, and whether CMS received 

information from FDA on entities producing drugs in violation of the Act. 

24 Congressional Research Service, Federal Authority to Regulate the Compounding of 

Human Drugs (April 12, 2013). Accessed at https://www.fas.org/sgp/crs/misc/ 

R43038.pdf on December 31, 2013. 25 FDA, Compliance Policy Guidance for FDA Staff and Industry, Section 460.200, 

May 29, 2002. Accessed at http://www.fda.gov/ICECI/ComplianceManuals/Compliance 

PolicyGuidanceManual/ucm074398.htm on October 3, 2013. On November 27, 2013, 

FDA withdrew this guidance because it was no longer consistent with the agency’s 

current thinking on the issues it addressed. 78 Fed Reg. 72901–72902 (December 4, 

2013). 

26 P.L. 113-54. 

Compounded Drugs Under Medicare Part B: Payment and Oversight (OEI-03-13-00270) 5 
 

 

We also reviewed Part D policies related to compounded drugs and 

obtained CMS’s report analyzing Part D claims for compounded drugs. 

Data Analysis 

MACs. We reviewed MACs’ survey responses to determine their policies 

and procedures for reviewing and processing claims for compounded 

drugs, including the procedure codes, payment policies, and other 

information required on Part B claims for compounded drugs. From those 

responses, we determined whether MACs tracked (1) the number of 

claims for compounded drugs and (2) the amount that Part B paid 

providers for compounded drugs in 2012. 

CMS and MAC Oversight. We reviewed CMS’s and MACs’ policies and 

procedures as well as CMS’s report on its analysis of Part D claims data 

for compounded drugs. We then analyzed responses from CMS and 

MACs to determine the extent of each entity’s oversight. 

Limitations 

We did not verify the accuracy or completeness of the data provided by 

CMS or the MACs, or the MACs’ responses to our survey. The scope of 

this review was limited to CMS’s and MACs’ policies and procedures; we 

did not collect or analyze information from FDA. 

Standards 

This study was conducted in accordance with the Quality Standards for 

Inspection and Evaluation issued by the Council of the Inspectors General 

on Integrity and Efficiency. 

Compounded Drugs Under Medicare Part B: Payment and Oversight (OEI-03-13-00270) 6 
 

Compounded Drugs Under Medicare Part B: Payment and Oversight (OEI-03-13-00270) 7 

 

FINDINGS 

CMS and MACs did not track the number of claims or 

the amount paid for compounded drugs under 

Medicare Part B 

Part B claims do not contain information that can be used to systematically 

identify all claims for compounded drugs. HCPCS codes for drugs 

represent specific drugs and dosage amounts; because compounded-drug 

products are unique combinations of pharmaceutical ingredients, they are 

not assigned unique HCPCS codes. When billing for compounded drugs, 

or other drugs that are not associated with specific HCPCS codes, 

providers use “not otherwise classified” (NOC) codes. 

CMS reported that it did not track Part B claims for compounded drugs 

paid under NOC codes in 2012. Although some MACs reported that there 

are certain criteria specific to compounded drugs (e.g., providers are 

instructed to enter 1 billing unit, list the drug names, bill at the invoice 

price, etc.), they also do not track claims for these drugs, and therefore 

could not determine the total number of claims or amount paid for 

compounded drugs in 2012. 

Unlike claims submitted under Part B, those submitted under Part D 

contain a code—the “compound code”—that indicates whether a 

prescription is for a compounded drug. Because this information is 

available on Part D claims, CMS recently conducted oversight by 

performing a number of descriptive analyses of Part D claims for 

compounded drugs. 

Claims for compounded drugs do not identify the 

compounding pharmacy; however, it may be included in 

documentation kept by the provider 

Part B claims for compounded drugs do not include the name or 

identification code of the compounding pharmacy from which the provider 

purchased the drugs. There is no requirement for providers to identify the 

compounding pharmacy on a Part B claim. However, MACs representing 

eight jurisdictions indicated that the invoice or medical records generally 

include this information, meaning that the pharmacy name is included in 

the documentation kept by the provider, and could be obtained upon 

request.27 MACs representing the remaining five jurisdictions do not 

require providers to include the information identifying the pharmacies. 

Without the pharmacy name or a code that identifies the pharmacy, neither 

27 One of these MACs reported that it does not require the invoice, but that it could 

request the pharmacy information. 
 

 

 

 

 

CMS nor MACs would be able to determine from the claim alone where 

the provider purchased the compounded drug. 

Most MACs manually reviewed Part B claims 

containing NOC codes, which can represent 

compounded drugs, to determine payment amounts 

MACs have the general authority for reviewing, pricing, and paying 

claims.28 MACs representing 10 jurisdictions reported that they manually 

review claims containing NOC codes, which can represent compounded 

drugs.29 For example, MACs that conduct manual reviews reported that 

claims with NOC codes are separated from the other claims and undergo 

an enhanced review. Because these MACs review all claims with NOC 

codes and compounded drugs are billed for under NOC codes, these 

MACs thereby review all claims for compounded drugs. 

MACs that manually review claims for compounded drugs generally do so 

to determine the payment amount. Unlike HCPCS codes for specific 

drugs, NOC codes—including those for compounded drugs—do not have 

nationally established payment amounts.30 MACs representing several 

jurisdictions reported that when they manually review claims for 

compounded drugs, they assign payment amounts on the basis of the 

description of the drugs that the provider enters on the claim. 

MACs have similar coding requirements but vary slightly in 

their payment and reporting processes for compounded drugs 

All MACs permitted providers to use the NOC code J3490 when billing 

for compounded drugs. MACs representing 7 of the 13 jurisdictions 

reported that providers could also use other NOC codes, including J3590, 

J7799, and J9999. Medicare and its beneficiaries spent $345 million on 

claims with these four NOC codes in 2012.31 Although MACs require 

providers to include specific billing codes, most MACs (those for 9 of 

28 For example, according to CMS’s Medicare Benefit Policy Manual, MACs are to stop 

Medicare payment for compounded drugs produced in violation of the Act only after 

MACs receive the appropriate instructions from CMS. CMS reported that during 2012, it 

did not instruct the MACs to stop payment for compounded drugs because it did not 

receive any communication from FDA regarding pharmacies that FDA determined to 

have been producing drugs in violation of the Act. As we previously stated, we did not 

collect any information from FDA. 

29 The manual review is in addition to the automated review and payment process for 

claims with HCPCS codes for specific drugs. 30 Although each NOC code does not have an established payment amount, MACs may 

use fee schedules that establish payment amounts for individual drugs that are submitted
 

under each NOC code.
 31 This total includes all claims containing one of these four NOC codes, which includes 

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

for only compounded drugs would likely be lower.
 

Compounded Drugs Under Medicare Part B: Payment and Oversight (OEI-03-13-00270) 8 
 

 

13 jurisdictions) do not require providers to include specific diagnostic 

codes when submitting claims for compounded drugs. MACs representing 

all but one jurisdiction require providers to include the names of each drug 

and the dosage amount on claims for compounded drugs. For all of these 

12 jurisdictions, MACs require the drug name and dosage amount to be 

included in a general text field that allows providers to describe the 

compounded drug. Although MACs representing most jurisdictions 

require drug names and dosage amounts, none of these MACs require 

providers to include the component drugs’ National Drug Codes, an 

11-digit code that identifies the manufacturer, drug product, and the 

package size. 

As for payment policies, MACs for 10 of the 13 jurisdictions paid 

providers in 2012 the invoice price for compounded drugs, i.e., the 

purchase price from the compounding pharmacy. MACs covering the 

remaining three jurisdictions paid for compounded drugs using a specific 

fee schedule, i.e., they had developed payment amounts for the drugs 

commonly used in compounded products. In addition to paying providers 

for the drug cost, MACs representing nine jurisdictions also paid providers 

for additional related costs including shipping, handling, a compounding 

fee, and tax. 

Compounded Drugs Under Medicare Part B: Payment and Oversight (OEI-03-13-00270) 9 
 

 

CONCLUSION AND RECOMMENDATIONS 

Our findings indicate that neither CMS nor MACs track the number of 

claims or the amount paid for compounded drugs under Medicare Part B. 

Unlike Part D claims, which include a code that identifies claims for 

compounded drugs, Part B claims do not contain an indicator to identify 

these drugs. The inability to track claims for compounded drugs and 

identify the compounding pharmacies limits the ability of CMS and MACs 

to take steps that could stop payments for compounded drugs produced in 

violation of the Act. 

CMS grants MACs the authority to oversee, review, and pay claims for 

compounded drugs. We found that most MACs manually review claims 

for compounded drugs to determine payment amounts because 

compounded drugs are billed under NOC codes that do not have nationally 

established payment amounts. In other words, these claims undergo a 

manual review not because they are for compounded drugs, but because 

they are submitted using NOC codes. 

Therefore, we recommend that CMS: 

Establish a method to identify Part B claims for compounded 

drugs 

Unlike Part D, Part B does not offer a means of systematically identifying 

all claims for compounded drugs. If CMS were to establish a method that 

specifically identifies compounded drug claims (e.g., a modifier) and were 

to require providers to include this information on all claims for 

compounded drugs, CMS and MACs could identify and track all Part B 

claims for compounded drugs. 

Explore the possibility of requiring providers to identify on the 

Part B claim the pharmacy that produced the compounded 

drug 

Claims for compounded drugs under Part B do not identify the pharmacy 

that produced the drug. As a result, CMS and MACs are unable to 

determine where these drugs are being produced. If providers were 

required to include this information, it would enable CMS to work with 

MACs to stop payment for drugs produced in violation of the Act. 

Explore the possibility of conducting descriptive analyses of 

Part B claims for compounded drugs 

If claims data were to include information that identified compounded 

drugs and the pharmacies that produce them, CMS and/or MACs would be 

able to conduct descriptive analyses of claims for compounded drugs 

under Part B, similar to the analysis that CMS conducted for such claims 

under Part D. These analyses could include calculating how much Part B 

Compounded Drugs Under Medicare Part B: Payment and Oversight (OEI-03-13-00270) 10 
 

is paying for compounded drugs; determining where compounded drugs 

are being produced; determining which compounded drugs are being 

billed for; and, if there are future outbreaks, identifying the claims for 

drugs produced by the pharmacies linked to these outbreaks. 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

CMS concurred with our recommendation to establish a method to 

identify Part B claims for compounded drugs and noted that it may be 

possible to create a modifier or specific code that physicians would be 

required to use when billing for compounded drugs. CMS stated that this 

approach may allow compounded drugs to be distinguished from other 

drugs that are billed under NOC codes, but that any issues related to public 

safety of compounded drugs should be addressed before the drugs are 

administered. 

CMS did not concur with our recommendation to explore the possibility of 

requiring providers to identify on the Part B claim the pharmacy that 

produced the compounded drug. CMS stated that it does not need to 

identify the dispensing compounding pharmacy to pay the physician who 

is billing for the drugs. CMS noted that it is not clear that authority exists 

under the statute to collect the suggested information as that information is 

not necessary to determine the payment amount. CMS also stated that 

changes to Medicare claims processing systems to accommodate the 

inclusion of dispensing pharmacy information would be significant and 

would compete for administrative resources with statutorily required 

payment methodology changes that necessitate system changes. Further, 

CMS does not believe that stopping Medicare payment for compounded 

drugs produced in violation of the Act will be a reliable tool for addressing 

public safety issues regarding compounded drugs. 

CMS concurred with our third recommendation to explore the possibility 

of conducting descriptive analyses of Part B claims for compounded 

drugs. CMS stated that concurrence was conditional upon successful 

implementation of the first recommendation and it would undertake such 

analyses only if it were for a program-related purpose. 

We recommend that CMS explore the possibility of identifying the 

pharmacy that produced the compounded drug. We acknowledge that 

claims analysis is retrospective and identifying the pharmacy on the claim 

would not by itself address public safety issues. We also recognize the 

challenges of including additional information on Part B claims. 

However, this additional information could supplement any descriptive, 

proactive analyses of Part B claims for compounded drugs, identify 

Compounded Drugs Under Medicare Part B: Payment and Oversight (OEI-03-13-00270) 11 
 

pharmacies that may be producing compounded drugs in violation of the 

Act, and alert providers about pharmacies associated with those violations, 

which, in turn, could prevent future payments. 

We did not make any changes to the report on the basis of CMS’s 

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

Compounded Drugs Under Medicare Part B: Payment and Oversight (OEI-03-13-00270) 12 
APPENDIX 

Agency Comments 

DEPARTh1ENT OF IJEALTH & HUMAN SERVICES Cantors for Medteare & Medicaid Services 

Administrator 

Washington, DC 20201 

DATE: MAR 11 1014 

TO: Daniel R. Levinson 

Inspector General 

FROM: 	 Marllyn Ta"\'enaer 

Administratou 

SUBJECT: 	 Ofllce of Inspector General (OIG) Draft Report: Compounded Drugs Under 

Medicare Part B: Payment and Oversight (OEI-03-13-00270) 

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

comment on the above subject OIG draft report. OIG 's objectives were to detem1ine--( I) The 

extent to which Medicare Part B paid providers for compounded drugs in 20 12; and (2) Medicare 

Administrative Contractors' (MAC) policies and procedures for reviewing and processing Part B 

claims for compounded drugs. 

The OIG surveyed MAC policies and procedures for identifying, reviewing and processing Part 

8 claims for compounded drugs. OIG also collected information about Part 8 policies for 

compounded drugs and oversight of payment for these drugs. Finally. OIG reviewed Part D 

policies related to compounded drugs. 

The OJG found that neither CMS nor the MACs track the number of claims for compounded 

drugs or the amount paid for such claims. OJG pointed out that Part B claims do not contain 

information that would easily identify all claims for compounded drug, and also noted that Part B 

claims for compounded drugs do not identify the compounding phannacy from which the 

provider purchased the drugs. OIG believes that information that identifies the source of the 

compounded drug is available from the provider. The report also described claims processing 

and claims submission requirements at the MACs, finding that most MACs conducted enhanced 

manual reviews of compounded drug claims and that payments were usually based on the 

invoice. OIG also compared claims infonnation in Part B to Part D, noting that infonnation on 

Part D claims identifies claims for compounded drugs. 

OIG Recommendation 

The OIG recommends that CMS establish a method to identify Part B claims for compounded 

drugs. 

CMS Response 

The CMS concurs with this recommendation. Currently, compounded drugs generally are paid 

under "not otherwise classified (NOC)'' codes. These codes are used for all drugs that are not 

specifically described by other codes. We believe that it may be possible to create a modifier or 

specific code that physicians would be required to use when billing for compounded drugs. 

While this approach may allow compounded drugs to be distinguished from other drugs that are 

Compounded Drugs Under Medicare Part B: Payment and Oversight (OEl-03-13-00270) 13 
 

Agency Comments (continued) 

Compounded Drugs Under Medicare Part B: Payment and Oversight (OEI-03-13-00270) 14 
 

ACKNOWLEDGMENTS 

This report was prepared under the direction of Robert A. Vito, Regional 

Inspector General for Evaluation and Inspections in the Philadelphia 

regional office. 

Edward K. Burley served as team leader for this study. Other Office of 

Evaluation and Inspections staff from the Philadelphia regional office who 

conducted the study include Kevin McAloon. Central office staff who 

provided support include Meghan Kearns and Christine Moritz. 

Compounded Drugs Under Medicare Part B: Payment and Oversight (OEI-03-13-00270) 15 
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.