Compounded Drugs: Payment Practices Vary across Public Programs and Private Insurers, and Medicare Part B Policy Should Be Clarified
Published: 2014-10-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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 FDA-approval 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.
section_title: What GAO Recommends
paragraphs: 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.

section_title: Letter
paragraphs: 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. 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.
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). 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. 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.
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. 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. 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. 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  reimbursement practices of public health care programs, such as  Medicare and Medicaid, and private health plans. 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. 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 benefit— 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.
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.
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. 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. 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. 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.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.
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. We interviewed officials from two companies that publish  national drug compendia for their perspectives on payments for  compounded drugs. 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. 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.
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  pharmacists—who administer or dispense compounded drugs in  inpatient, outpatient, or pharmacy settings; 2 pharmaceutical standards- setting 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.
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.
subsections: section_title: Background
subsections: section_title: Drug Compounding
paragraphs: Compounded drugs may include sterile and nonsterile preparations,  which, like all drug products, are made up of active and inactive  ingredients. The active ingredient or ingredients in a compounded drug  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). FDA  maintains a publicly available list of NDCs for FDA-approved products.  NDCs for FDA-approved products and bulk drug substances are  published in three national drug compendia, by First Databank, Medi- Span, 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. A single FDA- approved 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. (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.)
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. 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  (known as anticipatory compounding). 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.  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   According to FDA, inclusion of a bulk drug substance on an FDA  drugs.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  exemptions from certain requirements of the FDCA if they compound  using bulk drug substances included on the lists.
USP 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. pharmacy transactions. These entities were required to be fully  compliant with version D.0 by January 1, 2012.
section_title: Drug Benefits under Public Programs and Private Health Plans
subsections: section_title: Medicare
paragraphs: 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. Medicare uses contractors to process and pay Part A and Part B  claims. 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.
section_title: Medicaid
paragraphs: 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. States  report these payments to CMS, which provides federal matching funds to  states to cover a portion of these costs.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.
section_title: Private Health Plans
paragraphs: 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.
section_title: Medicare, Medicaid, and Private Health Insurers Have Varying Payment Practices for Compounded Drugs, and Medicare Part B Payment Policy Is Unclear
subsections: section_title: For Compounded Drugs Dispensed in Pharmacy Settings, Medicare, Medicaid, and Private Health Insurers Have Varying Payment Practices
paragraphs: 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. 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.
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  insurers across the insurer’s Medicare Part D, Medicaid, and private  health plans.
Under Medicare Part D, federal payments are not available for non- FDA-approved products—including bulk drug substances—and  inactive ingredients used to make a compounded drug. 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. 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. 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  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.
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.  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. The fifth  state Medicaid program and the remaining two insurers pay for only  those bulk drug substances that are listed on their formulary.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.
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 FDA- approved products under their prescription drug benefit. Officials  from one of these three insurers told us that the insurer requires prior  authorization for all compounded drug prescription claims; 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. 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.
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  pricing benchmarks. These pricing benchmarks apply to both FDA- approved 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. 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.
section_title: 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
paragraphs: 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 FDA- approved 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  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. 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.develop their own payment policies for these drugs.
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  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. 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.
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 FDA- approved 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  every HCPCS drug code and not just the nonspecific code, and  providers may not submit more than one NDC with the nonspecific  code. 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.
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  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 FDA- approved 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. 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.
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.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   Because these drugs are bundled,  generally pay a preset rate for the cost to deliver inpatient services,  including any compounded drugs administered as part of the services;the use of a particular drug—including a compounded drug—would not  generally change the inpatient payment rate for a given service.
section_title: Medicare’s Payment Policy for Compounded Drugs under Part B Is Unclear
paragraphs: 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.  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   As noted above, most of the Part B contractors do  approved by FDA.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.
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. 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  drug, CMS may be may be paying for such drugs in a manner that is  inconsistent with its policy.
section_title: Payment Practices, among Other Factors, May Affect the Use of Compounded Drugs
paragraphs: 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  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  need to prescribe and use compounded drugs.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.
section_title: Conclusions
paragraphs: 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.
section_title: Recommendation for Executive Action
paragraphs: 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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 FDA- approved 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.
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.
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.
section_title: Appendix I: Comments from the Department of Health and Human Services
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: 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.
section_title: Related GAO Products
paragraphs: 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.