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 (DQSA) 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 DQSA requires FDA to develop lists of bulk drug substances that may be used for compounding and lists of drugs that present demonstrable difficulties to compound, among others. To develop these lists, FDA has issued requests for nominations of bulk drug substances that pharmacists and outsourcing facilities may use to make compounded drugs.FDA, inclusion of a bulk drug substance on an FDA list does not indicate that FDA has approved the drug; rather, inclusion on the list means that a pharmacist or outsourcing facility may qualify for exemptions from certain According to 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. TRICARE offers pharmacy and medical benefits to active duty personnel and their dependents, military retirees and their dependents and survivors, as well as reservists and members of the National Guard and their dependents. TRICARE beneficiaries may obtain drugs through network and non-network retail pharmacies, MTF pharmacies, and TRICARE's mail-order pharmacy through the TRICARE pharmacy benefit. In addition, through TRICARE's medical benefit, TRICARE beneficiaries may obtain drugs in outpatient or inpatient settings, such as civilian physicians' offices and hospitals and MTFs. 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. claims. Medicare Part B also provides benefits for certain vaccines, such as influenza; drugs administered in hospital outpatient settings, such as part of emergency department services; and drugs administered using durable medical equipment. For the purposes of this report, when we discuss outpatient settings we are referring to drugs administered in physician offices incident to physician services. 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 Part D. Part D provides a voluntary pharmacy benefit for Medicare beneficiaries. Beneficiaries may choose Part D plans from among those offered by private Part D plan sponsors. Part D beneficiaries may obtain drugs through retail and mail-order pharmacies. Through VA's pharmacy benefit, veterans may obtain prescription drugs through VA medical center (VAMC) pharmacies and VA's mail-order pharmacy. In certain cases, they may also obtain drugs from retail pharmacies. In addition, through VA's medical benefit, veterans may obtain drugs administered to patients in VAMCs and associated outpatient clinics. In certain cases, they may also obtain drugs from non- VA outpatient and inpatient providers in the non-VA care program, which provides payment for veterans' health care services in non-VA facilities in certain circumstances, such as in emergencies or if a VAMC is unable to provide health care services to the veteran. In fiscal year 2013, TRICARE paid for about 465,000 compounded drug prescriptions through its pharmacy benefit, representing 0.3 percent of all prescription drugs paid for through its pharmacy benefit in that year. Over 395,000, or 85 percent, of these compounded drug prescriptions were dispensed in retail pharmacies. (See fig. 2.) Retirees and their dependents were the most frequent users of compounded drugs, accounting for 68 percent, or about 317,000, of the compounded drug prescriptions paid for through the pharmacy benefit. These beneficiaries obtained about 95 percent of their compounded drug prescriptions from retail pharmacies. (See fig. 3.) Among retirees and their dependents, those beneficiaries under age 65 accounted for about 61 percent of compounded drug prescriptions. DHA officials attributed the higher use of compounded drugs by retirees and their dependents, among other reasons, to these individuals' tendencies to obtain care from civilian providers, whose prescribing practices DOD does not control. Compounded drug prescriptions paid for through TRICARE's pharmacy benefit cost about $259 million in fiscal year 2013--representing about 3 percent of the total cost of prescription drugs paid for through its pharmacy benefit--up from about $5 million in fiscal year 2004. Compounded drug prescriptions containing at least 1 bulk drug substance accounted for about 98 percent of the $259 million cost. The average cost of a compounded drug that included at least 1 bulk drug substance was $557 per prescription compared to an average cost of $53 per prescription for a compounded drug that contained only FDA-approved products. More specifically, DOD data on the top 25 highest-cost compounded drugs containing at least 1 bulk drug substance showed an average cost ranging from about $848 to $9,961 per prescription. Each of these top 25 compounded drugs contained at least 1, and as many as 11, bulk drug substances. Baclofen, cyclobenzaprine hydrochloride, flurbiprofen, gabapentin, ketamine hydrochloride, and lidocaine hydrochloride powders were among the most common bulk substance included in these compounded drugs. All 25 of these compounded drugs were topical medications (e.g., creams or gels), most of which were used to treat pain. See app. II for a list of the top 25 highest-cost compounded drugs containing at least one bulk drug substance dispensed in retail pharmacies in fiscal year 2013. DHA officials attributed the high cost of compounded drug prescriptions containing bulk drug substances to several factors, including the number of these substances used in each prescription, the aggressive marketing of compounded drugs containing these substances to providers, and the high AWP of these substances--which, according to DHA and Express Scripts officials, have been inflated by manufacturers of these substances. For example, according to Express Scripts, the AWP of bulk gabapentin increased by as much as 4,948 percent from 2011 to 2014, while the AWPs of bulk ketamine and bulk baclofen increased by as much as 1,313 percent and 1,102 percent, respectively, over the same period. TRICARE could not identify compounded drug prescriptions paid for through its medical benefit because claims for drugs administered in outpatient and inpatient settings often lack specific billing codes for these drugs. For drugs administered in civilian outpatient settings, TRICARE relies on specific codes for individual drugs in the Healthcare Common Procedure Coding System (HCPCS)--a standardized coding system that is used by public programs and private health insurance plans 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 outpatient claims. However, for the majority of compounded drugs administered in outpatient settings, no HCPCS codes Providers typically bill for compounded drugs using HCPCS codes exist.for "not otherwise classified" drugs; these HCPCS codes are also used to bill for noncompounded drugs that lack specific HCPCS codes and, therefore, do not designate only compounded drugs or their ingredients. TRICARE's managed care support contractors and their subcontractor-- who are responsible for processing outpatient and inpatient claims--told us that they expect providers to list all of the NDCs for each drug ingredient or provide information about the ingredients used in the drug administered to the beneficiary. However, according to DHA officials and a TRICARE managed care contractor and subcontractor, multiple NDCs on a claim could indicate more than one noncompounded drug administered to a beneficiary and would not necessarily indicate individual ingredients used to make a compounded drug. Therefore, DHA officials told us that they would be unable to identify whether a compounded drug was administered to a beneficiary based on individual NDCs or track this information in any way. Similarly, compounded drugs administered in inpatient settings, such as hospitals, cannot be identified through DOD's available data because prescription drugs are not billed separately from the rest of the services that a TRICARE beneficiary receives; rather, they are bundled together as part of the overall charge for the hospital stay or inpatient admission. As a result, DHA officials told us that they cannot determine whether a beneficiary received a compounded drug in an inpatient setting, and thus, cannot determine the total number and cost of compounded drugs TRICARE paid for in this setting. Costs for drugs provided in inpatient settings are typically accounted for in the diagnosis-related group-a system that classifies inpatient stays according to both patients' clinical conditions (the primary diagnosis along with any secondary illnesses and complications developed during the stay) and the procedures patients receive. TRICARE pays for all ingredients that make up a compounded drug-- both FDA-approved products and bulk drug substances--inconsistent with its regulations, which stipulate that TRICARE is to pay for FDA- approved drugs only. In fiscal year 2013, 74 percent of the compounded drug prescriptions paid for by TRICARE through its pharmacy benefit contained at least one bulk drug substance.neither TRICARE nor Express Scripts was able to determine whether TRICARE was paying for bulk drug substances in compounded drug prescriptions dispensed at retail pharmacies prior to Express Scripts' July 2012 implementation of the updated NCPDP standard for electronic transmission of prescription drug claims that enables pharmacies to identify compounded drug prescriptions and ingredients used to make DHA officials told us that, them by NDC. However, we found that, prior to implementation of the updated standard, TRICARE was able to identify bulk drug substances that comprised the primary ingredient--defined as the most expensive ingredient in a compounded drug prescription--based on claims information and was paying for these bulk drug substances. DHA officials told us that they were unaware that TRICARE was paying for compounded drug prescriptions for which the primary ingredient was a bulk drug substance until Express Scripts brought it to their attention after the implementation of the updated standard. In addition, according to DHA officials, since July 2012, TRICARE has continued to pay for compounded drug prescriptions containing bulk drug substances, including ones for which the primary ingredient is a bulk drug substance. As a result, TRICARE incurred additional costs reimbursing pharmacies for these compounded drug prescriptions. DHA officials told us that they are considering denying payment for certain compounded drug prescriptions that include bulk drug substances, and are waiting to review the lists of bulk drug substances that may be used to make compounded drugs--and the lists of drugs that may not be compounded because they present demonstrable difficulties for compounding--that FDA is required to develop under the DQSA. However, DHA officials were not able to tell us when they planned to make any policy decisions because they are unsure of FDA's time frames for compiling and publishing these lists; in the meantime, TRICARE plans to continue paying for compounded drug prescriptions that include bulk drug substances. FDA officials told us that they do not expect to publish these lists until 2015. These officials also told us that the inclusion of a bulk drug substance on a list of substances that may be used for compounding does not signify that the bulk drug substance is FDA- approved. In contrast to TRICARE, Part D's payment practices for compounded drugs are more restrictive. As required by statute, under 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. For example, Part D would not pay for bulk ketamine or flurbiprofen used to make a compounded topical pain medication, whereas TRICARE currently does. Medicare Advantage organizations that offer Part D benefits and Part D plan 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 Medicare Advantage organizations 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 Officials from the remaining two Medicare Advantage substances.organizations 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. Officials from the remaining three Medicare Advantage organizations and one Part D plan sponsor--including one organization that purchases drug ingredients, including some bulk drug substances used to make compounded drugs, for its pharmacies, which it owns and operates--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. VA provides and pays for compounded drug prescriptions dispensed to beneficiaries on a limited basis and, therefore, VA's payment practices for these drugs are more restrictive than TRICARE's. VAMC pharmacies dispense a compounded drug prescription only if the beneficiary has a specific medical need that cannot be met by a commercially available drug and an alternative drug from the VA formulary has been given full consideration. According to VA officials, VA may pay for compounded drug prescriptions dispensed to beneficiaries at retail pharmacies through the non-VA care program, but those payments are limited and require VA review and approval. Once the decision by TRICARE, Medicare, or VA to pay for compounded drugs is made, payment calculations for determining reimbursement amounts vary across the three programs but are generally based on common drug pricing benchmarks. TRICARE reimburses pharmacies for each ingredient submitted as part of the claim at AWP minus a negotiated discount for compounded drug prescriptions dispensed at retail pharmacies. In addition, according to DHA officials, TRICARE also pays pharmacies an additional fee for the pharmacist's efforts to make the drug, known as a level-of-effort fee. MTF pharmacies and TRICARE's mail-order pharmacy purchase drugs, including ingredients used to make compounded drugs, directly from manufacturers and, therefore, do not reimburse providers for the use of these drugs. Under Part D, officials from four of the five Medicare Advantage organizations and both Part D plan sponsors we interviewed told us that they reimburse pharmacy providers for compounded drugs based on a negotiated price for each covered ingredient based on common drug pricing benchmarks including AWP, wholesale acquisition cost, or maximum allowable cost. In addition, two of the Medicare Advantage and both Part D plan sponsors pay an additional level-of- effort fee or a higher dispensing fee based on the complexity of the compounding or the number of ingredients in the drug. According to VA officials, VAMCs typically purchase drug ingredients used to make compounded drugs. Drug ingredient purchases are usually made under contract with a prime vendor that provides the drug ingredients at a fixed percentage discount off the lowest price otherwise available for each ingredient. For drugs that beneficiaries obtain from non-VAMC pharmacies, VA will either reimburse the beneficiary for any out-of-pocket costs or reimburse the pharmacy at AWP. Through its medical benefit, TRICARE generally pays for compounded drugs administered in outpatient and inpatient settings, and it may have paid for bulk drug substances used to make these drugs in a manner that is inconsistent with its regulations stipulating payment for FDA-approved drugs only. TRICARE reimburses civilian outpatient providers based on the HCPCS codes for "not otherwise classified" drugs and the specific NDC for each drug ingredient. While officials from TRICARE's managed care support contractors and their subcontractor told us that they require providers to either list all of the NDCs for each drug ingredient or provide information about which ingredients were used in the drug provided to the beneficiary, they do not use the NDCs to determine whether each drug ingredient listed on a claim is an FDA-approved product.TRICARE may have incurred additional costs if it reimbursed providers for bulk drug substances used to make compounded drugs administered in civilian outpatient settings, which is inconsistent with TRICARE regulations. TRICARE contractor and subcontractor officials told us that prescription drugs, including compounded drugs, administered in civilian inpatient settings are not billed separately from the rest of the services the beneficiary received but bundled together as part of the overall charge for the hospital stay or inpatient admission. Therefore, TRICARE cannot identify compounded drugs or their ingredients and instead reimburses civilian inpatient providers based on codes for these bundled services. Medicare generally pays for compounded drugs administered in outpatient and inpatient settings in a manner similar to TRICARE. Like TRICARE, CMS and Medicare Advantage organizations generally rely on HCPCS codes, and for compounded drugs administered in outpatient settings, providers typically bill CMS and Medicare Advantage organizations using nonspecific HCPCS codes for "not otherwise classified" drugs. CMS contractors responsible for processing Part B claims and Medicare Advantage organizations may conduct further reviews of outpatient claims and supplemental information 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. In Medicare Part B, Medicare contractors evaluate each claim containing the nonspecific HCPCS codes manually to make payment decisions, based on the responsible contractor's policy. Officials from two of the five Medicare Advantage organizations we spoke with told us that they review all claims with compounded drugs billed under the nonspecific code and request additional information. Officials from one of these two organizations told us that the organization 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 organization determines that they are medically necessary. Officials from the second organization told us that the organization requires providers to submit supporting documentation, including invoices that list the name and amount of each ingredient in the compounded drug. A third organization 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 organization uses NDCs primarily to calculate payments, likely for all ingredients in the compounded drug. The fourth organization does not review claims with the nonspecific HCPCS code or collect additional information and pays for all ingredients in the compounded drug. Officials from the fifth organization told us that, because the organization 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 organization is able to determine whether a compounded drug was administered to a beneficiary in outpatient settings. As is the case for TRICARE, under Medicare Part A, both CMS and four of the five Medicare Advantage organizations we interviewed told us that compounded drugs administered in inpatient settings are bundled together as part of the overall charge for the hospital stay or inpatient admission. VA provides and pays for compounded drugs administered in outpatient and inpatient settings on a limited basis and, therefore, VA's payment practices for these drugs are more restrictive than TRICARE's. VA instructs VAMCs to determine the suitability of FDA-approved drugs for inpatient and outpatient use prior to compounding drugs onsite or purchasing them from a pharmacy for VAMC use. For VA beneficiaries seeking care from non-VA providers, VA requires beneficiaries to obtain prior authorization from VA, except in emergencies. Because of VA's process for approving care outside of VA medical centers, VA officials told us that the agency makes decisions on whether to pay for a given procedure or service, including a compounded drug, on a case-by-case basis. Once the decision by TRICARE, Medicare, or VA to pay for compounded drugs is made, payment calculations for determining reimbursement amounts vary for compounded drugs administered in outpatient settings and inpatient settings across the three programs. TRICARE reimburses providers for compounded drugs at either the lesser of the billed charges or 95 percent of AWP for each ingredient as determined by ingredients' NDCs for compounded drugs administered in civilian outpatient settings. MTFs purchase drugs and drug ingredients directly from manufacturers and, therefore, do not reimburse providers for the use of these drugs. Officials from TRICARE contractors and their subcontractors told us that, for compounded drugs administered in civilian inpatient settings, TRICARE pays a preset rate for the cost to deliver inpatient services, including any drugs administered as part of the service. The use of a compounded drug--including one that contains bulk drug substances--would not generally change the inpatient payment rate for a given service. CMS generally reimburses Medicare providers for compounded drugs administered in outpatient settings based on the invoice price from the pharmacy, which the contractors responsible for processing Part B payments obtain during manual reviews of claims with the nonspecific HCPCS codes.we interviewed calculate payments based on either the provider- submitted price for the drug, which may include payment for non-FDA- approved bulk drug substances, or common drug pricing benchmarks, such as wholesale acquisition cost. The fifth Medicare Advantage organization owns and operates its healthcare facilities and pays the price set by the manufacturer for drugs and drug ingredients. For drugs administered in inpatient settings, CMS and these organizations pay a preset rate for the cost to deliver inpatient services, including any drugs administered as part of the service, and the payment rate would not change if the claim included a compounded drug. Although compounded drugs account for only a small percentage of the drugs dispensed to TRICARE beneficiaries in pharmacy settings, their costs have increased significantly over the past ten years, from $5 million in fiscal year 2004 to $259 million in fiscal year 2013, which is notably higher than TRICARE's overall increase in drug costs. The majority of these costs were for compounded drugs containing bulk drug substances, the payment for which is inconsistent with TRICARE regulations that authorize payment for FDA-approved drugs only. As a result, TRICARE incurred additional costs reimbursing pharmacies for these drugs. Moreover, because TRICARE does not track compounded drugs administered in outpatient settings and its contractors do not determine whether each drug ingredient listed on a claim is FDA-approved, TRICARE may have also paid for compounded drugs containing bulk drug substances in outpatient settings in a manner that is inconsistent with its regulations, which may have also resulted in TRICARE incurring additional costs. To help ensure TRICARE's payment practices for compounded drugs are consistent with its regulations, we recommend that the Secretary of Defense align TRICARE's payment practices for compounded drugs with applicable regulations governing the TRICARE program. This may include considering whether to amend TRICARE's regulations to explicitly allow payment for some or all bulk drug substances in compounded drugs. We provided a draft of this report to DOD, HHS, and VA for review, and DOD and VA provided written comments, which are reprinted in appendixes III and IV, respectively. In its comments, DOD concurred with our recommendation that DOD align its payment practices for compounded drug prescriptions with applicable regulations governing the TRICARE program. DOD stated that it will monitor developments related to the changing statutory and regulatory environment on compounded drugs in order to inform its policy in the months ahead. Specifically, DOD stated that the DQSA, HHS's efforts to implement this act, and a provision in the Carl Levin National Defense Authorization Act for Fiscal Year 2015 to allow DOD to provide provisional coverage or authorization for coverage of certain health care products and services that have not been demonstrated to be safe or effective, would help shape DOD's approach to payment practices for compounded drugs. In its written comments, VA generally agreed with our conclusions. VA and HHS provided technical comments, which we incorporated as appropriate. We are sending copies of this report to appropriate congressional committees and the Secretaries of Defense, Health and Human Services, and Veterans Affairs. The report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff 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 are on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. The Department of Defense (DOD) relies on accrediting organizations and its pharmacy benefit manager (PBM) to help ensure the safety of compounded drugs provided to TRICARE beneficiaries through military treatment facilities (MTF), TRICARE's mail-order pharmacy, and its network of retail pharmacies. The Joint Commission, a not-for-profit organization, which accredits and certifies more than 20,000 health care organizations and programs in the United States, accredits MTFs, including MTF pharmacies, operated by the Army, Navy, and Air Force. The Joint Commission establishes pharmacy standards that address all drugs--including those that are compounded--and assesses compliance with these standards during the accreditation process. The Joint Commission has standards related to an organization's critical medication management processes--those undertaken by the hospital or organization and those provided through contracted pharmacy services--that include planning, selection, storage, ordering, preparing and dispensing, administration, monitoring and evaluation. Furthermore, The Joint Commission's standards evaluate specific aspects of compounding such as verifying the credentials and assessing the competency of the staff, adherence to proper labeling of medication, manufacturer recommendations related to storage and end- use dates, following infection control processes and ensuring, when appropriate, a sterile environment. For example, to help ensure that compounded drugs are prepared safely, The Joint Commission standards specify that, in most circumstances, a pharmacist, or pharmacy staff under the supervision of a pharmacist, must prepare the compound or admixture for all sterile compounded drugs and that staff use clean or sterile techniques to avoid contamination. According to The Joint Commission officials, the MTFs that The Joint Commission accredits include small and large hospitals and ambulatory care clinics. Accreditation surveys are conducted for each facility on a regular basis. In addition, the Army, Navy, and Air Force maintain written guidance on drug compounding in MTFs. This guidance includes general instructions on the preparation of sterile and nonsterile compounded drugs, such as specifying that these drugs should be prepared in accordance with applicable U.S. Pharmacopeial Convention standards. DOD requires TRICARE's PBM, Express Scripts, to ensure that pharmacies, which are part of its retail network, are fully licensed in accordance with applicable federal and state laws, credentialed according to Express Scripts' criteria, and have a current National Council for Prescription Drug Programs number. Accordingly, a pharmacy that provides compounded drugs to patients must adhere to individual state board of pharmacy laws and regulations governing the dispensing of compounded drugs. Express Scripts requires pharmacies interested in joining its retail pharmacy network to complete a credentialing questionnaire, which asks, among other things, for the name and license number of all pharmacists and technicians employed by the pharmacy and whether the pharmacy or pharmacists, technicians, or other employees have previously been disciplined by a state board of pharmacy or other regulatory authority. Express Scripts has recently developed an additional questionnaire for compounding pharmacies, which includes a question on the source of the ingredients used to make compounded drugs. Officials from Express Scripts told us that they evaluate pharmacies' responses to these questions prior to admitting them to Express Script's retail pharmacy network. Department of Defense (DOD) officials identified the top 25 highest-cost compounded drugs, based on total cost, that included at least one bulk drug substance and were dispensed to TRICARE beneficiaries in retail pharmacies in fiscal year 2013. Fifteen of the 25 highest-cost compounded drugs contained only bulk drug substances; the remaining 10 drugs contained a combination of bulk drug substances and inactive ingredients, such as sterile water. None of these drugs contained a product approved by the Food and Drug Administration (FDA). All 25 of these compounded drugs were topical medications (e.g., creams or gels), most of which were used to treat pain. The average cost per prescription for these drugs ranged from $848 to $9,961. See table 2 for information on each of these 25 compounded drugs, including the number of prescriptions dispensed, total cost, and average cost per prescription. DOD officials told us that there are alternate, FDA-approved drug treatment options for the medical conditions for which each of these drugs was prescribed. In addition to the contact named above, Rashmi Agarwal, Assistant Director; Shana R. Deitch; Sandra George; Laurie Pachter; Carmen Rivera-Lowitt; and Michael Zose made key contributions to this report. Prescription Drugs: Comparison of DOD, Medicaid, and Medicare Part D Retail Reimbursement Prices. GAO-14-578. Washington, D.C.: June 30, 2014. Defense Health Care: Evaluation of TRICARE Pharmacy Services Contract Structure Is Warranted. GAO-13-808. Washington, D.C.: September 30, 2013. Drug Compounding: Clear Authority and More Reliable Data Needed to Strengthen FDA Oversight. GAO-13-702. Washington, D.C.: July 31, 2013. Prescription Drugs: Comparison of DOD and VA Direct Purchase Prices. GAO-13-358. Washington, D.C.: April 19, 2013. DOD Pharmacy Benefits Program: Reduced Pharmacy Costs Resulting from the Uniform Formulary and Manufacturer Rebates. GAO-08-172R: Washington, D.C.: Oct 31, 2007.

Summary:
DOD offers comprehensive health care coverage--pharmacy and medical benefits--to eligible beneficiaries through its TRICARE program. As part of its benefits package, TRICARE pays for compounded drugs. Traditionally, a drug is compounded through the process of mixing, combining, or altering ingredients, to create a customized drug tailored to the medical needs of an individual patient upon receipt of a prescription. Concerns exist about the safety and the rising costs of compounded drugs. The National Defense Authorization Act for Fiscal Year 2014, mandated that GAO review TRICARE's payment for compounded drugs. For this report, GAO examined (1) the number and cost of compounded drugs paid for by TRICARE in fiscal year 2013, and (2) TRICARE's payment practices for compounded drugs and how they compare to other federal health care programs. GAO reviewed and analyzed TRICARE data on compounded drugs and reviewed, analyzed, and compared federal laws, regulations, and other documents pertaining to pharmacy and medical benefits under TRICARE, Medicare, and the VA health care system. GAO also interviewed program and contractor officials. The Department of Defense's (DOD) TRICARE program paid for about 465,000 compounded drug prescriptions through its pharmacy benefit in fiscal year 2013; these prescriptions represented 0.3 percent of all prescription drugs paid for through TRICARE's pharmacy benefit in that year. Most of these compounded drug prescriptions were dispensed in retail pharmacies and to retirees and their family members. Compounded drug prescriptions paid for by TRICARE's pharmacy benefit cost $259 million in fiscal year 2013--accounting for about 3 percent of the total cost of all prescription drugs paid for through TRICARE's pharmacy benefit--up from $5 million in fiscal year 2004, and were largely driven by compounded drug prescriptions containing bulk drug substances. Bulk drug substances are typically raw powders that are generally not approved by the Food and Drug Administration (FDA)--the agency within the Department of Health and Human Services (HHS) responsible for assuring the safety and effectiveness of drugs and approving them for marketing in the United States. TRICARE could not identify compounded drug prescriptions paid for through its medical benefit, which pays for drugs administered to patients in outpatient or inpatient settings, because claim forms for outpatient and inpatient drugs lack specific billing codes. TRICARE's payment practices for certain compounded drugs under its pharmacy and medical benefit are inconsistent with TRICARE regulations and are typically more generous than those of Medicare and the Department of Veterans Affairs (VA). Through its pharmacy benefit, TRICARE pays for compounded drugs that contain bulk drug substances in a manner that is inconsistent with its regulations, which stipulate that TRICARE is to pay for FDA-approved drugs only. In contrast, Medicare and VA have more restrictive payment practices for compounded drugs provided through their pharmacy benefits. By paying for compounded drugs containing bulk drug substances, TRICARE incurred additional costs. DOD officials told us that they are considering denying payment for compounded drugs that include bulk drug substances. TRICARE also pays for compounded drugs administered to patients through its medical benefit but does not determine whether these drugs contain bulk drug substances, in which case payment practices may be inconsistent with TRICARE's regulations. TRICARE's payment practices for these drugs are similar to Medicare's, but more generous than VA's. Though compounded drugs represent a small share of TRICARE's overall drug costs, its costs for these drugs have risen significantly in recent years. Moreover, because most of these drugs contain bulk drug substances generally not approved by FDA, TRICARE's practice of paying for them is inconsistent with its regulations and results in added costs for the program. GAO recommends that DOD align TRICARE's payment practices for compounded drugs with applicable regulations governing the TRICARE program. DOD concurred with GAO's recommendation and VA generally agreed with GAO's conclusions. HHS and VA provided technical comments that GAO incorporated as appropriate.