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. 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. 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. 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. 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. 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. 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. 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. 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. To help ensure that Medicare Part B is able to appropriately apply its payment policy for compounded drugs, we recommend that the Secretary of Health and Human Services direct the Administrator of the Centers for Medicare & Medicaid Services to clarify the Medicare Part B payment policy for compounded drugs and, as necessary, align payment practices with the policy. For example, CMS should consider updating the Medicare Part B payment policy to either explicitly allow or restrict payment for compounded drugs containing bulk drug substances and, as appropriate, develop a mechanism to indicate on Medicare Part B claims both whether a beneficiary received a compounded drug and the drug’s individual ingredients in order to properly apply this policy and determine payment. We provided a draft of this report to HHS for review, and its comments are reprinted in appendix I. In its comments, HHS disagreed with our recommendation that CMS clarify the Medicare Part B payment policy and align payment practices with the policy as necessary. HHS also provided technical comments, which we incorporated as appropriate. In disagreeing with our recommendation to clarify the Medicare Part B payment policy, HHS stated that it did not believe that clarifying the policy to specifically address payments for bulk drug substances was necessary at this time. HHS commented that the Part B payment policy does not currently distinguish between compounded drugs that contain bulk drug substances and compounded drugs that contain FDA-approved products but, rather, recognizes differences between compounded drugs and 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. 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. 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.

Summary: 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. 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. 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.