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.