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.