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Questionable Billing for Compounded Topical Drugs in Medicare Part D


In 2016, OIG called attention to significant growth in spending for compounded drugs (customized medications tailored to meet the needs of individual patients). Specifically, OIG found that Medicare Part D spending for compounded drugs grew by 625 percent from 2006 to 2015 and spending for topical compounded drugs-such as creams, gels, and ointments to relieve pain-grew at an even faster pace.

At the same time, OIG has been involved in an increasing number of fraud cases related to compounded drugs-including topical drugs-in Medicare and other health insurance programs.

There are also safety and effectiveness concerns related to compounded drugs, which are not FDA-approved. The quality standards for compounded drugs are generally lower than for FDA-approved drugs, leading to increased risks such as production of products with the wrong potency.


We analyzed Prescription Drug Event (PDE) records for compounded topical drugs from 2010 to 2016. With input from OIG investigators and CMS, we developed five measures to identify pharmacies with questionable billing for these drugs. We also identified prescribers associated with these pharmacies.


Medicare Part D spending for compounded topical drugs was 24 times higher in 2016 than it was in 2010. This explosive growth raises concerns about fraud and abuse. About 550 pharmacies had questionable Part D billing for compounded topical drugs in 2016. These pharmacies warrant further scrutiny. They each billed extremely high amounts for at least one of five measures that OIG has developed as indicators of possible fraud, waste, or abuse. For example, many of these pharmacies billed for compounded topical drugs for a high proportion of their beneficiaries. More than one-quarter of these pharmacies were located in four metropolitan areas. In addition, 124 prescribers associated with pharmacies with questionable billing raise particular concern. Each of these prescribers ordered high amounts of compounded topical drugs dispensed by these pharmacies.


We recommend that the Centers for Medicare & Medicaid Services (CMS) clarify Part D policies for coverage of compounded topical drugs and use of utilization management tools. Specifically, CMS should clarify that sponsors-the private companies that provide the Part D benefit-have the option to cover compounded topical drugs through an exceptions process. CMS should also clarify that sponsors may apply utilization management tools to compounded topical drugs, even if individual ingredients would not be subject to such tools when dispensed individually. CMS should also conduct additional analysis on compounded topical drugs and conduct training for Part D sponsors on fraud schemes and safety concerns. Lastly, CMS should follow up on the pharmacies and prescribers identified in this review. CMS concurred with all four of our recommendations.

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Office of Inspector General, U.S. Department of Health and Human Services | 330 Independence Avenue, SW, Washington, DC 20201