Compounding Pharmacies and Potential for Fraud

In the early days of pharmacy, compounding was a common practice.  Chemical ingredients were regularly combined to produce medicinal products.  This is even reflected in the mortar and pestle logo used by one of our major drug store chains.

But in today’s world, almost all of our medications are manufactured by pharmaceutical companies.  Drug creation and manufacturing is tightly controlled and regulated by the Food & Drug Administration (FDA) to insure product safety and consistency.

However, drug compounding has not disappeared.  In fact, in recent years it has become an increasing cost share of medications being dispensed.  In some instances, compounding is necessary for valid reasons such as modifying a medication from a pill to a liquid form to make it easier to swallow or to remove an ingredient a patient is allergic to.  Flavoring can be added to make a medication palatable for small children or a dosage adjusted for infants. It allows a medication to be tailored to an individual patient’s particular needs.

A compounding pharmacist essentially follows a recipe to create a customized formula for a patient.  Because of the customized nature of these drugs they have not been approved by the FDA.   Compound pharmacies are only regulated at the state level with a minimum amount of oversight.

This minimal regulation has opened the door to the possibility of fraud and abuse fueled by the lure of significant profits.  Compounded drugs can be difficult to track and examine for utilization because they do not use the standard National Drug Codes (NDC) of traditional medications.  This presents a challenge for payers in determining if providers are overbilling or doubling billing for compounded drugs.

A common scheme used by an unscrupulous provider is to produce a cream or ointment by combining traditional drugs and other chemicals and then bill a payer a greatly inflated amount for a compound they created at a fraction of the cost.

These practices are of concern not only because they can contribute to the rising costs of health care paid by employers, insurers and plan sponsors, but also because of the impact on patient safety.

This has placed compounding pharmacies on the radar for increased oversight by states and other organizations.  Insurers and plan sponsors are implementing systems and other procedures to trigger reviews and validation of billing and claims payment related to compound medications. Some compounded drugs are valid and benefit the patient, but those produced for fraud and abuse are of great concern.

As in most situations involving fraud and abuse, unscrupulous providers will undoubtedly concoct new schemes attempting to circumvent regulations and reviews.  It is important that regulators and plan sponsors keep pace with those attempts for the sake of patient safety and cost control.

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About Rick Ewers

Mr. Ewers is an analytical consultant providing financial analysis, vendor evaluations, market & compliance analysis, as well as national industry trending for group employers.

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