November 5th, 2018

Compounding pharmacies can provide a valuable services when a patient needs a customized formulation of a prescription drug.  Unfortunately, because of lax regulations and high reimbursement, some compounding pharmacies can also present the potential for major risks to patient health and significant healthcare fraud, especially for fraudulent prescriptions for topical pain creams and scar creams.


The following is a rough transcript of the video:

Today, I am going to talk about the risk of serious healthcare fraud in the compounding pharmacy industry, especially a recent government report that identified questionable billing practices at over 500 pharmacies that could be indicative of fraud.

What are compounding pharmacies?

Compounding pharmacies are a special subset of pharmacies or a function provided by pharmacies to fill a gap by making custom medications – fill a gap that is not covered by standard large scale production of pharmaceuticals.  So, for instance, if a patient has a specific need, if they need a dosage that’s non=standard or if they are allergic to one of the inactive ingredients of a medication, a compounding pharmacy can create a custom formulation.  I used it for my kids, there were times when they needed medications where there wasn’t a pediatric dose or they wanted to put it into liquid with a bubblegum flavor and a compounding pharmacy did that.

Potential Risks to Patient Health

There are some risks with compounding pharmacies though because they’ve traditionally been subject to lesser regulation in certain areas and that has led to some problems — safety problems.  You may have heard about a case back in 2012 where there was a multi-state outbreak of fungal meningitis that was traced back to some unsanitary practices at a compounding pharmacy in Massachusetts.  Over 800 people got sick and over 70 died.

There have been other, more isolated cases where patients have died because they had a reaction to the ingredients – the active or the inactive ingredients – or some of the side effects for compounded drugs.

The Department of Justice is prosecuting compounding pharmacy healthcare fraud

The lack of – the lesser, not lack, the lesser regulation has also created opportunities for fraud, especially when combined with the fact that often times Medicare, Medicaid, or other health plans pay more for compounded drugs than they would for the standard prescription.

So for instance, this Spring, the Department of Justice intervened in a False Claims Act case brought by two whistleblowers against a compounding pharmacy, Diabetic Care RX, as well as two executives from the pharmacy and the private equity firm that owned the pharmacy.  The allegations in that Complaint involved – and these are pretty standard for what you see in compounding pharmacy fraud cases:

  • Kickbacks to doctors to get them to write prescriptions;
  • Kickbacks to patients;
  • Paying money to a marketing firm to get patients;
  • A lot of these kickbacks were to get prescriptions regardless of the medical necessity.

There were also allegations that the pharmacy manipulated the formula for the compounded drug to maximize the reimbursement.  These formulas are customized but the pharmacy would change what they put into the compounded drug to get greater reimbursement

Similarly, in 2017, a doctor was indicted by the Department of Justice for paying kickbacks by using a sham patient safety study.  He pretended there was a study and that is why he was paying money to other doctors, but the allegation was that really the payments were to get prescriptions for compounded drugs.

The list goes on.  These investigations, prosecutions, False Claims Act cases, show how seriously the Department Justice is taking compounding pharmacy fraud.

The Inspector General published a report about compounding pharmacy fraud

Beyond DJ’s efforts, the Office of the Inspector General of the Department of Health and Human Services has done a number of studies looking more broadly at the problem.  Recently it came out with a study focused on topical compounded drugs, especially pain creams.  The study is titled: “Questionable Billing for Compounded Topical Drugs in Medicare Part D” – sounds super exciting.

HHS OIG did a data analysis of a large subset of pharmacies that do compounding, and, for 2010 to 2016, looked at them on five different factors.  The report identified 550 pharmacies that were outliers on one of those five factors in 2016 – and many of them were outliers on multiple factors.  It also identified 124 prescribers who were outliers on those factors in their prescribing to these 550 outlier pharmacies.

What factors suggest possible fraud?

First: How many of the pharmacies patients got a prescription for a topical compounded drug?

This matters because, again, these are supposed to be relatively small batch, comparatively custom drugs.  So the median for most pharmacies was 2% of their patients got a topical compounded drug.  The outlier threshold that that the Inspector General looked at was 38%.  246 pharmacies had more than 38% of their patients get these drugs.

At one pharmacy, 91% of its patients got compounded topical drugs, almost all of which were for a lidocaine-based pain crème.

Second: How many of the patients at the pharmacy got the exact same compounding prescription?

The second factor goes at the same problem in a somewhat different way.  How many of the patients at the pharmacy got the exact same compounding prescription.  This is significant because, again, compounded drugs are supposed to be relatively custom, targeted at a specific patient’s needs or allergies or something similar.  So there’s a concern that if the pharmacy is giving a bunch of patients the exact same formula that maybe they’re not making custom drugs.  Instead, maybe they are getting into more the manufacture of drugs.

So in this factor the median was 2 patients at a pharmacy got the exact same drug.  The outlier threshold was 21 patients got the exact same formulation.  246 pharmacies exceeded this threshold.

One pharmacy had 588 patients, 1082 prescriptions, all got the exact same 40 days’ supply of a lidocaine-based pain cream, they all cost exact same $383.26.  And interestingly, there were over 500 prescribers in twenty-two states that were sending prescriptions to this one pharmacy.  Again, suggesting that something may be going on that they’re not just responding to local need but rather are they advertising?  Are they engaging in fraud where they’re paying kickbacks to get people to write prescriptions for this drug?

Third: What was the average payment per prescription?

This matters because, as I mentioned, in the False Claims Act case, there was an allegation that that pharmacy was manipulating what ingredients it put in the compounded drug in order to maximize the reimbursement.

There is  sometimes fraud where they don’t actually put the ingredients in — they just claim that they do.  I’ve heard of one case – this was not discussed in the OIG report – where you are supposed to bill for the amount of active pain ingredient you put in the cream but the pharmacy was instead billing for the total weight of the cream, including the cream and the pain medication.

Fourth: How many prescriptions came from any one prescriber?

This is a potential risk area because of the problems with kickbacks.  What is going on?  What is the relationship that pharmacy has with the provider?  How are they getting this high a volume of prescriptions?

There have also been cases where the scripts weren’t written by the providers – where pharmacy engaged in identity theft, took provider identification numbers and billed as if there were prescriptions when there wasn’t.  That is why this data point is potentially problematic.

Fifth: How big was the increase in compounding pharmacy topical prescription sales from one year to the next?

The concern here is that  a major increase might indicate that something questionable was going on.  Here that the median was most pharmacies saw a 6% increase from 2015 to 2016.  The outlier threshold was 483%.

So there was one example from the report that combines the fourth and fifth factors.  A Florida pharmacy had $7,000 in prescriptions in 2015 and $1.8 million in 2016.  Interestingly, of that pharmacy’s 1085 prescriptions, over 1000 were written by one nurse who practiced 50 miles away.

So, again, this is a data analysis, and just the data can’t say what is going on behind the scenes.  But it flags questions, and really questionable behavior.

Another interesting factor is that the report identified 123 prescribers who were sending prescriptions to these 550 questionable pharmacies.  20% of those prescribers had prescriptions in 4 or more states – again, raising questions about whether they are treating patients they have a legitimate patient care relationship with in their community or is there something else going on?

These 124 prescribers accounted for 23% of all compounded topical drugs paid for by Medicare Part D in 2016.  Another interesting point is that a third, actually 35%, of those questionable prescribers were podiatrists, even though podiatrists only represented 10% of all prescriptions written at those 550 pharmacies.

Common fraud schemes

So again, this is the data analysis, and it identifies areas where some of the standard frauds, the most common frauds that we see in compounding pharmacies show up, or risks of those kinds of fraud.  A big one is kickbacks to physicians:

  • Are they using sham studies to funnel money to them?
  • are they giving the medical directorships where they pay them and don’t require them to do any work?
  • Are they giving jobs to their family members?

There are also times where patients have been getting kickbacks – they have been given untraceable money cards, or they have waived the patients’ copays or things like that.

There have been problems paying marketing companies, and especially those marketing companies then have a really strong incentive to just go get scripts however they can get them.

Beyond the kickbacks, a big concern is identity theft.  There have been pharmacies that have been found to have stolen patients’ identities and billed Medicare or Tricare or other government-funded healthcare programs for prescriptions that either the patients didn’t ask for or sometimes the patients didn’t even get.

And a third one, as I mentioned before, is manipulating or misrepresenting what is in the compounded drug in order to get more money from the prescription.

How to fight compounding pharmacy fraud?

The report concluded with a number of recommendations that the Department of Health and Human Services agreed with, things like:

  • Clarify the policy on a reimbursement for compounded drugs;
  • Educate the health plans that are running the Medicare Part D program about fraud concerns;
  • Do more data analysis;
  • Follow up one these pharmacies that were identified – again, this was just a data analysis, so go investigate what’s going on there.

How about educating the public, especially potential whistleblowers?

Interestingly, what the HHS OIG report didn’t say, and I think it should have recommended is: Educate for the public, especially people who are in a position to know what is going on – namely, potential whistleblowers.

Encourage pharmacists to speak up if they see things that are questionable, like these kinds of high volume prescriptions or if they have questions about the financial relationship between a pharmacy and a prescriber.

And patients: If you see, you get an Explanation of Benefits (EOB) from Medicare or Tricare – or the Postal Service identified a problem in their workers’ compensation program – for a compounded drug that you didn’t get or if you got one but you your doctor didn’t prescribe it to you or you don’t know what it’s for – that’s a red flag for potential fraud.

Whistleblowers are in a position to go beyond just the data here and know more about what’s going on behind the scenes to help identify the fraud.

This has been an overview of the area of health care fraud – a pretty significant area, a complicated area, but it’s just an overview.  If you have a concern that maybe you may know about fraud in this area, and would like to talk about it, please contact me or call me at (207) 747-7639 for a free, confidential consultation about whether or not you might have a False Claims Act whistleblower case.

Also, the disclaimer:

While I hope this video was informative, it is not legal advice and you should not rely on it as such. Watching this video does not make me your lawyer or you my client.