The HHS Office of the Inspector General (OIG) recently published a report titled “Compounded Drugs Under Medicare Part B: Payment and Oversight” (Report) in which it recommended that the Centers for Medicare & Medicaid Services (CMS) implement changes to the way Medicare Part B claims for compounded drugs are identified, tracked and paid. The Report is yet another example of the increased federal scrutiny of compounding pharmacies following the deadly fungal meningitis outbreak linked to contaminated vials produced by New England Compounding Center in late 2012. In the Report, the OIG recommends that CMS:

  • Establish a method to identify Part B claims for compounded drugs;
  • Explore the possibility of requiring providers to identify on the Part B claim the pharmacy that produced the compounded drug; and
  • Explore the possibility of conducting descriptive analyses of Part B claims for compounded drugs.

CMS concurred with the first recommendation and conditionally agreed with the third, while rejecting the second.

Background and OIG Findings

Medicare Part B covers some outpatient prescription drugs and biologicals, including drugs incident to a doctor’s treatment, those covered by statute and drugs used in conjunction with durable medical equipment. In order to receive Part B reimbursement, providers submit claims to the proper Medicare Administrative Contractors (MACs) in their respective Medicare Part A and/or 
Part B jurisdictions using Healthcare Common Procedure Coding System (HCPCS) codes.

The Report highlights several problems associated with compounded drug reimbursement under Medicare Part B. For starters, unlike Part D claims, there is no “compound code” for Part B claims. Thus, because compounded drugs are unique combinations, they are billed under “not otherwise classified” (NOC) codes. MACs for 10 of the 13 Part B jurisdictions have indicated they manually review claims containing NOC codes, but the reason for this review is generally to determine payment amount, as compounded drugs typically do not have nationally established payment amounts. Although MACs for 8 of the 13 jurisdictions indicated that documentation maintained by providers to substantiate Part B claims, such as invoices or medical records, generally includes the name of the compounding pharmacy, currently there is no requirement for providers to identify the compounding pharmacy on Part B claims. Additionally, although all MACs have similar coding requirements, their treatment of compounded drugs varies—while all MACs permit the use of NOC code J3490 for compounded drugs, MACs for 7 of the 13 jurisdictions have indicated they also permit the use of other NOC codes for compounded drugs, including J3590, J7799, and J9999.

According to the Report, and as a result of the issues highlighted above, neither CMS nor the MACs tracked Part B claims for compounded drugs paid under NOC codes in 2012. The MACs were therefore unable to determine the total number of claims for compounded drugs or the total amount paid for compounded drugs in 2012. Further, as there is no requirement that a Part B claim include the pharmacy name or a code that identifies the pharmacy, neither CMS nor the MACs would be able to determine from the claim alone where the provider purchased a compounded drug.

Recommendations and CMS Response

Establish a method to identify Part B claims for compounded drugs

The OIG recommended that CMS establish a method of systematically identifying all claims for compounded drugs, such as the use of a modifier or other code for compounded drugs that distinguishes them from other drugs billed under NOC codes. CMS concurred with this recommendation, but noted that any issues related to public safety would need to be addressed before the drugs are administered.

Explore the possibility of requiring providers to identify on the Part B claim the pharmacy that produced the compounded drug

OIG concluded that the inability to identify the pharmacy that produced a compounded drug from the Part B claim alone limited the ability of CMS and the MACs to stop payment for drugs manufactured in violation of the Federal Food, Drug and Cosmetic Act (FFDCA). They recommended requiring that the identity of the compounding pharmacy producing the compounded drugs administered be included on Part B claims. CMS rejected this recommendation, noting that Medicare generally limits the information it collects to that which is needed for payment purposes, and CMS does not need pharmacy information in order to reimburse the billing physician. In fact, CMS indicated it may not have the statutory authority to collect this information because it is not needed to determine the payment amount. CMS also noted that collecting the information would require significant changes to the claims processing systems that would consume administrative resources needed for other statutorily required changes. Finally, CMS did not believe the ability to stop payments for drugs made in violation of FFDCA would be a reliable tool for public safety, which it cited as the OIG’s motivation for the Report. For example, a patient will already have received a tainted drug before Medicare receives a claim for the administration of that drug.

Explore the possibility of conducting descriptive analyses of Part B claims for compounded drugs

OIG stated that, should Part B claims include information that identified compounded drugs and the pharmacies that produce them, CMS could conduct descriptive analyses of claims for compounded drugs under Medicare Part B. These analyses might include how much Part B is paying for compounded drugs, where those drugs are produced, which drugs are being billed for and, in the event of an outbreak, the claims for drugs produced by pharmacies linked to that outbreak. CMS agreed that if claims data included a method of identifying compounded drugs and the compounding pharmacies that produced them, both they and a MAC would be able to conduct descriptive analyses for such claims, as CMS is able to do with Part D claims. However, CMS advised that such analyses would only be done for a program-related purpose, like analysis of spending trends or its payment policies.

As federal regulators continue to focus on compounding pharmacies, additional legislative and regulatory changes seem inevitable. Compounding pharmacies and the practitioners that utilize them should monitor these changes closely to ensure continued compliance with applicable state and federal law.