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OIG Report on Topical Compounded Drug Prescribing, Marketing and Billing Practices Signals Heightened Administrative and Enforcement Scrutiny

When commercially available medications’ standard dosage forms or amounts don’t quite fit a patient’s particular needs, the patient may benefit from customized compounded drugs. Medicare Part D, the prescription drug program, allows the private company sponsors that administer the benefit to cover compounded drugs under certain circumstances.[1]

In recent years, Part D reimbursement to pharmacies for compounded drugs has increased significantly. A 2016 report by the Office of the Inspector General for the Department of Health and Human Services (“OIG”) found that from 2006 to 2015, payment for compounded drugs under Part D had grown more than sevenfold—compared to a less-than-threefold increase in Part D spending as a whole over the same period.[2] Topical compounded medications in particular, the 2016 report noted, drew over 34 times as much Part D funding in 2015 as in 2006.

In a recently published follow-up report, OIG has expanded on its concerns about compounded topical drugs.[3] The new report details OIG’s study of Part D data from 2010 to 2016 and its finding that many pharmacies that compound pain creams and other topical products and receive Part D reimbursement have certain billing characteristics that the OIG finds concerning. These characteristics include rapid increases in billing rates (twenty pharmacies increased their billing for compounded drugs by more than 10,000 percent during the seven (7) years covered in the study), and patterns of preparing identical custom compounds for numerous individual patients.

Compounding pharmacies can provide drugs that are very similar to conventional pharmaceuticals (for instance, by substituting in different inactive ingredients in place of commonly-used dyes or other substances to which a patient is allergic). Even so, the new OIG report seizes on the fact that compounded drugs are not subject to full Food and Drug Administration clearance and monitoring processes to suggest that the increase in Part D-funded topical compounds poses a public safety risk.

OIG’s report suggests that fraudulent and abusive practices, including kickback schemes between compounding pharmacies and marketing agents paid on a percentage basis, may be responsible for at least a share of the increase in topical compounded medication prescriptions and Part D expense. The report notes that OIG has prepared a list of practitioners who prescribe these medications at levels that the agency finds suspicious. It also notes that “questionable” billing patterns are clustered in the New York, Houston, Los Angeles, and Detroit metropolitan areas. Both pharmacies and prescribers, especially in these regions, can expect continued scrutiny of their compounded topical drug prescription and marketing practices. Moreover, OIG has proposed adding administrative hurdles: it and the Centers for Medicare and Medicaid Services agree that Part D sponsors should receive clear authority to get involved earlier in managing and reviewing various types of compounded drug prescriptions. It remains to be seen whether formal rulemaking will cement that authority.

[1] Medicare Prescription Drug Benefit Manual, Chapter 6, Section 10.4.

[2] OEI-02-16-00290, High Part D Spending on Opioids and Substantial Growth in Compounded Drugs Raise Concerns (June 2016),

[3] OEI-02-16-00440, Questionable Billing for Compounded Topical Drugs in Medicare Part D (August 2018),

Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume VIII, Number 306



About this Author

Kathleen Stratton, Sheppard Mullin Law Firm, Washington DC, Corporate Law Attorney
Senior Counsel

Kathleen M. Stratton is Special Counsel in the Corporate Practice Group in the firm’s Washington D.C. office.

Areas of Practice

Kathleen Stratton represents health care industry clients in a range of matters focusing predominantly on regulatory compliance, licensure, certification, and operational issues facing a vast array of provider types. Over the past 30 years, her provider clients have included hospitals, specialty pharmacies, ambulatory surgery centers, durable medical equipment suppliers,...

Sean Cuddihy, Sheppard Mullin Law Firm, Corporate Law Attorney

Sean M. Cuddihy is an associate in the Corporate Practice Group in the firm's Washington, D.C. office.