This is the accessible text file for GAO report number GAO-15-85 
entitled 'Compounded Drugs: Payment Practices Vary across Public 
Programs and Private Insurers, and Medicare Part B Policy Should Be 
Clarified' which was released on November 10, 2014. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as 
part of a longer term project to improve GAO products' accessibility. 
Every attempt has been made to maintain the structural and data 
integrity of the original printed product. Accessibility features, 
such as text descriptions of tables, consecutively numbered footnotes 
placed at the end of the file, and the text of agency comment letters, 
are provided but may not exactly duplicate the presentation or format 
of the printed version. The portable document format (PDF) file is an 
exact electronic replica of the printed version. We welcome your 
feedback. Please E-mail your comments regarding the contents or 
accessibility features of this document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

October 2014: 

Compounded Drugs: 

Payment Practices Vary across Public Programs and Private Insurers, 
and Medicare Part B Policy Should Be Clarified: 

GAO-15-85: 

GAO Highlights: 

Highlights of GAO-15-85, a report to congressional requesters 

Why GAO Did This Study: 

Drug compounding is a process whereby a pharmacist mixes or alters 
ingredients to create a drug tailored to the medical needs of an 
individual patient. Compounded drugs make up 1 to 3 percent of the 
$300 billion domestic prescription drug market. Compounded drugs and 
some of their ingredients are not approved by FDA. Members of Congress 
have questioned whether federal health care programs' payment 
practices create incentives for providers to prescribe these drugs. 

GAO was asked to examine public programs' and private health insurers' 
payment practices for compounded drugs. GAO examined (1) Medicare's, 
Medicaid's, and private health insurers' payment practices for 
compounded drugs and (2) the extent to which these payment practices 
for compounded drugs affect their use. GAO reviewed the payment 
policies of CMS, the five largest state Medicaid programs, five of the 
largest insurers that offer both Medicare and Medicaid managed care 
plans as well as private plans, and the two largest Medicare Part D-
only sponsors. GAO also interviewed officials from these entities and 
from provider associations. 

What GAO Found: 

Medicare, Medicaid, and private health insurers have varying payment 
practices for compounded drugs, depending upon whether compounded 
drugs and their ingredients can be identified on health insurance 
claims, and Medicare's Part B payment policy for these drugs is 
unclear. 

* For drugs dispensed in pharmacy settings, claims contain sufficient 
information for public programs and private insurers to identify 
compounded drugs and their ingredients. These programs and plans use 
claims information to determine whether compounded drug ingredients 
are products approved by the Food and Drug Administration (FDA) or are 
bulk drug substances—-usually raw powders—-that are generally not 
approved by FDA. Two of the five insurers and one of the two Medicare 
Part D-only sponsors we spoke with generally do not pay for these 
substances in their Medicare Part D plans. Four of the five state 
Medicaid programs and three of the five insurers offering private 
health plans we spoke with generally do not pay for ingredients that 
are bulk drug substances in their respective plans. 

* For drugs administered in outpatient physician office settings, 
claims lack information to identify compounded drugs because there are 
no specific billing codes for most of these drugs. Therefore, 
Medicare, most state Medicaid programs, and most private health 
insurers pay for these compounded drugs. Some public programs and 
private health insurers conduct further claims reviews for compounded 
drugs billed under nonspecific codes, including obtaining information 
that can be used to determine FDA-approval status of compounded drug 
ingredients, and make payment decisions based on this information. 

* Additionally, the Centers for Medicare & Medicaid Services (CMS)-—
the agency within the Department of Health and Human Services (HHS) 
responsible for administering the Medicare program—-has a national 
payment policy for compounded drugs under Medicare Part B, but this 
policy is unclear. The policy generally states that drugs must be FDA-
approved to be paid for under Medicare. Payment may be available for 
compounded drugs, but the policy does not stipulate whether payment is 
available for ingredients that are bulk drug substances, which are 
generally not FDA-approved. CMS contractors who process Part B claims 
do not collect information on the FDA-approval status of drug 
ingredients and, therefore, may be paying for ingredients that are not 
FDA-approved products. Thus, it is uncertain whether Medicare payments 
are inconsistent with Part B policy. 

Payment practices of public programs and private health insurers may 
affect the use of compounded drugs when specific payment exclusions 
exist, such as those for bulk drug substances; however, other factors 
also affect the use of compounded drugs. For example, insurers that 
restrict payment for compounded drugs dispensed in pharmacy settings 
in their private health plans to only ingredients that are FDA-
approved products saw significant decreases in both the number of 
claims and the amount of payments for these drugs after they 
implemented these restrictions. Individual patient need, such as the 
need for custom dosages, and drug shortages also affect the use of 
compounded drugs. 

What GAO Recommends: 

GAO recommends that CMS clarify its Medicare Part B payment policy to 
either allow or restrict payment for compounded drugs containing bulk 
drug substances and align payment practices with this policy. HHS 
disagreed with this recommendation, stating that the Part B payment 
policy does not depend on drug ingredients. GAO maintains that the 
policy needs clarification. 

View GAO-15-85. For more information, contact John Dicken at (202) 512-
7114 or dickenj@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Medicare, Medicaid, and Private Health Insurers Have Varying Payment 
Practices for Compounded Drugs, and Medicare Part B Payment Policy Is 
Unclear: 

Payment Practices, among Other Factors, May Affect the Use of 
Compounded Drugs: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Comments from the Department of Health and Human Services: 

Appendix II: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Figure: 

Figure 1: Number of New National Drug Codes for Bulk Drug Substances 
Added to First Databank's Database, 2009 through 2013: 

Abbreviations: 

AWP: average wholesale price: 

CMS: Centers for Medicare & Medicaid Services: 

FDA: Food and Drug Administration: 

FDCA: Federal Food, Drug, and Cosmetic Act: 

HCPCS: Healthcare Common Procedure Coding System: 

HHS: Department of Health and Human Services: 

NCPDP: National Council for Prescription Drug Programs: 

NDC: national drug code: 

PBM: pharmacy benefit manager: 

OIG: Office of Inspector General: 

USP: U.S. Pharmacopeial Convention: 

[End of section] 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

October 10, 2014: 

Congressional Requesters: 

Traditionally, drug compounding is the process by which a pharmacist 
or doctor combines, mixes, or alters ingredients to create a 
customized drug tailored to the medical needs of an individual patient 
upon receipt of a prescription. Drug compounding is typically used to 
prepare prescription drugs that are not commercially available; for 
example, a pharmacist may prepare a liquid formulation for a patient 
who has trouble swallowing pills or tailor a drug for a patient who is 
allergic to an ingredient in a commercially available prescription 
drug.[Footnote 1] Drug compounding is practiced in a variety of 
pharmacy settings, including retail pharmacies, mail-order pharmacies, 
and home infusion pharmacies, as well as hospital pharmacies. 
Compounded drugs may be dispensed directly to patients in pharmacy 
settings, or administered to patients in inpatient or outpatient 
settings, such as hospitals or physician offices. 

Compounded drugs are not approved by the Food and Drug Administration 
(FDA)--the agency within the Department of Health and Human Services 
(HHS) responsible for assuring the safety and effectiveness of drugs 
and approving them for marketing in the United States. Compounded 
drugs may contain ingredients that are FDA-approved products. These 
drugs may also contain bulk drug substances--typically raw powders--
that are generally not FDA approved.[Footnote 2] Traditionally, the 
practice of drug compounding has been regulated by state pharmacy 
regulatory bodies (e.g., boards of pharmacies). FDA and others have 
raised concerns that some pharmacies are going beyond the traditional 
practice of preparing compounded drugs for individual patients by 
producing large quantities of compounded drugs without prescriptions 
for individual patients and selling those drugs to facilities in 
multiple states with no assurance of their having met the safety and 
legal requirements with which drug manufacturers must comply.[Footnote 
3] In addition, in 2012, an outbreak of fungal meningitis linked to 
contaminated compounded drugs raised concerns about the safety and 
quality of compounded drugs. In July 2013, we reported on FDA's 
oversight of entities that compound drugs and found that FDA's 
oversight was limited.[Footnote 4] 

Questions have also been raised about the cost of compounded drugs. 
The International Academy of Compounding Pharmacists estimates that 
the compounding industry makes up 1 to 3 percent of the $300 billion 
retail prescription drug market in the United States in 2014.[Footnote 
5] Pharmacy benefit managers (PBM)--companies that contract with 
health insurers to manage prescription drug benefits and process and 
pay claims--have expressed concerns that, while these drugs make up a 
small percentage of prescription drug claims, costs for compounded 
drugs, particularly those made with bulk drug substances, are 
increasing.[Footnote 6] For example, one PBM reports that the number 
of claims it received for compounded prescription drugs from retail 
pharmacies in one of its health insurer's plans increased 35 percent 
over a 12-month period between 2012 and 2013.[Footnote 7] 
Additionally, members of Congress have raised questions about 
potential financial incentives for providers to prescribe or dispense 
these drugs that may be inadvertently created by the coverage and 
reimbursement practices of public health care programs, such as 
Medicare and Medicaid, and private health plans.[Footnote 8] For 
example, in 2004, one congressional committee attributed the growth of 
the compounded drug industry to payments for these drugs under 
Medicare Part B--the part of the Medicare program that covers certain 
physician, outpatient hospital, laboratory and other services, and 
medical equipment and supplies.[Footnote 9] In addition, this 
committee raised concerns that the coverage and payment practices of 
Medicare Part D sponsors--that is, those health insurers that 
administer the Medicare Part D prescription drug benefit[Footnote 10]--
might be interpreted the same way as Medicare Part B policies and lead 
to increased use of compounded drugs under the benefit. In 2006, 
another congressional committee raised similar concerns about Medicare 
Part B and Part D benefits.[Footnote 11] 

You asked us to examine public programs' and private health insurers' 
payment practices for compounded drugs, as well as any possible 
financial incentives created by these practices. This report examines 
(1) Medicare's, Medicaid's, and private health insurers' payment 
practices for compounded drugs and (2) the extent to which these 
payment practices for compounded drugs may affect their use.[Footnote 
12] 

To examine Medicare's, Medicaid's, and private health insurers' 
payment practices for compounded drugs, we reviewed information and 
interviewed officials from the Centers for Medicare & Medicaid 
Services (CMS), the HHS agency responsible for administering the 
Medicare and Medicaid programs; state Medicaid programs; health 
insurers; and other stakeholders. To select the state Medicaid 
programs, we used publicly available CMS data as of February 2014 to 
identify the five state Medicaid programs with the highest number of 
enrollees and spoke with officials from these five states.[Footnote 
13] To select private health insurers, we used CMS data and 
information from insurers' websites to select insurers that offer 
plans through Medicare Part C--that is Medicare managed care, known as 
Medicare Advantage--Medicare Part D, Medicaid managed care, and the 
commercial market.[Footnote 14] Specifically, we used publicly 
available CMS data as of February 2014 to identify the 10 insurers 
with the highest number of enrollees in Medicare Advantage and Part D 
plans and used information from insurers' websites to determine 
whether they also offer Medicaid managed care and private health plans 
in the commercial market.[Footnote 15] Of these 10 insurers, we spoke 
with officials from 4 national insurers and 1 state insurer, each of 
which offers Medicare Advantage plans with Part D benefits, Medicaid 
managed care plans, and private health plans in the commercial market; 
and officials from 2 insurers that offer Medicare Part D plans only, 
referred to as Part D-only sponsors.[Footnote 16] We interviewed 
officials from these entities to obtain information on public 
programs' and private health insurers' payment practices for 
compounded drugs in each market and how they calculate payment for 
these drugs. We analyzed available payment policies for compounded 
drugs and any related documents from CMS and each of the states, 
insurers, and sponsors we interviewed. In addition, we interviewed 
officials from three PBMs that process and pay prescription drug 
claims to obtain their perspectives on payment practices for 
compounded drugs in pharmacies, how claims for these drugs are 
processed, and how payments are calculated.[Footnote 17] We 
interviewed officials from two companies that publish national drug 
compendia for their perspectives on payments for compounded drugs. 
[Footnote 18] We also reviewed an April 2014 report from the HHS 
Office of Inspector General (OIG) on Medicare Part B payments for 
compounded drugs and interviewed officials from HHS OIG about their 
findings.[Footnote 19] We reviewed related documentation on how the 
CMS data are collected and determined that these data were 
sufficiently reliable for our purposes. However, the results of our 
analysis are intended to be illustrative; they are not generalizable 
to all state Medicaid programs; all private health insurers offering 
Medicare Advantage plans with Part D benefits, Medicaid managed care 
plans, and private health plans in the commercial market; or all Part 
D-only sponsors. 

To determine the extent to which public programs' and private 
insurers' payment practices for compounded drugs may affect their use, 
we reviewed information and interviewed officials from the entities 
identified above, as well as officials from provider associations and 
other relevant organizations. Specifically, we analyzed payment 
policies and related documents of CMS, states, and insurers to 
identify any characteristics of these policies that may affect the use 
of compounded drugs. We interviewed officials from 11 national and 
international associations representing health care providers--
including physicians and pharmacists--who administer or dispense 
compounded drugs in inpatient, outpatient, or pharmacy settings; 2 
pharmaceutical standards-setting organizations; and 2 associations 
representing private health insurers and PBMs to obtain their 
perspectives on the extent to which payment practices affect the use 
of compounded drugs.[Footnote 20] 

We conducted this performance audit from February 2014 through October 
2014 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

Background: 

Drug Compounding: 

Compounded drugs may include sterile and nonsterile preparations, 
which, like all drug products, are made up of active and inactive 
ingredients.[Footnote 21] The active ingredient or ingredients in a 
compounded drug may be one or more FDA-approved products or may be 
bulk drug substances. Bulk drug substances--usually raw powders--are 
generally not approved by FDA for marketing in the United States. 
Examples of bulk drug substances that may be used to make compounded 
drugs include baclofen, a muscle relaxer, and gabapentin, an 
anticonvulsant, both of which may be compounded for use in topical 
pain medications. 

Active ingredients used to make a compounded drug--including bulk drug 
substances--are generally assigned national drug codes (NDC).[Footnote 
22] FDA maintains a publicly available list of NDCs for FDA-approved 
products.[Footnote 23] NDCs for FDA-approved products and bulk drug 
substances are published in three national drug compendia, by First 
Databank, Medi-Span, and Truven Health Analytics. In addition, these 
compendia include drug pricing data by NDC, such as the average 
wholesale price (AWP) of FDA-approved products and bulk drug 
substances.[Footnote 24] A single FDA-approved product or bulk 
substance may be distributed by multiple manufacturers, in different 
forms or strengths, and by varying package sizes and, hence, may have 
multiple NDCs associated with it. The number of bulk drug substances 
that First Databank has added to its database--which First Databank 
tracks using NDCs--has increased significantly over the last 5 years, 
with the number of new NDCs added from 2009 through 2013 representing 
an increase of approximately 58 percent.[Footnote 25] (See figure 1 
for the number of NDCs for bulk drug substances that have been added 
to First Databank's database from 2009 through 2013.) 

Figure 1: Number of New National Drug Codes for Bulk Drug Substances 
Added to First Databank's Database, 2009 through 2013: 

[Refer to PDF for image: line graph] 

Year: 2009; 
Number of new national drug codes added: 165. 

Year: 2010; 
Number of new national drug codes added: 402. 

Year: 2011; 
Number of new national drug codes added: 1,963. 

Year: 2012; 
Number of new national drug codes added: 1,969. 

Year: 2013; 
Number of new national drug codes added: 2,229. 

Source: First Databank. GAO-15-85. 

Note: According to First Databank officials, First Databank tracks the 
number of bulk drug substances--which are generally not approved by 
FDA for marketing--added to its database by national drug code (NDC). 
NDCs are three-segment numbers that are the universal product 
identifiers for drugs for human use. A single bulk drug substance may 
be distributed by multiple manufacturers, in different forms or 
strengths, and by varying package sizes and, hence, may have multiple 
NDCs associated with it. According to First Databank officials, 
manufacturers submit requests to First Databank to add NDCs for bulk 
drug substances to its database. 

[End of figure] 

Under section 503A of the Federal Food, Drug, and Cosmetic Act (FDCA), 
a compounded drug is exempt from certain FDCA requirements, including 
new drug approval and certain labeling and current good manufacturing 
practice requirements, provided the compounded drug meets certain 
criteria.[Footnote 26] These criteria include that the drug is 
compounded by a pharmacist or physician based on a valid prescription 
for an identified individual patient or in limited quantities in 
anticipation of receiving a valid prescription based on historical 
prescribing patterns (known as anticipatory compounding).[Footnote 27] 
The Drug Quality and Security Act of 2013 amended certain FDCA 
provisions as they apply to the oversight of compounded drugs to 
clarify the applicability of section 503A nationwide and to create a 
category of outsourcing facilities involved in sterile drug 
compounding under section 503B. Outsourcing facilities that register 
with FDA and provide information to the agency about the products that 
are compounded at the facility can qualify for exemptions from the 
FDCA's new drug approval and certain labeling requirements.[Footnote 
28] Outsourcing facilities, however, must comply with current good 
manufacturing practice requirements. In addition, the Drug Quality and 
Security Act requires FDA to develop lists of bulk drug substances 
that may be used for compounding and lists of drugs that present 
demonstrable difficulties to compound, among others. To develop these 
lists, FDA has issued requests for nominations of bulk drug substances 
that pharmacists and outsourcing facilities may use to make compounded 
drugs.[Footnote 29] According to FDA, inclusion of a bulk drug 
substance on an FDA list does not indicate that FDA has approved the 
drug; rather, inclusion on the list means that a pharmacist or 
outsourcing facility may qualify for exemptions from certain 
requirements of the FDCA if they compound using bulk drug substances 
included on the lists.[Footnote 30] 

Several organizations develop standards and guidelines for compounded 
drugs and pharmacy transactions, adherence to which may be required by 
law. The U.S. Pharmacopeial Convention (USP) publishes professional 
standards and guidelines for preparing compounded drugs.[Footnote 31] 
According to the National Association of Boards of Pharmacy, 28 states 
had laws requiring full adherence to USP standards for preparing 
sterile compounds, as of 2013.[Footnote 32] In addition, to qualify 
for the exemption under section 503A of the FDCA, a drug product must 
be compounded in compliance with these standards. The National Council 
for Prescription Drug Programs (NCPDP) develops standards for 
electronic pharmacy prescribing and billing transactions. These 
standards include version D.0, which allows pharmacies to submit, and 
insurance plans to see, the NDC for and quantity of each ingredient 
used to make a compounded drug on the pharmacy claim, as well as the 
pharmacy-submitted price per ingredient. In 2009, HHS issued a 
regulation requiring entities subject to the Health Insurance 
Portability and Accountability Act, including pharmacies and health 
insurers, to use version D.0 for electronic pharmacy transactions. 
[Footnote 33] These entities were required to be fully compliant with 
version D.0 by January 1, 2012.[Footnote 34] 

Drug Benefits under Public Programs and Private Health Plans: 

Medicare: 

Medicare Part A, Medicare's inpatient medical benefit, provides 
benefits for drugs administered in inpatient settings, such as 
hospitals. Medicare Part B, Medicare's outpatient medical benefit, 
provides limited benefits for drugs administered to patients in 
outpatient settings, such as physician offices.[Footnote 35] Medicare 
uses contractors to process and pay Part A and Part B claims.[Footnote 
36] Medicare Part C--Medicare's managed care benefit, also known as 
Medicare Advantage--offers beneficiaries plans that provide inpatient 
and outpatient drug benefits (Part A and Part B, respectively) through 
a network of managed care organizations. In addition, some Medicare 
Advantage organizations offer plans with pharmacy benefits similar to 
those provided under Medicare Part D. Medicare Part D provides a 
voluntary pharmacy benefit for Medicare beneficiaries. Beneficiaries 
may choose Medicare Part D plans from among those offered by private 
Part D-only sponsors. Part D beneficiaries may obtain drugs through 
retail and mail-order pharmacies. 

Medicaid: 

States establish and administer their own Medicaid programs within 
broad federal guidelines. Medicaid programs vary from state to state, 
but all state Medicaid programs provide inpatient and outpatient 
medical benefits, which include benefits for drugs administered in 
inpatient hospital and outpatient physician office settings. In 
addition, all state Medicaid programs provide a prescription drug 
benefit under which they pay pharmacies for drugs dispensed to 
Medicaid beneficiaries.[Footnote 37] States report these payments to 
CMS, which provides federal matching funds to states to cover a 
portion of these costs.[Footnote 38] States may provide Medicaid 
benefits using a fee-for-service or managed care delivery system. In a 
managed care delivery system, states typically contract with managed 
care organizations to provide some or all Medicaid covered services to 
beneficiaries. 

Private Health Plans: 

Private health plans in the commercial market provide medical 
benefits, which include benefits for drugs administered in inpatient 
hospital and outpatient physician office settings, and pharmacy 
benefits. Private health plans offered in the commercial market 
include individual and group market plans. Participants in the 
individual market purchase health insurance directly from an insurer, 
through a broker, or through a state health insurance exchange. Group 
market participants generally obtain health insurance through a group 
health plan, usually offered by an employer. These plans can include 
fee-for-service, preferred provider organization, and health 
maintenance organization options.[Footnote 39] 

Medicare, Medicaid, and Private Health Insurers Have Varying Payment 
Practices for Compounded Drugs, and Medicare Part B Payment Policy Is 
Unclear: 

For Compounded Drugs Dispensed in Pharmacy Settings, Medicare, 
Medicaid, and Private Health Insurers Have Varying Payment Practices: 

Medicare, Medicaid, and private health insurer payment practices for 
compounded drugs dispensed in pharmacy settings allow for the payment 
of FDA-approved products but vary in whether they allow payment for 
bulk drug substances in these compounds. As a result of version D.0 of 
NCPDP's standard for pharmacy transactions, officials from the states, 
insurers, and Part D-only sponsors we spoke with told us that claims 
for compounded drugs dispensed in pharmacy settings contain sufficient 
information to identify when a compounded drug is dispensed and the 
ingredients used to make the drug by NDC.[Footnote 40] Therefore, 
these public programs and private health insurers are able to use NDC 
information from national drug compendia to determine whether the 
ingredients in the compounded drug are FDA-approved products or bulk 
drug substances. 

Officials from CMS, the five state Medicaid programs, four of the five 
insurers, and the two Part D-only sponsors provided us with 
information on their payment practices for compounded drugs, including 
those made with bulk drug substances. Of the five insurers we spoke 
with, one insurer owns and operates its pharmacies. Officials from 
this insurer told us that the insurer purchases drugs and drug 
ingredients, including some bulk drug substances used to make 
compounded drugs; therefore, the insurer's payment practices in 
pharmacy settings differ from the other four insurers across the 
insurer's Medicare Part D, Medicaid, and private health plans. 
[Footnote 41] 

* Under Medicare Part D, federal payments are not available for non-
FDA-approved products--including bulk drug substances--and inactive 
ingredients used to make a compounded drug.[Footnote 42] However, 
insurers that offer Medicare Part D benefits and Part D-only sponsors 
may choose to pay for bulk substances but may not submit these 
payments as part of the Part D transaction data CMS uses to determine 
federal payments to Part D plans.[Footnote 43] Officials from two 
insurers offering Medicare Advantage plans that include Part D drug 
benefits and one Part D-only sponsor we spoke with told us that they 
generally pay pharmacies for each ingredient in the compounded drug 
that is an FDA-approved product and is otherwise eligible for payment 
under Part D and thus do not pay for bulk drug substances.[Footnote 
44] Officials from the remaining two insurers and one Part D-only 
sponsor we spoke with told us that they pay pharmacies for bulk drug 
substances but do not include these payments as part of the Part D 
transaction data they submit to CMS. However, in July 2014, the Part D-
only sponsor that currently pays pharmacies for bulk drug substances 
announced its plans to discontinue payments for most of these 
substances by March 2015. This decision to cease paying for bulk drug 
substances was a result of the sponsor's internal analyses showing 
that pharmacies have been increasing their billed amounts for the 
ingredients not covered by Part D, including bulk drug substances, 
used to make compounded drugs; as a result, the sponsor's costs for 
these ingredients began to exceed its costs for the ingredients 
covered by Part D in compounded drug claims in early 2014.[Footnote 45] 

* Under Medicaid, CMS provides federal matching dollars to states that 
opt to pay for compounded drugs under the prescription drug benefit, 
including those that contain bulk drug substances, and has issued a 
notice to the states informing them of this policy.[Footnote 46] 
Officials from four of the five state Medicaid programs and two 
insurers that offer Medicaid managed care plans we spoke with told us 
that they generally do not pay for bulk drug substances used to make 
compounded drugs under the prescription drug benefit.[Footnote 47] The 
fifth state Medicaid program and the remaining two insurers pay for 
only those bulk drug substances that are listed on their 
formulary.[Footnote 48] Officials from the fifth state Medicaid 
program told us that pharmacies may request to add a bulk drug 
substance to the state formulary, and the state will evaluate the 
request and the need to do so. However, these officials also told us 
that the state has received no such requests in at least the last 4 to 
6 months. 

* For private health plans offered in the commercial market, officials 
from three insurers we spoke with told us that they generally do not 
pay for bulk drug substances used to make compounded drugs and pay 
only for those ingredients in the compound that are FDA-approved 
products under their prescription drug benefit.[Footnote 49] Officials 
from one of these three insurers told us that the insurer requires 
prior authorization for all compounded drug prescription claims; 
[Footnote 50] officials from the other two insurers told us that they 
require beneficiaries to obtain prior authorization only for 
compounded drug claims over a certain dollar amount, regardless of 
whether the drug's ingredients are FDA-approved products or bulk drug 
substances.[Footnote 51] The fourth insurer pays for bulk drug 
substances as well as FDA-approved products, provided that the bulk 
drug substance is not listed as the primary ingredient on the claim. 

Once states, insurers, and sponsors determine which ingredients they 
will pay for in compounded drugs dispensed in pharmacy settings, they 
typically calculate the amount of the payment based on common drug 
pricing benchmarks.[Footnote 52] These pricing benchmarks apply to 
both FDA-approved products and bulk drug substances used to make 
compounded drugs. Officials from the states, insurers, and Part D-only 
sponsors we spoke with told us that they generally calculate payments 
to pharmacies based on a negotiated price for each ingredient, such as 
AWP, wholesale acquisition cost, or maximum allowable cost.[Footnote 
53] Some states, insurers, and one Part D-only sponsor calculate the 
price of each ingredient according to the pricing benchmarks and then 
pay pharmacies the lesser of the total calculated price for all 
included ingredients, the price submitted by the pharmacy, the usual 
and customary charge, or other payment calculations.[Footnote 54] 

For Compounded Drugs Administered in Inpatient and Outpatient 
Settings, Medicare, Medicaid, and Private Health Insurers Generally 
Have Similar Payment Practices, Which Are Affected by Lack of Specific 
Billing Codes on Claims: 

Medicare, Medicaid, and private health insurers generally have similar 
payment practices for compounded drugs administered in outpatient 
settings, which are affected by the lack of specific billing codes for 
these drugs on claims. As a result, most of these public programs and 
private health insurers pay for compounded drugs, including both the 
FDA-approved products and bulk drug substances that comprise these 
drugs, because they may be unable to identify whether compounded drugs 
were administered and what individual ingredients were used to make 
the compounded drugs. For drugs administered in outpatient settings, 
public programs and private health insurers generally rely on specific 
codes for individual drugs in the Healthcare Common Procedure Coding 
System (HCPCS)--a standardized coding system used by public programs 
and private health insurers to help ensure medical claims are 
processed in a consistent manner--to indicate whether a beneficiary 
received a prescription drug, including a compounded drug, on an 
insurance claim. However, for the majority of compounded drugs 
administered in outpatient settings, no specific HCPCS codes exist; 
rather, providers typically bill for compounded drugs administered in 
outpatient settings using HCPCS codes for "not otherwise classified" 
drugs.[Footnote 55] Nonspecific HCPCS codes may also be used to bill 
for noncompounded drugs that lack specific HCPCS codes. Public 
programs and private health insurers may conduct further reviews of 
outpatient claims to determine whether the drug billed under a 
nonspecific HCPCS code is a compounded drug and to identify its 
ingredients in order to make payment decisions. Given the difficulty 
in identifying these drugs on insurance claims, the insurers we spoke 
with generally do not have specific written policies regarding payment 
allowances or limitations for any FDA-or non-FDA-approved ingredients 
used to make compounded drugs administered in outpatient settings. In 
addition, while CMS has a national policy for payment of compounded 
drugs under Medicare Part B, the agency does not have any policies 
regarding federal Medicaid payments for compounded drugs administered 
in outpatient settings and likely provides some federal matching 
dollars to states to pay for compounded drugs, including those that 
contain bulk drug substances.[Footnote 56] State Medicaid programs may 
develop their own payment policies for these drugs. 

CMS, the five state Medicaid programs, and four of the five insurers 
provided us with information on whether they review outpatient claims, 
including requesting and reviewing additional documentation, with 
drugs billed under the nonspecific code. Of the five insurers we spoke 
with, officials from one insurer told us that because the insurer owns 
and operates its health care facilities and purchases drugs and drug 
ingredients--including some non-FDA-approved bulk drug substances used 
to make compounded drugs--the insurer is able to determine whether 
drugs administered to beneficiaries in outpatient settings are 
compounded drugs and what ingredients were used to make them. This 
insurer's payment practices for reimbursing its health care facilities 
differ from the other four insurers across the insurer's Medicare 
Advantage, Medicaid, and private health plans. 

* Under Medicare Part B, CMS contractors manually review claims and 
any additional documentation, such as invoices for compounded drugs 
purchased by the provider. Most of the contractors do not require 
providers to submit NDCs for compounded drug ingredients to determine 
whether these ingredients are FDA-approved products or to obtain 
pricing information. Officials from two of the insurers we spoke with 
that offer Medicare Advantage plans told us that they review all 
claims with compounded drugs billed under the nonspecific code and 
request additional information. Officials from one of these insurers 
told us that the insurer requires providers to submit NDCs for each 
ingredient to determine which ingredients are FDA-approved products 
and does not pay for bulk drug substances, unless the insurer 
determines that they are medically necessary. Officials from the other 
insurer told us that the insurer requires providers to submit 
supporting documentation, including invoices that list the name and 
amount of each ingredient in the compounded drug. A third insurer 
reviews claims and requests additional documentation only when the 
amount for a drug billed under the nonspecific HCPCS code on a claim 
exceeds a certain dollar amount but does not require NDCs to determine 
which ingredients are FDA-approved products. For these claims, the 
insurer uses NDCs primarily to calculate payments, likely for all 
ingredients in the compounded drug.[Footnote 57] The fourth insurer 
does not review claims with the nonspecific HCPCS code or collect 
additional information and pays for all ingredients in the compounded 
drug. 

* Under Medicaid, officials from two state Medicaid programs told us 
that these states require providers to submit NDCs for each ingredient 
in compounded drugs billed under the nonspecific code and review the 
claims and the NDCs to determine medical necessity. However, neither 
state uses NDCs to determine which ingredients are FDA-approved 
products. Both states pay for compounded drugs, including those that 
contain bulk drug substances, if they determine the drugs are 
medically necessary. Officials from two other state Medicaid programs 
told us that the states require providers to submit NDCs for every 
HCPCS drug code and not just the nonspecific code, and providers may 
not submit more than one NDC with the nonspecific code.[Footnote 58] 
For one of these states, officials told us that providers may not bill 
compounded drugs as single line items on claims; rather, providers 
must bill each ingredient with the nonspecific code and the 
ingredient's NDC. This state uses the NDCs to determine which 
ingredients are FDA-approved products and does not pay for bulk drug 
substances. Officials from the other state told us that the state 
assigns a short list of NDCs for FDA-approved products to the 
nonspecific HCPCS code and updates it annually when CMS updates the 
HCPCS code database. Officials told us that the state's claims 
processing system will automatically reject those claims with the 
nonspecific code that are accompanied by an NDC that is not on the 
state's list. Two insurers offering Medicaid managed care plans 
process claims for compounded drugs billed under nonspecific HCPCS 
codes in a similar manner as they do for compounded drugs billed in 
their Medicare Advantage plans. One insurer that collects NDCs for 
drugs billed under nonspecific HCPCS codes for claims exceeding a 
certain dollar amount in its Medicare Advantage plans does not do so 
in its Medicaid managed care plans; rather, in its Medicaid managed 
care plans, this insurer collects information from the provider, 
either on the claim or in additional information submitted by the 
provider, about why a compounded drug is being administered.[Footnote 
59] 

* For private health plans offered in the commercial market, the four 
insurers require information about compounded drugs administered in 
outpatient settings and review claims in a similar manner as they do 
for compounded drugs billed in either their Medicare Advantage or 
their Medicaid managed care plans. 

Medicare Part B, the states, and the insurers vary in how they 
calculate payments for compounded drugs billed under nonspecific HCPCS 
codes on outpatient claims depending upon whether these entities 
review these claims. Medicare contractors calculate payments for 
compounded drugs based on the invoice price submitted by the provider, 
which may also include taxes and shipping fees. Officials from the 
state Medicaid program that requires NDCs for each ingredient and pays 
only for FDA-approved products told us that they calculate payment 
based on either the Medicare Part B rate or the pharmacy rate of 
reimbursement for each FDA-approved product.[Footnote 60] The state 
that allows for the use of the nonspecific HCPCS code with only 
certain NDCs calculates payment based on the wholesale acquisition 
cost. Four insurers that offer Medicare Advantage, Medicaid managed 
care, and private health plans calculate payments based on either (1) 
the provider-submitted price for the drug, which may include payment 
for non-FDA-approved bulk drug substances; (2) common drug pricing 
benchmarks, such as wholesale acquisition cost, for the NDC of each 
FDA-approved product; or (3) the state Medicaid program's fee 
schedule. These insurers' payment calculations may depend on whether 
the plan is public or private and whether the insurer reviews claims 
and additional information. The insurer that owns and operates its 
healthcare facilities pays the price set by the manufacturer for drugs 
and drug ingredients. 

In inpatient hospital settings, drugs, including compounded drugs, are 
generally not billed separately from the rest of the services the 
beneficiary received but are bundled together as part of the overall 
charge for the hospital stay or inpatient admission.[Footnote 61] 
Because these drugs are bundled, officials from CMS, all five states, 
and all but one of the insurers we spoke with told us that they cannot 
determine whether a beneficiary received a compounded drug. Medicare 
Part A, Medicaid, and private health insurers generally pay a preset 
rate for the cost to deliver inpatient services, including any 
compounded drugs administered as part of the services;[Footnote 62] 
the use of a particular drug--including a compounded drug--would not 
generally change the inpatient payment rate for a given service. 

Medicare's Payment Policy for Compounded Drugs under Part B Is Unclear: 

Medicare's Part B national payment policy for compounded drugs is 
unclear. The policy notes that federal law requires that drugs be 
reasonable and necessary in order to be covered under Medicare Part B 
and indicates the agency's view that, to be considered reasonable and 
necessary, FDA must have approved the drug for marketing.[Footnote 63] 
Accordingly, the policy instructs Medicare contractors and insurers 
that offer Medicare Advantage plans to deny payments for drugs that 
have not received final marketing approval by FDA. The policy also 
indicates that payment is available for compounded drugs; however, it 
does not stipulate whether payment is available for ingredients in 
compounded drugs that are FDA-approved products only or whether it is 
also available for those ingredients that are bulk drug substances 
that have not been approved by FDA.[Footnote 64] As noted above, most 
of the Part B contractors do not require providers to submit NDCs for 
compounded drug ingredients to determine whether these ingredients are 
FDA-approved products or bulk drug substances and, therefore, may be 
paying for ingredients that are not FDA-approved. Because Medicare 
Part B policy for compounded drugs is unclear, it is uncertain whether 
payment for such ingredients is consistent with that policy. 

In addition to having unclear policies, CMS does not know how much it 
has paid for compounded drugs under Part B, the number of compounded 
drug claims it paid, or whether compounded drugs paid for under Part B 
were made using bulk drug substances. Having access to such 
information may help ensure that payment for such drugs is consistent 
with CMS policy. CMS lacks this information because the agency does 
not collect any information that the contractors responsible for 
processing Medicare Part B claims obtain during their review of claims 
with the nonspecific HCPCS code, including amounts paid to providers 
for compounded drugs based on the invoice price, which CMS officials 
attributed to limitations in claims processing systems. In April 2014, 
HHS OIG reported on payments for compounded drugs in Medicare Part B 
and found that neither CMS nor its contractors track compounded drug 
claims and confirmed what CMS officials told us about neither the 
agency nor the contractors being able to determine the total number of 
these claims, or CMS's payments, for compounded drugs. HHS OIG 
recommended that CMS establish a method specifically to identify 
compounded drugs on those Part B claims that contain the nonspecific 
HCPCS code in order to track compounded drug claims, as these claims 
undergo manual review because of the code and not because they are for 
compounded drugs. HHS OIG also found that, while most Medicare 
contractors require providers to list the individual ingredients that 
made up a compounded drug billed under the nonspecific HCPCS code in a 
text field on a claim, they do not require NDCs for these ingredients. 
NDCs could be used to (a) identify whether an ingredient is an FDA-
approved product or a bulk drug substance and (b) help determine 
ingredient price for the purposes of calculating payment.[Footnote 65] 
In August 2014, CMS officials told us that the agency was working to 
implement HHS OIG's recommendation regarding a compounded drug 
indicator for Part B claims. Without specific information indicating 
whether a beneficiary received a compounded drug in an outpatient 
setting or what ingredients made up the compounded drug, CMS may be 
may be paying for such drugs in a manner that is inconsistent with its 
policy.[Footnote 66] 

Payment Practices, among Other Factors, May Affect the Use of 
Compounded Drugs: 

Officials from the public programs and private health insurers we 
spoke with generally agreed that payment practices for compounded 
drugs may affect the use of these drugs. Officials from CMS, one state 
Medicaid program, three of the five insurers, the two Part D-only 
sponsors, and the three PBMs with whom we spoke stated that payment 
practices for compounded drugs did affect their use, specifically when 
public programs and private health insurers excluded payments for bulk 
drug substances in retail pharmacy settings. In most cases, payment 
exclusions for bulk drug substances resulted in a decreased use of 
compounded drugs in these insurers' plans, particularly for compounded 
drugs dispensed in pharmacy settings. For example, according to CMS, a 
2012 analysis of Part D data showed that compounded drugs comprised 
less than one percent of all Part D claims in that year, which is 
likely due at least in part to Part D drug rules that exclude payment 
for bulk drug substances. CMS officials told us that the small number 
of claims for compounded drugs is a result of the law limiting 
Medicare Part D payment to FDA-approved drugs. The Part D sponsor that 
pays for bulk drug substances in compounded drugs saw its costs for 
these bulk drug substances increase significantly between January 2012 
and March 2014 and, as a result, will cease payments for these 
substances by March 2015. In contrast to this sponsor, officials from 
two insurers that do not pay for bulk drug substances in their 
Medicare Advantage plans that include Part D benefits told us that 
payments for compounded drugs have remained generally steady, with no 
significant increases or decreases. The experiences of the Part D 
sponsor and the two insurers suggest that Part D payment practices may 
affect the use of compounded drugs. Further, officials from one of the 
three insurers that pay for ingredients that are FDA-approved products 
only and do not pay for bulk drug substances in their private health 
plans in the commercial market told us that these practices have 
resulted in a decrease in compounded drug claims and payments. For 
example, officials from one of the insurers told us that, in 2011, the 
insurer's payments for compounded drugs decreased by 205 percent in 
the quarter after it ceased paying for bulk drug substances. 

Officials from one insurer that limits payment to only FDA-approved 
drugs in its private health plans in the commercial market and 
officials from one PBM expressed concern that manufacturers of bulk 
drug substances and outsourcing facilities are inflating the AWP of 
the bulk drug substances used to make compounded drugs. Further, these 
officials, as well as officials from two other PBMs, told us that 
outsourcing facilities are actively marketing their products to 
physicians, who may not know what ingredients these products contain 
or be sure of the compounded products' clinical benefits. Officials 
from one PBM said several of these outsourcing facilities are pushing 
certain compounded drugs onto the market through partnerships they 
have established with physicians who own shares in these facilities. 

Officials from the majority of associations representing health care 
providers we spoke with cited factors other than payment practices 
that affect the use of compounded drugs--primarily individual patient 
need and drug shortages. Officials from CMS and some of the states and 
insurers we spoke with also told us that these factors affected the 
use of compounded drugs. For example, officials from CMS, 11 
associations, 3 insurers, and 2 pharmaceutical standards-setting 
organizations told us that physicians primarily prescribe compounded 
drugs due to individual patient needs such as (1) the lack of a 
commercially available product for a patient's specific treatment 
needs; (2) a patient's allergy to an inactive ingredient, such as a 
dye or a filler, in an available FDA-approved drug; (3) a patient's 
need for a different delivery format for the drug, such as a patient 
who cannot swallow pills and needs a liquid formulation; or (4) a 
patient's need for custom dosage requirements, such as a pediatric 
patient who needs a lower dosage of a commercially available drug. In 
addition to individual patient need, officials from 7 of the 11 
associations and 2 state Medicaid programs we spoke with also cited 
shortages of certain FDA-approved drugs as a significant factor 
contributing to the need to prescribe and use compounded drugs. 
[Footnote 67] For example, officials from one association told us that 
nutrition drugs that need to be administered intravenously are 
frequently in shortage. Patients who need these nutrition drugs 
sometimes require a combination of more than 20 drugs, all of which 
are FDA-approved. However, according to officials from this 
association, many of these FDA-approved nutrition drugs have been in 
shortage since 2010 and, therefore, clinicians have to use compounded 
intravenous nutrition drugs made with bulk drug substances instead. 

Conclusions: 

Compounded drugs account for a small but likely growing percentage of 
all prescription drugs dispensed in retail pharmacies, but the number 
of these drugs administered in outpatient settings--as well as how 
much public programs and private health insurers are paying for them--
is unknown. The lack of information about use and payments results 
from the fact that, unlike retail claims, outpatient health insurance 
claims, including Medicare Part B claims, may not contain information 
specific enough to identify whether a compounded drug was administered 
or what ingredients were used to make it. Medicare Part B policy for 
payment for compounded drugs is also unclear and instructs CMS 
contractors to deny payment for non-FDA-approved drugs but is silent 
with respect to whether payment is available for ingredients--namely, 
bulk drug substances--in a compounded drug that are not FDA-approved. 
In addition, CMS may be unable to appropriately apply Medicare payment 
policy because CMS's Medicare contractors do not collect information 
needed to determine whether each ingredient used to make a compounded 
drug administered in an outpatient setting is FDA-approved. As a 
result, CMS may have paid for compounded drugs containing bulk drug 
substances in outpatient settings inconsistently with its payment 
policy and incurred additional expenses in the process. In April 2014, 
HHS OIG recommended that CMS establish a method to identify Part B 
claims for compounded drugs, which could also help CMS to 
appropriately apply its payment policy. 

Recommendation for Executive Action: 

To help ensure that Medicare Part B is able to appropriately apply its 
payment policy for compounded drugs, we recommend that the Secretary 
of Health and Human Services direct the Administrator of the Centers 
for Medicare & Medicaid Services to clarify the Medicare Part B 
payment policy for compounded drugs and, as necessary, align payment 
practices with the policy. For example, CMS should consider updating 
the Medicare Part B payment policy to either explicitly allow or 
restrict payment for compounded drugs containing bulk drug substances 
and, as appropriate, develop a mechanism to indicate on Medicare Part 
B claims both whether a beneficiary received a compounded drug and the 
drug's individual ingredients in order to properly apply this policy 
and determine payment. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to HHS for review, and its comments 
are reprinted in appendix I. In its comments, HHS disagreed with our 
recommendation that CMS clarify the Medicare Part B payment policy and 
align payment practices with the policy as necessary. HHS also 
provided technical comments, which we incorporated as appropriate. 

In disagreeing with our recommendation to clarify the Medicare Part B 
payment policy, HHS stated that it did not believe that clarifying the 
policy to specifically address payments for bulk drug substances was 
necessary at this time. HHS commented that the Part B payment policy 
does not currently distinguish between compounded drugs that contain 
bulk drug substances and compounded drugs that contain FDA-approved 
products but, rather, recognizes differences between compounded drugs 
and FDA-approved manufactured drugs. According to HHS, the policy 
allows for payment for compounded drugs prepared in a manner that does 
not violate the FDCA and does not permit payment for drugs 
manufactured or otherwise prepared in a manner that is inconsistent 
with the FDCA. As we state in the report, the Part B policy indicates 
the agency's view that, to be eligible for Medicare coverage, FDA must 
have approved the drug for marketing, while at the same time 
indicating that payment is available for compounded drugs. We also 
note that neither bulk drug substances nor compounded drugs, 
regardless of their ingredients, are generally approved by FDA. Based 
on HHS's comments, CMS does not consider the FDA-approval status of 
compounded drug ingredients in making Part B payment determinations 
and focuses on whether the drug was prepared in a manner consistent 
with the FDCA. We appreciate HHS's explanation of this distinction; 
however, we maintain that the Part B policy should be clarified to 
explicitly contain this exception for compounded drugs. 

With regard to HHS's comment that payment is not made for drugs 
manufactured or otherwise prepared in a manner that is inconsistent 
with the FDCA, including cases in which FDA has determined that a 
company is producing compounded drugs in violation of the FDCA--such 
as a company compounding drugs on a large scale that resembles 
manufacturing--the extent to which CMS ensures compliance with this 
policy is unclear. As noted by HHS OIG in its April 2014 report on 
Medicare Part B payments for compounded drugs, Medicare contractors 
generally review claims for compounded drugs to determine payment 
amounts and assign payments on the basis of the description of the 
drug given by the provider on the claim. The HHS OIG report was silent 
on whether the contractors also review these claims to determine who 
produced the compounded drug but noted that CMS contractors, whose 
specific policies and requirements for claims vary, do not necessarily 
require providers to submit this information. As we note in the 
report, and as the HHS OIG report confirmed, CMS does not collect 
information from the Medicare contractors on payments for compounded 
drugs, and neither CMS nor its contractors track claims or payment 
amounts for these drugs. Therefore, CMS does not know what compounded 
drugs the contractors paid for or whether the contractors were able to 
determine whether the company that produced the compounded drug had 
been found by FDA to be in violation of the FDCA for the purposes of 
denying payment in adherence with the Part B policy. In addition, it 
is unclear whether CMS contractors are collecting sufficient 
information to identify specific bulk drug substances used to make 
compounded drugs. This information will be necessary for the 
contractors to make payment determinations when FDA finalizes its 
lists of bulk drug substances that may or may not be used for 
compounding under the FDCA. 

In addition, HHS commented on the limitations of the Part B claims 
systems that would prevent CMS from collecting detailed information, 
such as NDCs of drug ingredients, from claims. However, HHS noted that 
CMS concurred with the HHS OIG recommendation to develop a modifier or 
other mechanism to identify claims for compounded drugs, which is 
consistent with our recommendation. In light of CMS's inability to 
obtain detailed information about compounded drug ingredients 
collected by its contractors, we remain concerned that the agency is 
unable to ensure that payments are made in accordance with the Part B 
policy. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to the 
Secretary of Health and Human Services. In addition, the report will 
be available at no charge on the GAO website at [hyperlink, 
http://www.gao.gov]. If you or your staffs have any questions about 
this report, please contact me at (202) 512-7114 or dickenj@gao.gov. 
Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this report. GAO staff who 
made key contributions to this report are listed in appendix II. 

Signed by: 

John Dicken: 
Director, Health Care: 

List of Congressional Requesters: 

The Honorable Henry A. Waxman: 
Ranking Member: 
Committee on Energy and Commerce: 
House of Representatives: 

The Honorable Sander M. Levin: 
Ranking Member: 
Committee on Ways and Means: 
House of Representatives: 

The Honorable Frank Pallone, Jr. 
Ranking Member: 
Subcommittee on Health: 
Committee on Energy and Commerce: 
House of Representatives: 

The Honorable Diana DeGette: 
Ranking Member: 
Subcommittee on Oversight and Investigations: 
Committee on Energy and Commerce: 
House of Representatives: 

The Honorable Jim McDermott: 
Ranking Member: 
Subcommittee on Health: 
Committee on Ways and Means: 
House of Representatives: 

[End of section] 

Appendix I: Comments from the Department of Health and Human Services: 

Department Of Health & Human Services: 
Office Of The Secretary: 
Assistant Secretary for Legislation: 
Washington, DC 20201: 

September 23, 2014: 

John Dicken: 
Director, Health Care: 
U.S, Government Accountability Office: 
441 G Street NW: 
Washington, DC 20548: 

Dear Mr. Dicken: 

Attached are comments on the U.S. Government Accountability Office's 
(GAO) report entitled, "Compounded Drugs: Payment Practices Vary 
Across Public Programs and Private Insurers, and Medicare Part B 
Policy Should Be Clarified" (GAO-14-831). 

The Department appreciates the opportunity to review this report prior 
to publication. 

Sincerely, 

Signed by: 

Jim R. Esquea: 
Assistant Secretary for Legislation: 

Attachment: 

General Comments Of The Department Of Health And Human Services (HHS) 
On The Government Accountability Office's Draft Report Entitled: 
Compounded Drugs: Payment Practices Vary Across Public Programs And 
Private Insurers, And Medicare Part B Policy Should Be Clarified (GAO-
14-831): 

The Department appreciates the opportunity to review and comment on 
this draft report. 

GAO Recommendation: 

We recommend the Secretary of Health and Human Services direct the 
Administrator of the Centers for Medicare & Medicaid Services (CMS) to 
clarify the Medicare Part B payment policy for compounded drugs and, 
as necessary, align payment practices with the policy. For example, 
CMS should consider updating the Medicare Part B payment policy to 
either explicitly allow or restrict payment for compounded drugs 
containing bulk substances; and as appropriate, develop a mechanism to 
indicate on Medicare Part B claims whether a beneficiary received a 
compounded drug and its individual ingredients in order to properly 
apply this policy and determine payment. 

HHS Response: 

HHS non-concurs with GAO's recommendation. HIS does not agree that 
clarification about the use of bulk ingredients in compounded drugs is 
necessary at this time. In general, Part B policy does not prohibit 
the use of bulk substances in compounded drugs. As stated in Chapter 
17, Section 20.1.2 of the Claims Processing Manual, Medicare 
Administrative Contractors (MAC) are responsible for pricing 
compounded drugs, and the MACs may establish additional limitations or 
restrictions on payments for these drugs. 

A recent report by the Office of Inspector General (OIG) (OEI-03-13-
00270), which is referenced in footnote 18 on page 5 of this GAO 
report, accurately summarized Medicare Part B payment policy for 
compounded drugs. Page 3 of the OIG report states that: "Generally, 
compounded drugs are eligible for coverage under Medicare Part B. 
However, when FDA determines that an entity is producing compounded 
drugs in violation of the Federal Food, Drug, and Cosmetic Act (FDCA), 
Medicare does not pay for these drugs." 

The Part B policy for compounded drugs generally does not distinguish 
between compounded drugs that contain bulk drug substances or those 
prepared from FDA-approved drug products. Instead, Medicare Part B 
policy recognizes differences between compounded drugs and FDA-
approved manufactured drugs. Payment for compounded drugs is 
permissible provided that the compounded drugs are prepared in a 
manner that does not violate the FDCA. Payment is not made for drugs 
that are manufactured or otherwise prepared in a manner that is not 
consistent with the FDCA, including in those cases in which the FDA 
has determined that a company is producing compounded drugs in 
violation of the FDCA. 

We would also like to note that in response to the above-referenced 
OIG report, CMS indicated concurrence with a recommendation to 
identify compounded Part B drug claims and described a possible 
approach for addressing this matter. However, because the Part B 
claims system uses Healthcare Common Procedure Coding System (HCPCS) 
billing codes and has limitations regarding additional information 
that can be included on a claim and then archived and retrieved, HHS 
would not be able to obtain detailed information such as ingredient 
NDCs on each claim. When making payment and medical necessity 
determinations on compounded drug claims, Part B MACs collect and 
utilize additional data, such as drug ingredients. As reported by OIG 
on page 8 of the above-referenced report, MACs review all claims for 
compounded drugs. 

We thank GAO for their efforts regarding this complicated issue. 

[End of section] 

Appendix II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

John Dicken, (202) 512-7114 or dickenj@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Rashmi Agarwal, Assistant 
Director; Shana R. Deitch; Sandra George; Jyoti Gupta; and Laurie 
Pachter made key contributions to this report. 

[End of section] 

Related GAO Products: 

Compounded Drugs: TRICARE's Payment Practices Should Be More 
Consistent with Regulations. [hyperlink, 
http://www.gao.gov/products/GAO-15-64]. Washington, D.C.: October 2, 
2014. 

Prescription Drugs: Comparison of DOD, Medicaid, and Medicare Part D 
Retail Reimbursement Prices. [hyperlink, 
http://www.gao.gov/products/GAO-14-578]. Washington, D.C.: June 30, 
2014. 

Medicaid Prescription Drugs: CMS Should Implement Revised Federal 
Upper Limits and Monitor Their Relationship to Retail Pharmacy 
Acquisition Costs. [hyperlink, http://www.gao.gov/products/GAO-14-68]. 
Washington, D.C.: December 19, 2013. 

Drug Compounding: Clear Authority and More Reliable Data Needed to 
Strengthen FDA Oversight. [hyperlink, 
http://www.gao.gov/products/GAO-13-702]. Washington, D.C.: July 31, 
2013. 

[End of section] 

Footnotes: 

[1] Drug compounding does not generally include mixing or 
reconstituting approved products in accordance with the manufacturer's 
instructions or the product's approved labeling. Some pharmacies 
engage in repackaging of drugs, such as taking a multidose vial of a 
drug and transferring it to single dose vials or syringes. Repackaging 
of drugs was outside of the scope of our report. 

[2] FDA regulations define a bulk drug substance as any substance that 
is represented for use in a drug and that, when used in the 
manufacturing, processing, or packaging of a drug, becomes an active 
ingredient or a finished dosage form of the drug, but the term does 
not include intermediates used in the synthesis of such substances. 21 
C.F.R. § 207.3(4)(2014). 

[3] In general, compounded drugs meeting certain criteria are exempt 
from certain requirements under the Federal Food, Drug, and Cosmetic 
Act (FDCA), including new drug approval, current good manufacturing, 
and certain labeling requirements. 21 U.S.C. § 353a. 

[4] See [hyperlink, http://www.gao.gov/products/GAO-13-702], Drug 
Compounding: Clear Authority and More Reliable Data Needed to 
Strengthen FDA Oversight, (Washington, D.C.: July 31, 2013). 

[5] In 2012, the International Academy of Compounding Pharmacists 
estimated that, of the more than 56,000 community-based retail 
pharmacies in the United States, approximately 7,500 of these 
specialize in compounding services. 

[6] In addition to processing and paying prescription drug claims, 
PBMs are also responsible for developing and maintaining health plan 
formularies--lists of medications that health care providers are 
encouraged to prescribe--contracting with retail pharmacies, and 
negotiating rebates with drug manufacturers and discounts with retail 
pharmacies. 

[7] OptumRx, Compounding Pharmacies: A Costly Challenge, April 24, 
2014, accessed August 1, 2014, [hyperlink, 
http://www.optum.com/thought-leadership/compounding-pharmacies-costly-
challenge.html]. 

[8] Medicare is the federal program that provides coverage of health 
services for people aged 65 and older and certain other individuals. 
Medicaid is the joint federal-state program that provides coverage of 
health services for certain low-income individuals. The Centers for 
Medicare & Medicaid Services (CMS) is the federal agency responsible 
for administering the Medicare and Medicaid programs. 

[9] U.S. House of Representatives, Committee on Government Reform. New 
Medicare Rules May Increase Risk from Unregulated Compounded Drug 
Copies (Washington, D.C.: Sept. 28, 2004). 

[10] Medicare Part D, established in 2006, provides a voluntary drug 
benefit for Medicare beneficiaries to obtain drugs through retail and 
mail-order pharmacies. 

[11] United States Senate, Committee on Finance. Chairman Grassley 
Questions CMS, FDA about Substituted Inhalation Drugs (Washington, 
D.C.: July 13, 2006). 

[12] We examined payment practices for compounded drugs under TRICARE-
-the Department of Defense program that provides medical and 
prescription drug benefits to active duty personnel, military 
retirees, reservists and members of the National Guard, and their 
dependents--in a separate report. See GAO, Compounded Drugs: TRICARE's 
Payment Practices Should Be More Consistent with Regulations, 
[hyperlink, http://www.gao.gov/products/GAO-15-64] (Washington, D.C.: 
Oct. 2, 2014). 

[13] We used publicly available data from the Medicaid and CHIP 
Payment and Access Commission to identify state Medicaid programs by 
number of enrollees. The five state Medicaid programs are California, 
Florida, Illinois, New York, and Texas. 

[14] CMS contracts with private health insurers that offer (1) medical 
benefits under Medicare through a managed care network, known as 
Medicare Advantage plans, (2) Medicare Advantage plans with Part D 
coverage, or (3) Medicare Part D prescription drug benefits only. 
State Medicaid programs also contract with health insurers to offer 
medical and prescription drug benefits through a managed care network. 

[15] CMS's data includes enrollment in Medicare Advantage-only plans, 
Medicare Advantage plans with Part D benefits, and Medicare Part D-
only plans. 

[16] The four national insurers are Aetna, Humana, Kaiser Permanente, 
and WellPoint. The state insurer is Blue Cross Blue Shield of 
Michigan. The two Part D-only plan sponsors are CVS Caremark and 
Express Scripts. CVS Caremark and Express Scripts also serve as 
pharmacy benefit managers for other health insurers. These seven 
insurers and sponsors accounted for about 48 percent of all Medicare 
Advantage and Part D enrollees as of February 2014. 

[17] The three PBMs are CVS Caremark, Express Scripts, and OptumRx. 

[18] These national drug compendia provide pharmaceutical information, 
including drug pricing data, to hospitals, physician practices, 
payers, retail pharmacies, state health programs and others for the 
purpose of medication decision support and negotiating reimbursement 
rates paid to pharmacies and other providers. The two companies are 
First Databank and Medi-Span. 

[19] Department of Health and Human Services, Office of Inspector 
General, Compounded Drugs under Medicare Part B: Payment and 
Oversight, OEI-03-13-00270 (Washington, D.C.: April 2014). We 
coordinated with HHS OIG officials to obtain information about and 
avoid overlap and duplication with their evaluation. In addition, 
while we report on some of HHS OIG's findings from its Medicare Part B 
assessment, we independently corroborated information in this report 
with CMS. 

[20] The 11 national and international associations representing 
health care providers are the American Academy of Dermatology, 
American Academy of Ophthalmology, American Hospital Association, 
American Pharmacists Association, American Society of Health-System 
Pharmacists, American Society of Parenteral and Enteral Nutrition, 
International Academy of Compounding Pharmacists, National Association 
of Chain Drug Stores, National Community Pharmacists Association, 
National Home Infusion Association, and Professional Compounding 
Centers of America. The 2 pharmaceutical standards-setting 
organizations are the National Council for Prescription Drug Programs 
and U.S. Pharmacopeial Convention (USP). The 2 associations 
representing private health insurers and PBMs are America's Health 
Insurance Plans and Pharmaceutical Care Management Association, 
respectively. 

[21] Compounded drugs include nonsterile preparations, such as 
capsules, ointments, creams, gels, and suppositories, which are 
typically dispensed in pharmacy settings. Sterile compounded 
preparations include intravenously administered fluids and injectable 
drugs, which are typically administered in both inpatient and 
outpatient settings. Compounded sterile drugs pose special risks of 
contamination if not made properly and require special safeguards to 
prevent injury or death to patients receiving them. Active ingredients 
include any drug component that is intended to furnish pharmacological 
activity or other direct effect in the diagnosis, cure, mitigation, 
treatment, or prevention of disease, or to affect the structure or any 
function of the body of man or other animals. An inactive ingredient, 
or excipient, is any component of a drug product other than the active 
ingredient, such as a dye or water for injection. See 21 C.F.R. § 
210.3(b)(3), (7), (8) (2014). 

[22] NDCs are three-segment numbers that are the universal product 
identifiers for drugs for human use. FDA assigns the first segment of 
the NDC, which identifies the labeler (i.e., the firm that 
manufactures, repackages, or distributes a drug). The labeler assigns 
the second and third segments. The second segment identifies a 
specific strength, dosage form, and formulation (e.g., 20 mg 
capsules), and the third segment identifies package size and type 
(e.g., 100 capsules in a bottle). 

[23] FDA's list of drugs approved for marketing within the United 
States is published annually in the Approved Drug Products with 
Therapeutic Equivalence Evaluations, also known as the Orange Book. 

[24] Average wholesale price (AWP) is the average of the list prices 
that the manufacturer suggests wholesalers charge pharmacies. AWP is 
obtained and published by Medi-Span and Truven Health Analytics. 

[25] According to First Databank officials, manufacturers submit 
requests to First Databank to add NDCs for bulk drug substances to its 
database. 

[26] Drug sponsors submit new drug applications to FDA when they 
believe there is enough evidence about the drug's safety and 
effectiveness to meet FDA's requirements for marketing approval. If 
FDA approves the application, the product may be marketed in the 
United States. 

[27] 21 USC § 353a, as amended by Pub. L. No. 113-54, § 106, 127 Stat. 
587, 598 (Nov. 27, 2013). 

[28] An outsourcing facility is a facility at one geographic location 
or address that is engaged in the compounding of sterile drugs, has 
elected to register as an outsourcing facility with FDA, and complies 
with all of the requirements of section 503B of the FDCA. These 
requirements include that the facility must comply with current good 
manufacturing practice requirements and must meet certain other 
conditions, such as reporting adverse events and providing FDA with 
certain information about the products it compounds. An outsourcing 
facility can qualify for exemptions from the FDA approval requirements 
and the requirement to label products with adequate directions for use 
but not for an exemption from the current good manufacturing practices 
requirements. 

[29] FDA initially published in the Federal Register two separate 
requests for nominations for inclusion on these lists in December 2013-
-one list to be used by individual physicians and pharmacists to 
compound in accordance with section 503A of the FDCA, and one list to 
be used by outsourcing facilities to compound in accordance with 
section 503B of the FDCA. To obtain more information concerning the 
substances nominated, the agency issued revised requests for 
nominations in July 2014. 79 Fed. Reg. 37747 (July 2, 2014) and 79 
Fed. Reg. 37750 (July 2, 2014). The notices request interested parties 
submitting nominations to provide certain information about the bulk 
drug substances and the drug products that will be compounded with the 
bulk drug substance, such as the drug's historical use and information 
published in reports in peer-reviewed medical literature. The public 
was provided 90 days to nominate bulk drug substances in response to 
these notices. 

[30] To qualify for the FDCA exemptions provided under section 503A of 
the act, a pharmacist or physician also may compound using bulk drug 
substances that comply with the standards of an applicable monograph 
or that are components of FDA-approved drugs. 21 U.S.C. § 
353a(b)(1)(A). 

[31] USP is a scientific nonprofit organization that sets standards 
for the identity, strength, quality, and purity of medicines, food 
ingredients, and dietary supplements. USP's current suite of General 
Chapters for compounding includes, among others, Chapter 797 
Pharmaceutical Compounding--Sterile Preparations, which provides 
procedures and requirements for compounding sterile preparations; and 
Chapter 795 Pharmaceutical Compounding--Nonsterile Preparations, which 
provides guidance on applying good compounding practices in the 
preparation of nonsterile compounded formulations for dispensing or 
administration to humans or animals. 

[32] The National Association of Boards of Pharmacy is a professional 
association that assists its member state boards of pharmacy and 
jurisdictions in developing, implementing, and enforcing uniform 
standards for the purpose of protecting the public health. 

[33] 74 Fed. Reg. 3296, 3302 (Jan. 16, 2009) (codified at 45 C.F.R. 
Part 162). 

[34] Prior to the implementation of the updated standard, providers 
typically submitted claims for compounded drugs based on the primary--
and, typically, the most expensive--ingredient. 

[35] Medicare Part B also provides benefits for certain vaccines, such 
as influenza; drugs administered in hospital outpatient settings, such 
as part of emergency department services; and drugs administered using 
durable medical equipment. For the purposes of this report, when we 
discuss outpatient settings, we are referring to drugs administered in 
physician offices incident to physician services. 

[36] CMS established the Medicare contractors as multistate, regional 
contractors responsible for administering both Medicare Part A and 
Medicare Part B claims. For more information on Medicare contractors, 
see GAO, Medicare: Contractors and Private Plans Play a Major Role in 
Administering Benefits, [hyperlink, 
http://www.gao.gov/products/GAO-14-417T] (Washington, D.C.: Mar. 4, 
2014). 

[37] Prescription drug coverage is an optional Medicaid benefit; 
however, all state Medicaid programs have elected to include it in 
their Medicaid benefit packages. 

[38] The federal government matches state Medicaid expenditures for 
services according to a state's federal medical assistance percentage, 
which is based on a statutory formula under which the federal share of 
a state's Medicaid expenditures may range from 50 to 83 percent. 

[39] Health maintenance organizations and preferred provider 
organizations are insurance products that generally rely on providers 
to control service utilization, and they provide financial incentives 
to encourage patients to use network providers who have agreed to 
accept fee discounts. 

[40] The prior NCPDP standard, version 5.1, contained an indicator for 
compounded drugs but allowed for the inclusion of only the primary--
and, typically, the most expensive--ingredient used to make the 
compounded drug on the claim. 

[41] Officials from this insurer told us that because it purchases 
drugs and drug ingredients directly from manufacturers for its 
pharmacies, it does not generally process pharmacy claims in any of 
its public or private plans. However, this insurer submits 
beneficiaries' prescription information to its PBM using the D.0 
standard in order for the PBM to determine a beneficiary's share of 
the cost of the prescription. 

[42] In general, under Medicare Part D, federal payments are 
unavailable for drugs not approved by FDA, drugs not available by 
prescription for purchase in the United States, and drugs for which 
payment would be available under Parts A or B of Medicare. 42 U.S.C. § 
1395w-102(e). 

[43] CMS's final rule for the Medicare Part D contract year 2012 notes 
that, while Part D sponsors may pay for non-Part D-covered ingredients 
without reporting these costs to CMS, Part D sponsors are prohibited 
from billing beneficiaries for the uncovered ingredients. 76 Fed. Reg. 
21432, 21523 (Apr. 15, 2011). Of the five insurers and two Part D-only 
sponsors, only one insurer has specific written policies in place 
beyond what was stated in the CMS regulation. 

[44] Officials from one of the two insurers that do not pay for bulk 
drug substances told us that the insurer will process claims and pay 
only for any ingredients in the compounded drug that are FDA-approved, 
provided that the FDA-approved ingredient is the primary ingredient; 
otherwise, this insurer will reject claims with a bulk drug substance 
that is the primary ingredient. Officials from the other insurer told 
us that the insurer will pay for bulk drug substances in compounded 
drugs in rare circumstances and only after it has deemed a 
prescription to be medically necessary. This insurer and the Part D-
only sponsor will process claims with a bulk drug substance that is 
the primary ingredient but pay only for the ingredients that are FDA-
approved products. 

[45] The Part D-only sponsor will cease paying for hundreds of bulk 
drug substances typically used to prepare compounded topical 
medications; sponsor officials told us that these substances accounted 
for 95 percent of the sponsor's increased costs. In addition to 
discontinuing payment for most bulk drug substances in its Medicare 
Part D plans, this sponsor also plans to cease paying for over a 
thousand bulk drug substances in the plans for which the sponsor 
contracts with plan insurers as the PBM. According to sponsor 
officials, insurers will be able to opt out of this payment exclusion. 

[46] States that offer a prescription drug benefit are required to 
provide coverage for those drugs for which manufacturers pay rebates 
to state Medicaid agencies under the federal Medicaid drug rebate 
program. See 42 U.S.C. § 1396r-8. CMS has clarified that bulk drug 
substances are not subject to the drug rebate program's requirements 
and, therefore, states are not required to cover such compounded drugs 
under their prescription drug benefit. However, states may opt to do 
so. Department of Health and Human Services, Centers for Medicare & 
Medicaid Services, Medicaid Drug Rebate Program Notice, Release No. 
158 (Baltimore, Md.: July 13, 2011). 

[47] Officials from two of these state Medicaid programs and the two 
insurers told us that they will pay for bulk drug substances in 
compounded drugs only after they have deemed a prescription to be 
medically necessary, which likely occurs in rare circumstances only. 
Of the four state Medicaid programs and two insurers that do not pay 
for bulk drug substances, only one insurer has specific written 
policies stating this payment exclusion. 

[48] A formulary is a list of medications, grouped by therapeutic 
class, that a health care system's providers are encouraged to use 
when prescribing medications. A therapeutic class describes a group of 
drugs that are similar in chemical structure, pharmacological effect, 
or clinical use. 

[49] Of the three insurers that do not pay for bulk drug substances, 
two insurers have specific written policies stating this payment 
exclusion. 

[50] According to officials from this insurer, this insurer may pay 
for bulk drug substances used to make compounded drugs in rare 
circumstances and only after the insurer has deemed a prescription to 
be medically necessary. 

[51] Prior authorization requires the provider to obtain approval from 
a health plan before a prescription drug is administered or dispensed. 
The need for prior authorization for prescription drugs dispensed at 
retail pharmacies is typically determined at the point of sale. 
Insurers' claims processing systems have triggers built in to 
automatically request prior authorization for electronic claims 
submitted by pharmacists. Depending upon the insurer and the plan, 
either the pharmacist or the patient would request prior authorization 
from the prescribing clinician, including any forms or supporting 
documentation, and submit it with the claim. 

[52] The insurer that owns and operates its healthcare facilities pays 
the price set by the manufacturer for drugs and drug ingredients. 

[53] State Medicaid programs are generally required to pay pharmacies 
the lower of (a) the state's estimate of the drug's acquisition cost 
to the pharmacy, based on a state-determined formula, plus a 
dispensing fee, or (b) the pharmacy's usual and customary charge to 
the general public. See 42 C.F.R. 447.512 (2013). For certain multiple-
source outpatient prescription drugs with three or more 
therapeutically and pharmaceutically equivalent versions, CMS will 
provide federal matching funds for reimbursements only up to a maximum 
amount--known as a federal upper limit. 42 U.S.C. § 1396r-8(e)(4). 
Wholesale acquisition cost is the manufacturer's list price for 
wholesalers before rebates and discounts and is published on a weekly 
basis. The maximum allowable cost is the maximum allowable payment 
established by each insurer or Part D sponsor. 

[54] The usual and customary fee is the cost of the drug the 
beneficiary would pay without insurance. Other payment methodologies 
may include estimated acquisition cost, which is the estimated cost to 
purchase the drug. 

[55] Specific HCPCS codes exist for some compounded drugs used with 
durable medical equipment, such as nebulizers used to administer 
inhalational drugs. 

[56] CMS contractors responsible for processing outpatient (Medicare 
Part B) claims develop their own policies in accordance with national 
Medicare policy. These contractors may be able to identify compounded 
drugs depending on what kind of information they require providers to 
submit on claims. We did not examine Medicare contractors' claims 
processing policies in our review. 

[57] For claims below the specified dollar amount, this insurer also 
likely pays for all ingredients in the compounded drug. 

[58] Officials from the fifth state Medicaid program did not provide 
us with information on whether it reviews outpatient claims to 
identify compounded drugs or its payment practices for these drugs. 

[59] Officials from the fourth insurer did not provide us with 
information on whether it reviews outpatient claims to identify 
compounded drugs billed under nonspecific HCPCS codes or its payment 
practices for these drugs. 

[60] The current Medicare Part B rate of reimbursement is the average 
sales price of a drug plus 6 percent. The pharmacy rate of 
reimbursement, when the Part B rate is not available, is defined in 
this state at the time this report was published as the lower of (1) 
AWP minus a negotiated percentage, (2) the federal upper limit, or (3) 
the maximum allowable ingredient cost. The federal upper limit is the 
maximum amount of matching federal funds that CMS will provide to 
states for certain multiple-source prescription drugs--that is, those 
drugs with three or more versions that either produce the same 
clinical effect and have the same safety profile or that contain the 
same active ingredient(s) in the same dosage form and meet strength 
and other applicable standards. 42 U.S.C. § 1396r-8(e)(4). The maximum 
allowable cost is the maximum allowable payment established by the 
state Medicaid program. 

[61] Costs for drugs provided in inpatient settings are typically 
accounted for in the rate set for the overall charge for the hospital 
stay, such as under a per diem charge or a diagnosis-related group--a 
system that classifies inpatient stays according to both 
beneficiaries' clinical conditions (the primary diagnosis along with 
any secondary illnesses and complications developed during the stay) 
and the procedures beneficiaries receive. 

[62] Officials from the remaining insurer told us that because the 
insurer purchases drugs and drug ingredients for its health care 
facilities directly from manufacturers, it is able to determine 
whether a compounded drug was administered to a beneficiary as part of 
the inpatient service. 

[63] Centers for Medicare & Medicaid Services, Medicare Benefit Policy 
Manual, Chapter 15 - Covered Medical and Other Health Services 
(Baltimore, Md.: May 10, 2013). 

[64] Medicare's Part B payment policy may not apply to certain 
compounded drugs, such as infusion drugs administered through 
implantable pumps, because these drugs can be paid for under the Part 
B durable medical equipment benefit or under Part D. Infusion therapy 
is the administration of medication through a needle or catheter, such 
as intravenously. Infusion drugs may need to be compounded because 
commercially available drugs may not be available in necessary doses 
for infusion therapy. We previously examined Medicare's and private 
insurers' policies for home infusion drugs. See GAO, Home Infusion 
Therapy: Differences between Medicare and Private Insurers' Coverage, 
[hyperlink, http://www.gao.gov/products/GAO-10-425] (Washington, D.C.: 
June 7, 2010). 

[65] Department of Health and Human Services, Office of Inspector 
General, Compounded Drugs under Medicare Part B: Payment and 
Oversight. In addition, HHS OIG found that Medicare Part B contractors 
representing 10 of the 13 Part B regions paid providers based on 
invoice price of the drug or the purchase price set by the compounding 
pharmacy that made the drug, rather than according to common drug 
pricing benchmarks. To conduct its work, HHS OIG surveyed and asked 
for supplemental information from the nine contractors responsible for 
processing Medicare Part B claims in CMS's 13 regions as of December 
2012; all nine contractors responded to HHS OIG's request for 
information. 

[66] Federal internal control standards call for agencies to have the 
information they need in a form that enables them to carry out 
internal control and other responsibilities and, on a day-to-day 
basis, to make operating decisions and allocate resources. GAO, 
Standards for Internal Control in the Federal Government, [hyperlink, 
http://www.gao.gov/products/GAO/AIMD-00.21.3.1] (Washington, D.C.: 
November 1999). Internal control is synonymous with management control 
and comprises the plans, methods, and procedures used to meet 
missions, goals, and objectives. 

[67] We previously reported on drug shortages in February 2014 and 
found that shortages are primarily due to quality problems resulting 
in supply disruptions, coupled with constrained manufacturing 
capacity. See [hyperlink, http://www.gao.gov/products/GAO-14-194], 
Drug Shortages: Public Health Threat Continues, Despite Efforts to 
Help Ensure Product Availability, (Washington, D.C.: Feb. 10, 2014). 

[End of section] 

GAO's Mission: 

The Government Accountability Office, the audit, evaluation, and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the 
performance and accountability of the federal government for the 
American people. GAO examines the use of public funds; evaluates 
federal programs and policies; and provides analyses, recommendations, 
and other assistance to help Congress make informed oversight, policy, 
and funding decisions. GAO's commitment to good government is 
reflected in its core values of accountability, integrity, and 
reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's website [hyperlink, http://www.gao.gov]. Each 
weekday afternoon, GAO posts on its website newly released reports, 
testimony, and correspondence. To have GAO e-mail you a list of newly 
posted products, go to [hyperlink, http://www.gao.gov] and select 
"E-mail Updates." 

Order by Phone: 

The price of each GAO publication reflects GAO's actual cost of 
production and distribution and depends on the number of pages in the 
publication and whether the publication is printed in color or black 
and white. Pricing and ordering information is posted on GAO's 
website, [hyperlink, http://www.gao.gov/ordering.htm]. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 
TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card, 
MasterCard, Visa, check, or money order. Call for additional 
information. 

Connect with GAO: 

Connect with GAO on facebook, flickr, twitter, and YouTube.
Subscribe to our RSS Feeds or E mail Updates. Listen to our Podcasts.
Visit GAO on the web at [hyperlink, http://www.gao.gov]. 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 
Website: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]; 
E-mail: fraudnet@gao.gov; 
Automated answering system: (800) 424-5454 or (202) 512-7470. 

Congressional Relations: 

Katherine Siggerud, Managing Director, siggerudk@gao.gov: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, DC 20548. 

Public Affairs: 

Chuck Young, Managing Director, youngc1@gao.gov: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, DC 20548. 

[End of document]