Drugs Made by Compounders That Operate in Violation of the Food, Drug, and Cosmetic Act Create Recoupment Risk

February 10, 2014

The U.S. Department of Health and Human Services Office of Inspector General’s (OIG) Work Plan for Fiscal Year 2014 indicates that the OIG will be examining Medicare Administrative Contractor (MAC) policies and procedures for reviewing and processing Medicare Part B claims for compounded drugs in light of the fact that Medicare pays only for compounded drugs that are produced in accordance with the Federal Food, Drug, and Cosmetic Act (FDCA). This initiative suggests that greater scrutiny will be applied to Medicare program payments for compounded drugs. If a compounder is not strictly complying with the FDCA or applicable exemptions thereto, it may find that its drugs are no longer reimbursed by MACs, who pay claims on behalf of the Medicare program. In addition, it is possible that MACs or the Centers for Medicare and Medicaid Services (CMS) may seek recoupment for claims previously paid for drugs compounded in violation of the FDCA.

Recent Changes to FDCA Compliance. The U.S. Food and Drug Administration (FDA) has recently changed how it regulates entities that compound drugs as a result of the Drug Quality and Security Act (DQSA), which was adopted on November 27, 2013, in response to the New England Compounding Center meningitis outbreak in October of 2012. In response to the DQSA, the FDA promulgated guidance that categorizes entities that compound drugs into one of three categories: (i) compounding pharmacies that are licensed under state law and comply with Section 503A of the FDCA; (ii) registered outsourcing facilities under the DQSA (which are permitted to compound sterile drugs without a prescription); and (iii) FDA-registered manufacturers.

Compounding Pharmacies Under Section 503A of the FDCA. Section 503A of the FDCA exempts compounding pharmacies from certain provisions of the FDCA, including good manufacturing practices, labeling with adequate directions for use, and FDA approval prior to marketing. The DQSA revised Section 503A of the FDCA to render it enforceable by removing its unconstitutional restrictions on advertising and promotion. A compounding pharmacy that desires to operate under Section 503A must, among other requirements, generally compound drugs only for an identified individual based on the receipt of a valid prescription from a prescribing practitioner and not compound drug products regularly or in inordinate amounts that are essentially copies of commercially available drug products. Additional information regarding complying with Section 503A is available here.

Outsourcing Facilities Under Section 503B of the FDCA. Under Section 503B of the FDCA, which was adopted as part of the DQSA, outsourcing facilities are eligible for exemption from the FDA’s approval requirements and the requirement to label drugs with adequate directions for use. In order to qualify for such exemptions, outsourcing facilities must compound sterile drugs in compliance with good manufacturing practices and, among other requirements, must not engage in wholesaling or compound drugs that are essentially a copy of one or more approved drugs. Additional information regarding registering as an outsourcing facility is available here.

Medicare Reimbursement for Compounded Drugs. CMS’ current policy regarding reimbursement for compounded drugs is that it will pay for compounded drugs that are reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member if the drugs are compounded in compliance with the FDCA. See Section 50.4.7, Chapter 15 of the Medicare Benefit Policy Manual. If the FDA has determined that a company is producing compounded drugs in violation of the FDCA (e.g., the company is not complying with either Section 503A or 503B of the FDCA and is not registered as a manufacturer with the FDA), Medicare will not pay for compounded drugs produced by that company and will not pay for any DME or prosthetic device used to administer such drugs. Id. When CMS becomes aware of such a FDA determination, it notifies the MACs to stop payment.

CMS bases this policy on Section 1862(a)(1)(A) of the Social Security Act, which requires items or services to be reasonable and necessary in order to be covered under Medicare Part A or B. CMS interprets this provision of the Social Security Act to require that compounded drugs either be approved for marketing by the FDA or exempt from such requirements under the FDCA in order to be covered under Medicare. Id. Accordingly, if a compounder does not comply with either Section 503A or 503B of the FDCA and is not registered as a manufacturer with the FDA, CMS could take the position that its drugs are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member. In such a case, CMS or a MAC could adopt an aggressive enforcement posture and seek recoupment of payments previously made for such drugs on the basis that they were not covered under Medicare Part A or B because they were not reasonable and necessary. Accordingly, compounders should ensure that they are operating in compliance with the FDCA to ensure the continued reimbursement of their drugs.

If you have any questions about the implementation of the DQSA or Medicare reimbursement for compounded drugs, please contact one of the authors.