Compounded Drugs and Medicare Part B: OIG Report Recommends Payment and Oversight Changes


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

The OIG Report recommended that CMS:

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

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

Background and OIG Findings

Medicare Part B covers some outpatient prescription drugs and biologicals, including drugs incident to a doctor’s treatment, those covered by statute and drugs used in conjunction with durable medical equipment. In order to receive Part B reimbursement, providers submit claims to one of the nine Medicare Administrative Contractors (MACs) in 13 Medicare Part A and Part B jurisdictions using Healthcare Common Procedure Coding System (HCPCS) codes.

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

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

Recommendations and CMS Response

Establish a method to identify Part B claims for compounded drugs

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

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

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

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

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

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


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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