Fierce Exclusive: After explosion of compounded drug fraud, legal experts say party's over

Health insurance, pen and stethoscope

In April 2015, Tricare, the government-run health program that covers military personnel and veterans, spent $545 million on compounded pharmaceuticals, which was more than 58 times its monthly spending just three years prior. In just one month, Tricare surpassed the total amount spent on compounded drugs during the previous fiscal year.

According to data provided by Tricare to FierceHealthPayer: Antifraud, the health plan saw a gradual rise in spending on compounded drugs over a three year period, which grew to more than $1.75 billion in FY 2015, accounting for nearly 18 percent of the total amount Tricare spent on all drugs dispensed through military treatment facility pharmacies.  

Within the last month, federal enforcement officials from the FBI, the Department of Justice (DOJ) and state agencies have launched a widespread investigation into fraudulent practices of compounding pharmacies in several states. The DOJ has estimated compounded drugs contributed to $500 million in fraudulent payments, most of which targeted Tricare. Experts say fraud schemes were orchestrated by individuals eager to capitalize on the willingness of insurers--both public and private--to pay as much as $10,000 for a tube of pain or scar cream with questionable effectiveness.

"If you take $10,000 and put it in a brown paper bag and lay in on the side of a road, someone's going to pick it up," Jeff Baird (pictured left), a healthcare attorney with Brown & Fortunato P.C. in Amarillo, Texas, said in an exclusive interview with FierceHealthPayer: Antifraud. "Well, that's what we've seen with compounding pharmacies."

In May, Tricare announced it would screen the ingredients in all compounded drug claims to ensure they were safe and effective, a move that essentially cut off the spigot of potentially fraudulent payments that had flooded the health plan. Spending promptly dropped from $75 million during the first 11 days of May, to less than $5 million during the remainder of the month, after Tricare strengthened its screening procedures. Spending has declined significantly ever since. In January 2016, Tricare spent $8.3 million on compound drugs, down from $194 million in January 2015.

Although the federal enforcement agencies have just begun investigating pharmacies across the country, the spike in claims from compounding pharmacies had a far-reaching effect that bled into the nation's defense budget. In July, Tricare officials sent a letter to the Senate Committee on Armed forces detailing a $2 billion funding shortfall in the Tricare budget "largely driven by the compounded pharmaceutical costs and utilization." Officials asked Congress to authorize a $900 million transfer from other parts of the Department of Defense budget, essentially pulling money away from the military to cover the gaps exposed by compounding pharmacies.

"To me, what makes this problem particularly egregious and noteworthy is this is the first time in my life I can think of a fraud scheme that targets the military," said Jason Mehta, assistant U.S. attorney for the Middle District of Florida in an exclusive interview with FierceHealthPayer: Antifraud. "It threatens the existence of a program."

Now, according to Mehta and other legal experts, DOJ investigators will be peeling back the layers of fraud, including whether pharmacies paid commissions to marketers to recruit Tricare patients, and whether the compounded drugs pharmacists were selling were medically effective.

"If they are selling a cream that literally is just a cream, and they are saying it's going to cure your arthritis, and it's going to cure your skin cancer, and it's going to cure gout, but there's no medical proof to that, they are exaggerating the effectiveness," Michael Weinstein (pictured right), chair of the white collar defense and investigations department at Cole Schotz P.C. in Hackensack, New Jersey, and a former DOJ attorney, told FierceHealthPayer: Antifraud. "I think the government gets concerned, and rightfully so, when companies do something like that."

Spending spikes pave the way

Although pharmacies appear to have targeted Tricare by marketing drugs to veterans, the military health plan was not the only payer seeing spikes in spending on compounded pharmaceuticals.  

In 2013, Harvard Pilgrim Health Care, the second-largest insurer in Massachusetts, said it would no longer cover compounded medications due to a 171 percent increase in claims for compounded drugs from 2011 to 2012 that led to three times as much in spending. Several other large payers followed suit. In 2014, Express Scripts, the nation's largest pharmacy benefits manager, announced it would no longer pay for a large portion of ingredients used in compounded drugs, citing a $140 million spike in spending between 2012 and 2014.

Within the Tricare program, spending on compounded drugs escalated rapidly at the end of 2014. For nearly two years prior, monthly spending increases were relatively gradual, ranging from $300,000 to as much as $12 million some months. But by December 2014, spending on compounded drugs had suddenly jumped by $60 million. Between December 2014 and April 2015, Tricare spent $1.46 billion on compounded pharmaceuticals. In April 2015, according to Tricare, when spending peaked at $545 million, compounded drugs made up just 0.5 percent of prescriptions submitted to the program and accounted for 20 percent of costs.

DoD spending on compounded drugs, FY 2015

Month Amount (millions)

October 2014$85.4 

November 2014$90.3

December 2014$150.6

January 2015$194

February 2015$233.5

March 2015 $335

April 2015$545

May 2015 (new screening procedures)$79.2

June 2015$10.2

The reason behind the escalating costs was simple: Compounding pharmacies were submitting claims for drugs with price-tags as high as $10,000, and insurers--both public and private--were paying the tab. That attracted "code killers," according to Baird, providers that find an expensive medical code and "bill the heck out of it."

Several factors contributed to that $10,000 price tag. In a written response to questions, George Jones, M.D., chief of pharmacy operations for the Defense Health Agency, which oversees Tricare, told FierceHealthPayer: Antifraud that by the fall of 2015, most private insurers had ceased coverage for compounded drugs, leaving Tricare as one of the largest insurers still paying.

Jones added that because compounded drugs are customized to meet the individual needs of patients, prices varied widely depending on what each compound contained. Furthermore, Tricare drug reimbursement is calculated using average wholesale price (AWP), which certain providers capitalized on. Jones says Tricare began the extensive process of changing its pharmaceutical formulary in November 2014, just before it saw a massive spike in payments.

"In the case of compounded drugs, the AWP was being determined by a small industry group working in collusion that allowed them to drive up the cost with no reasonable limits on what they could charge per ingredient," Jones said.

In Florida, authorities saw compounding pharmacies submitting massive quantities of claims to Tricare. Frequently, those pharmacies had an unusually large number of prescriptions coming from one physician. From 2014 to the end of 2015, pharmacies in the middle district of Florida alone accounted for $500 million in Tricare spending, representing one-quarter of spending on compounded prescriptions nationwide, Mehta says.

Over the past year, Mehta's office has collected more than $50 million in recoveries linked to compounding pharmacies, including a recent $10 million settlement in which a pharmacy was making 90 percent profit on compounded drugs.

"It really is just the tip of the iceberg," he said. "The civil and criminal actions we've seen so far are just beginning."

Last month, authorities seized $15 million in assets during raids of a dozen pharmacies in four different states, including nine in Mississippi. Experts say investigators are looking to see if the drugs are medically necessary and effective, whether they are being refilled without a patient's authorization, and if pharmacies violated state or federal anti-kickback laws.

"It's the modern-day equivalent of a snake oil salesman," Weinstein said. "Individuals are being sold a product which has absolutely no effectiveness in healing a person."

Weinstein adds investigators will likely test the effectiveness of various products and creams, and sift through internal emails to see whether the company's marketing department was instructed to present products as cure-alls even when internal studies showed it was ineffective. The extent to which a company intentionally misled the government will determine whether or not the DOJ will proceed with civil or criminal charges.

"I think the focus will be looking specifically at whether pharmacies knew or should have known the prescriptions they were filling were or were not bona fide," Mehta says.

Schemes rely heavily on kickbacks

A common thread among compounding pharmacies that engage in fraudulent billing is the use of marketers who would recruit patients, according to Baird. Pharmacies that offered incentives--often in the form of cash payments to marketers--violated Medicare's Anti-Kickback Statute. On top of that, pharmacies often waived the 20 percent co-pay for the patient, which qualifies as a beneficiary inducement. If Tricare reimburses $10,000 for a particular cream, even after waiving the co-pay, the company will make $8,000.

"It's a false claim because [the pharmacy] is misrepresenting to Tricare really what the true cost of the product is," Baird said, adding that production costs for compounded drugs are often $500 or less.

A potential legal hurdle for government prosecutors is that Stark law--which governs kickbacks paid to physicians--does not apply to Tricare. In cases where physicains had a partial ownership in a pharmaceutical company, self-referring Tricare patients would not be in violation of Stark law. In some states, however, antifraud laws offer additional tools for prosecutors.

"My experience has been that some state statutes are as restrictive as federal law, and others are less so," Baird says.

That doesn't mean physician owners haven't found less overt ways to generate pharmacy referrals. Baird said he saw one scheme where doctors with an ownership stake in Pharmacy A were referring patients to Pharmacy B, and physician owners from Pharmacy B were returning the favor.

Ultimately, legal experts expect to see a number of physicians and pharmacists face prison sentences, particularly in egregious cases that warrant criminal charges. Many others will face multi-million dollar settlements and ultimately go out of business.

"The pain cream party has come to an end," Baird said. "It was a real nice run for a number of pharmacies, and now they're getting nailed."