Pharmacy Regulations Are Compounding Headaches for Taxpayers

When most Americans think about the health care system, the term “pharmaceutical compounding” does not immediately come to mind. Compounding is vital for many patients who cannot take traditional medication, and recent policy developments in Washington mean that taxpayers have a stake in the future of this sector.

The practice of compounding involves making custom medicine for patients with unique medical needs, such as removing an allergen from a drug or customizing the strength and dosage of medication. Despite the importance of this process, the current regulatory structure governing the industry remains tenuous. It must be modernized and streamlined to protect the interest of the public, shield taxpayers from increased costs and defend legitimate businesses operating in the industry.

Historically, the regulation of medicine manufacturers has been under the purview of the Food and Drug Administration, while oversight of compounding pharmacies’ operations has been left to the states. But as more compounders began to engage in cross-border sales, the state-based regulatory system became ill-suited to provide adequate oversight with each entity. These serious gaps helped contribute to major public health incidents, leading Congress to pass a law in 2013 that attempted to right-size regulations among varied types of compounding pharmacies.

FDA Commissioner Scott Gottlieb’s implementation of this law has not been perfect, but has attempted to strike a balance that avoids excessive regulatory burdens while still serving taxpayers and patients. The agency characterizes “503A” facilities as traditional pharmacies that manufacture in accordance to individual, patient-specific prescriptions and follow state guidelines. “503B” facilities, on the other hand, produce large quantities for whole classes of patients and can “outsource” across different states.

Gottlieb has also been steadfast in his commitment to ensuring that the regulatory distinction between these two categories remains as clear and fair as possible. Specifically, concerns have been raised that 503A producers may be able to skirt the law by manufacturing compound drugs in bulk and marketing them directly to health care offices rather than to individual consumers. By following this strategy, they are able to inflate their revenue by adding expensive, and often unnecessary components into certain drugs, and filing huge reimbursement claims to health programs like Medicare and Medicaid, often amounting to tens of millions of dollars.

Taxpayers are footing the bill for some of these fraudulent claims, so they have a stake in how federal regulators approach the situation. In a recent report, the Office of Inspector General at the Department of Health and Human Services examined the spending trends for compounded drugs as well as the existence of fraud in the system. The OIG noted that Medicare Part D spending for compounded drugs has skyrocketed over the last decade, rising from $70 million in 2006 to more than $508 million in 2015, a nearly 625 percent increase. While some may point to America’s aging population for the cause, the report noted that over the same period, overall Medicare Part D prescription drug spending had grown by about one-fourth that rate.

The OIG believes the trend in Medicare compound drug spending can partially be attributed to abuse of taxpayer dollars, noting that “this high growth raises concerns that some compounded drugs may not have been medically necessary or may not have been dispensed.” The office also highlights the likelihood of fraud cases involving pharmacies paying kickbacks for prescriptions or filling prescriptions that should have gone unfilled. Hundreds of millions of dollars of fraud has been uncovered and prosecuted as a result.

At least one other federal agency has been attempting to find a sensible approach toward paying for compounded drugs that can help patients and taxpayers at the same time. Between 2010 and 2015, the Pentagon’s Tricare program went from paying $23 million in an entire year for compounded medicines to nearly $550 million per month, forcing authorities to request budget reprogramming from Congress.

Then, administrators diligently policed the use of these services and adopted private insurance plan rules for approving them, driving costs back down and saving money for taxpayers. Although the crackdown has been criticized as insufficiently flexible for service people and veterans’ needs, the Pentagon’s experience can provide some lessons for the rest of the government.

Gottlieb should be commended for his dedication in finding solutions for compounding regulations that protect taxpayers, while keeping a watchful eye on the burdens such rules can impose on the private sector and consumers. The draft guidance proposes migrating more 503A compounders to the 503B category in order to consolidate FDA oversight for those that intend to mass produce compound medicines. This shift will ensure better managed oversight, phase in Current Good Manufacturing Practice regulations and provide stability for the compounding sector. It’s a tricky balancing act, but a necessary one.


Pete Sepp is President of the National Taxpayers Union, a nonprofit dedicated to advocating for taxpayer interests at all levels of government.

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