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Compounding Pharmacies Remain at the Tip of the Enforcement Spear

Compounding pharmacies are subjected to special licensing and permitting rules because of the heightened risk of the very nature of what they do- customizing a prescription by combining, mixing or altering ingredients to create a sterile or non-sterile medication for a given patient.  Pharmacies may only compound drugs where a commercially available drug/dose/formulation is not available.  Because of the heightened risk coupled with the high cost of compounded drugs and the increased prescribing of these expensive drugs, compounding pharmacies continue to be at the tip of the enforcement spear and a target for investigations.   This and the fact that the number of compounding pharmacies is only a fraction of the number of licensed pharmacies in the U.S., contributes to the increasing visibility when the U.S. Department of Justice prosecutes violators.

Growth of Compounding

From 2006 to 2015, the U.S. experienced a sevenfold increase in the prescribing of compounded drugs.  Recently, the compounding pharmacies market was valued at more than $9 billion and is projected to grow by another $5 billion over the next 30 years.

Increase in Enforcement

In 2013, in response to a 2012 fungal meningitis outbreak traced to the New England Compounding Center that infected 753 patients and killed 64, the Food and Drug Administration’s Drug Quality and Security Act (the Act) was signed into law.  Under this Act, the Food and Drug Administration (FDA) was granted authority to regulate and monitor the manufacturing of compounded drugs.  Additional regulations were adopted concerning compounding drugs and new requirements for tracing prescription drug products through the pharmaceutical supply distribution chain became law.  Now, while states continue to provide oversight to “traditional” compounding pharmacies, special large-scale sterile labs that distributed compounded drugs between states (referred to as “registered outsourcing facilities) are regulated by the FDA under the Act.

The FDA continues to focus on the heightened risks of compounded drugs do not have the same safety, quality, and effectiveness assurances as approved drugs and that the unnecessary use of compounded drugs exposes patients to unnecessary and potentially serious health risks.

Since the 2013 enactment of the Act, enforcement against compounding pharmacies has increased.  Imprisonment, fines, restitution and penalties are common consequences for the perpetrators of health care fraud.  As a result of a significant enforcement case in 2021, the U.S. Health and Human Services Office of the Inspector General has stated that compounding pharmacy fraud is a priority for government enforcement.

Latest Enforcement Announcements

On 10/20/2021, the U.S. Attorney’s Office for the Middle District of Florida announced that a federal jury had found two individuals guilty of healthcare fraud.  Each individual faces a maximum penalty of 10 years in a federal prison.  The two operated a marketing firm through which they utilized sales representatives to market compounded medications and received a kickback of approximately 55% of the net collection for each claim from participating pharmacies.

On 10/25/2021, the U.S. Attorney’s Office for the Northern District of Georgia announced settlement of criminal charges against a company that owned pharmacies in Georgia and Florida.  The pharmacies dispensed compounded creams to government beneficiaries and paid kickbacks to a third-party marketer to arrange for physicians to send prescriptions to the pharmacies.  In addition, it waived copayments to drive up sales and submitted claims for compounded creams that were not medically necessary.  Allegations also included charging the government significantly higher prices than “usual and customary” prices charged to other patients.  Under the settlement, the company agreed to pay $4.6 million to resolve allegations of violations of the False Claims Act.

On 10/27/2021, the U.S. Department of Justice announced guilty please of 13 individual defendants in a $126 million compounding fraud scheme.  In this case, 3 compounding pharmacy owners, 2 physicians, 2 pharmacists and 2 patient recruiters pled guilty of being involved in a multi-state scheme under which false and fraudulent claims were submitted for injured federal workers and members of the armed forces.  Physicians and the patient recruiters were paid kickbacks for the referral of these prescriptions for compounded drugs which were not medically necessary but were prescribed based on their high reimbursement rates.  To make matters worse, in many instances, the patients never requested or needed the prescriptions, but the prescriptions were mailed to them notwithstanding.

The common theme among these schemes is the manipulation of the government, other payers and patients for personal financial gain.  Whenever an arrangement involves a prescriber and a pharmacy or a pharmacy and a marketing company or marketing individuals, the arrangement may give rise to regulatory issues and should be evaluated for compliance with applicable fraud and abuse statutes.

Closing Thoughts

Pharmacies are highly regulated businesses and must carefully scrutinize any arrangements under which they might be deemed to be soliciting patients or paying kickbacks.  In the compounding pharmacy setting, the regulatory oversight is even greater.  Caution should be exercised when examining any opportunities or arrangements between compounding pharmacies and marketers or physicians.  Avoidance of such relationships and compliance with the applicable drug safety and security requirements mitigates the risk of becoming a target of enforcement.