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Compounding Pharmacy Enforcement Shows no Signs of Slowing

There’s certainly a lot of enforcement activity against compounding pharmacies these days.  The ramp-up began around 2012 after a fungal meningitis outbreak that caused 64 deaths and many more infections related to the compounding activities at New England Compounding Centers.  That heightened scrutiny continues to rock the compounding pharmacy world, not just from the drug quality, safety, and security standpoint, but also from the standpoint of the potential fraud and abuse inherent in the pricing of ingredients and the final compounded product as well as relationships between compounding pharmacies and the physicians who refer to them.


Announced yesterday by the U.S. Department of Justice (DOJ), the latest enforcement action is against Professional Compounding Centers of America Inc. (PCCA), a Houston-based supplier of wholesale compounding ingredients to other pharmacies.  In many prior enforcement actions, compounding pharmacies have been charged in various schemes to defraud the federal government by filing false claims for prescriptions that were not medically necessary or not requested by patients and paying kickbacks to prescribing physicians.  While similar in some ways to prior enforcement actions, this one differs because in this case, the DOJ reached back to the wholesaler of the compounding ingredients that were sold to the pharmacies that then submitted inflated claims to TRICARE.  Here, the DOJ nabbed PPCA in a complaint alleging False Claims Act violations, specifically that PCCA reported fraudulent and inflated Average Wholesale Prices (AWPs) for the compounding ingredients that it sold to pharmacies.  Those inflated AWPs resulted in pharmacies submitting inflated claims to TRICARE, the federal payer for military personnel and their dependents.

Because TRICARE determines prescription reimbursement based in part on the reported AWP for each ingredient, where the AWPs are artificially inflated, those inflated prices can cause TRICARE to reimburse more.  Where the AWPs are knowingly inflated above the actual selling price, that action can give rise to false claims when the claims are filed listing the inflated AWPs.

However, the problems for PCCA don’t stop there.  The DOJ has also alleged that PCCA marketed the inflated AWPs and provided information to its pharmacy customers as to the resulting profit potential.  And lastly, the complaint alleges other significant inducements (such as all-inclusive travel packages) that PCCA gave to its pharmacy customers in exchange for purchasing the compounding ingredients.

Other defendants in this scheme settled with the DOJ in November 2019, agreeing to pay $22.05 million to resolve the false claims allegations.  Those defendants included the holding company, Fagron Holding USA LLC and its wholly owned subsidiaries, Freedom Pharmaceuticals Inc., and Pharmacy Services Inc.  Allegations in the case against Fagron and its subsidiaries included the artificially inflated pricing, kickbacks paid to referring/prescribing physicians for “consulting agreements” and illegal waiver of patient copays.

This enforcement action arose out of two whistleblower actions in which the government intervened and under which the whistleblowers received a total of $3,749,000.

Closing Thoughts

As mentioned in an article published recently, the U.S. Health and Human Services Office of the Inspector General earlier this year stated that compounding pharmacy fraud is a priority for government enforcement.  It hasn’t been difficult for the government to identify where fraud is occurring for many reasons, not the least of which the same schemes seem to be repeated frequently.  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. Compounding pharmacies should avoid arrangements intended to manipulate pricing and thereby increase profits, particularly where the pricing scheme attempts to exploit government payment methodologies as in this case.