Medication Management

Spending on Compounded Drugs Goes Sky High

Soaring prices and aggressive marketing fuel a buying frenzy for these specially made agents. The industry says it is meeting a need.


Thomas Reinke

Compounding pharmacies are on a tear, blanketing the country with concoctions touted to cure what ails us. Changes in federal regulations and billing mechanisms have opened the door to high prices and pitchmen who promote miraculous treatments that seem like nothing more than new fangled snake oil.

The industry counters that it is creating products that wouldn’t be available otherwise. Moreover, the compounders say that they are only dispensers, and that licensed providers are responsible for the prescriptions.

There’s no disputing, though, that the recent growth in compounded drugs has been dramatic—and very expensive. They now sit as the third most costly drug category in Express Scripts’ latest drug trend report. The company says the annual trend for compounded drugs was 128.4%, highest of the traditional therapy classes. The average cost per script was $1,164. From 2012 to 2014, the quarterly spend for compounded medications increased from $28 million to $171 million.

Per-member, per-year spending for the top 10 traditional therapy classes

Source: Express Scripts 2014 Drug Trend Report

“We initially saw an increase in the prices of ingredients coming across on claims, but then we also saw an increase in the volume of claims,” says Jo-Ellen Abou Nader, an audit and fraud executive at Express Scripts.

Jo-Ellen Abou Nader

“There is no FDA approval process to say that these mixtures work,” says Jo-Ellen Abou Nader, an audit and fraud specialist at Express Scripts.

Express Scripts reports that much of the increase stems from the alignment of the increase in AWP for bulk powders with the increase billed by the compounding pharmacies. Another important factor is a billing regulation that requires the listing of all ingredients and their prices on claims. Previously, claims included just the primary ingredient and the total cost of the script.

David Ball, a consultant and spokesperson for the International Academy of Compounding Pharmacists, acknowledged in an email the effect of more detailed line item billing. “One of the reasons we know that costs have ‘skyrocketed’ is because beginning in 2012, Express Scripts began seeing the real cost of each ingredient used in a compound,” Ball wrote. “Before, they had a single-line submission claim form that didn’t take into account the complete picture.”

Ball says volume is increasing because there’s a need for the compounded product: “There seems to be strong demand across the spectrum, including for hormone replacement therapy, ophthalmic drugs, and pediatric preparations, to name just three.”

Express Scripts says pain creams are the most common type of compounded medication, incorporating ingredients such as gabapentin, baclofen, cyclobenzaprine, progesterone micronized, and propylene glycol.

“The problem with compounded drugs is that there is no FDA approval process to say that these mixtures work, and there can be adverse reactions, overuse, and overdoses,” says Abou Nader.

Express Scripts says it has implemented a multipronged approach to rein in compounded drug costs that includes blocking payment for more than 1,000 bulk powders that it says do not provide a clinical benefit over traditional medications. The country’s largest PBM says its strategies will save its clients more than $1.9 billion in 2015. “Our clients want safety and many of them have opted in,” says Abou Nader.

But Abou Nader says when the company limited the use of bulk powders, the pharmacies started to crush tablets and capsules: “We saw one claim for a pain cream for migraines with multiple ingredients, including tramadol and zolmitriptan, that had over 2,000 tablets in it.”

A new business model for compounding pharmacies is also contributing to costs. Compounding has expanded from the original practice of individual prescriptions for specific patients to large-scale manufacturing and aggressive nationwide marketing of standardized concoctions for the general public. Compounding pharmacies are promoting their products with direct-to-consumer telemarketing campaigns and DTC websites.

“We have received tips through the fraud hot line that patients are being called by telemarketers asking if they take pain medication and if so, they are told that compounds may be a better solution,” says Abou Nader.

In February, CBS aired a report about a patient who received a monthly supply of three compounded medications he did not authorize, costing $18,000.

Abou Nader adds there’s another possible fraudulent practice in the telemarketing campaigns. “If the patients are receiving cold calls that don’t fully disclose what is going on, they are likely to be suspicious and less likely to be paying their copays. Forgiving copays could be a fraudulent practice and we audit the pharmacies for compliance.”

Regulatory changes and safety issues

The aggressive marketing stems, in part, from federal regulatory changes. In 1997, Congress passed a law that recognized compounded drugs for the first time. Prior to that they were technically unapproved new drugs subject to FDA approval, but the FDA used its discretion in not requiring reviews, explains Michael Carome, MD, director of research at the FDA watchdog agency Public Citizen.

Michael Carome, MD

Current law does not go far enough in controlling compounded drugs, says Michael Carome, MD, of Public Citizen, a consumer advocacy organization.

That law banned advertising of compounded products. It said a drug may be compounded “only if the pharmacy, licensed pharmacist, or licensed physician does not advertise or promote the compounding of any particular drug class or type of drug.”

The ban was challenged by compounding pharmacies and struck down by the Supreme Court in 2002, and the 2013 Drug Quality and Security Act (DQSA) officially removed the 1997 ban on advertising.

That law includes new regulations for “outsourcing facilities”—the compounding pharmacies that manufacture and distribute large volumes of standard dose compounds. “In essence the DQSA legalized large-scale production of compounded products for sale to the public,” says Carome.

Carome says the 2013 law did not go far enough in controlling compounded drugs and there are serious safety and quality issues.

“In our view,” he says, “the DQSA and FDA have created a tier of lower-quality drug manufacturers. They are required to adhere to good manufacturing practices but they are not required to comply with standards for traditional drugs such as safety, potency, and manufacturing consistency.” Ball, the spokesman for the international academy, has a different characterization of DQSA, noting that the law has meant that outsourcers can step forward and elect to be overseen, inspected, and regulated by the FDA.

Carome says only 52 facilities have registered as outsourcing pharmacies, but his group believes that is a just a fraction of the number that are operating (Congress choose to make registration voluntary, notes Ball). Forty-three have been inspected, which has resulted in 42 receiving citations for deficiencies in their manufacturing practices. A dozen compounders have received warning letters. “There can be a significant lag of 8 to 10 months between an inspection and a warning letter so more may be in the works.”

The FDA is working at its own pace under its limited mandate for safety to improve compounding. It has issued several draft guidances for comments and formed an advisory committee. One initiative is focused on identifying ingredients that should be banned from compounds. Separately, Carome suggests that prior authorization is a reasonable next step for health plans and PBMs who are striving to manage compounded drugs.