Compounding the Problem: The Government Cracks Down on Compounding Pharmacy Fraud and Abuse

Vol. 12 No. 8

AuthorAuthorI. Introduction

Citing to data from the Department of Defense (DOD), the Wall Street Journal reported in early February that TRICARE – the federal government payor for military health insurance – paid $1.75 billion in fiscal year 2015 for compounded drugs, including creams.1  However, after recently conducting parallel federal and state investigations, investigators from various agencies (including the DOD, Department of Justice (DOJ), and HHS Office of Inspector General (OIG)) suspect that the majority of those bills are fraudulent. Indeed, due in part to the dearth of regulations pertaining to compounding pharmacies, as well as the rates at which federal payors (especially TRICARE) reimburse compounded drugs, the market for such drugs has, to this point, been rife with suspected fraud and abuse. 

This article provides an overview of compounding pharmacies and will discuss recently uncovered alleged fraudulent schemes in the industry. Additionally, this article serves as a “what to look for” guide for healthcare attorneys advising their clients with regards to relationships between compounding pharmacies and prescribing physicians.  

II. Background: Compounding Pharmacies and Compounded Drugs 

According to the Food and Drug Administration (FDA), “compounding” is a practice whereby a pharmacist, physician, or other authorized professional under the supervision of a pharmacist or physician “combines, mixes, or alters ingredients of a drug to create a medication tailored to the needs of an individual patient.”2 Physicians may decide to prescribe compounded drugs over ordinary prescription medications for a variety of reasons. For example, a patient incapable of swallowing a pill may seek an alternative compounded medication in liquid form.

Although the FDA retains some authority over the operations of compounding pharmacies, most regulatory authority in this area remains with the individual state boards of pharmacy.3 Moreover, the compounded drugs themselves are not FDA-approved; unlike most other prescription medications, “FDA does not verify the safety, or effectiveness of compounded drugs.”4

Originally, Section 503A of the Food and Drug Administration Modernization Act of 1997 exempted compounded drugs from the FDA’s standard drug approval requirements with the condition that compounded drug providers refrain from advertising or promoting such drugs.5 However, after the Supreme Court ruled that the advertising prohibition violated commercial speech rights under the First Amendment,6 compounding pharmacies have continually engaged in such promotional activities. Marketing blitzes over the Internet and through telemarketers have generated booming sales of compounded drugs since the Court’s 2002 decision, and promotional pitches for products such as compounded scar and pain creams have targeted seniors, military personnel, and even professional athletes.7 

Indeed, due to TRICARE’s high rates of reimbursement for compound medications,8 TRICARE beneficiaries (i.e., military personnel and their families) have been subjected to the most “extreme sales tactics,” according to the Military Times. Such tactics have included “cold calls,” Craigslist searches for sales reps and customers, solicitations inside military hospital pharmacies, and even food trucks set up outside of military bases that promise free lunch to TRICARE beneficiaries who sign up to receive compound medications.9

III. Alleged Fraud in the Compounding Pharmacy Industry 

Recent settlements and reported investigations of alleged fraud and abuse by compounding pharmacies highlight the government’s increased level of scrutiny over the industry.10 Although the extent of such allegedly fraudulent practices reaches beyond the TRICARE program,11 fraudulent billings for compounded drugs to TRICARE have received the bulk of the government’s attention. Data from the Defense Health Agency (DHA, the arm of the DOD responsible for overseeing the TRICARE program) shows that TRICARE’s costs for compounded drugs rose from $5 million in 2004 to $514 million in 2014.12 Both the DHA and the DOJ picked up this surge and, upon investigation, federal authorities uncovered the allegedly fraudulent schemes that serve as the impetus for the spike in costs. 

These investigations, which are currently underway across several states and in several U.S. Attorneys’ Offices, have honed in on potential false claims, kickback arrangements, and even improper auto-refill programs.13 Although each investigation has its own unique set of facts and circumstances, the typical TRICARE scheme proceeds as follows: Using the aggressive marketing tactics described above, pharmacy sales reps and others hired to promote compound medications market these drugs directly to TRICARE beneficiaries. Patients may be asked to fill out an online form with their TRICARE number included, or to simply send their insurance information straight to the sales rep.14 The information is then sent along to a physician, who writes a prescription and sends it to a compounding pharmacy. According to the DOD, “[t]hese prescriptions may not be tailored to the beneficiary’s needs, and sometimes the beneficiary never even meets or speaks to a doctor before the pharmacy sends them the drug.  Not only that, but often there is little or no evidence that these products are safe or effective. . . .”15 Indeed, lack of medical necessity and the failure to establish proper physician-patient relationships served as the basis of the DOJ’s allegations of False Claims Act (FCA) violations in two recent settlements with Florida compounding pharmacies.16

Moreover, pharmacies across the country have billed TRICARE as much as $10,000 to $20,000 per prescription, despite the fact that the cost to the pharmacy to make the drugs is only a fraction of the submitted cost.17 These high profit margins allow compounding pharmacies to provide incentives and other kickbacks to physicians for agreeing to write prescriptions.  According to one Assistant U.S. Attorney in Florida, such kickback arrangements have “involved doctors conducting sham research studies and being paid ‘speaker fees’ in exchange for prescribing medicine.”18 In the case of the most recent settlement in Jacksonville, Florida, the four physicians involved allegedly received kickbacks in the form of profit distributions after the pharmacy had been reimbursed.19 Indeed, to enhance the scheme even further, these four physicians allegedly recruited other doctors to write prescriptions in exchange for a share of the money.20 Investigations are currently under way in other states, such as Mississippi and Texas.21

IV. Avoiding Illegal Arrangements Between Compounding Pharmacies and Prescribing Physicians

As healthcare attorneys well know, the Anti-Kickback Statute (AKS) makes it a felony for anyone to offer, pay, solicit, or receive any form of remuneration in exchange for the referral of federal healthcare program business.22Thus, for example, the AKS prohibits the payment or receipt of anything of value in exchange for a physician writing a prescription for compounded medications, if claims for those medications are submitted to a federal healthcare program. Any such claims submitted to a federal healthcare program for reimbursement are therefore “tainted” by the kickback and, because violations of the AKS serve as predicates to FCA liability,23 those claims will also be considered “false” under the FCA, thereby subjecting both parties to the alleged kickback scheme to treble damages, per-claim penalties, and possible program exclusion in addition to potential criminal liability.24

That does not mean, of course, that any remuneration from a compounding pharmacy to a prescribing physician automatically violates the AKS. First, the AKS is an intent-based statute and, so long as no “one purpose” of the remuneration is to induce referrals, there is no violation of the statute.25 Second, there are a number of “safe harbors” to the AKS and, if a relationship falls under such a safe harbor, there is no violation.26 

One common safe harbor that could apply to the compounding pharmacy-prescribing physician relationship is the safe harbor for personal services and management contracts.27 An example of a relationship between a compounding pharmacy and a prescribing physician that might fall under this safe harbor is a bona fide speaker program, wherein the pharmacy pays the physician to speak at conferences and other events about the pharmacy’s products. If the requirements of the personal services safe harbor are met (e.g., among other things, the agreement is for at least one year, set out in writing, signed by the parties, covers all of the services that the physician will provide to the pharmacy, the aggregate compensation is set in advance and is consistent with fair market value and does not take into account the volume or value of referrals), then such a relationship would fall under the safe harbor and be exempted from potential AKS liability.28 Accordingly, in order to avoid such potential liability, both physicians who prescribe compounded drugs, on the one hand, and compounding pharmacies, on the other hand, must carefully assess their relationships with one another to ensure compliance with the AKS.

Moreover, even where the physician does not receive any financial gain from writing prescriptions, the physician must remain wary of the fact that federal healthcare programs only reimburse for “medically necessary” products and services.29 Indeed, because healthcare providers must certify up front that all products and services rendered were medically necessary, billing for medically unnecessary services constitutes a false certification and therefore violates the FCA.30 Thus, physicians who prescribe compounded drugs may further subject themselves to FCA liability if they fail to establish the proper physician-patient relationship necessary to determine whether the patient truly needs the specially-made medications. 

A 1999 Fraud Alert issued by the OIG pertaining to improper physician certifications in dealing with medical equipment suppliers and home health agencies parallels the relationship some physicians have with their compounding pharmacies.  As the Fraud Alert states:

Unscrupulous suppliers and providers may steer physicians into signing or authorizing improper certifications of medical necessity. In some instances, the certification forms or statements are completed by [equipment] suppliers or home health agencies and presented to the physician, who then signs the forms without verifying the actual need for the items or services. In many cases, the physician may obtain no personal benefit when signing these unverified orders and is only accommodating the supplier or provider. While a physician's signature on a false or misleading certification made through mistake, simple negligence, or inadvertence will not result in personal liability, the physician may unwittingly be facilitating the perpetration of fraud on Medicare by suppliers or providers. When the physician knows the information is false or acts with reckless disregard as to the truth of the statement, such physician risks criminal, civil, and administrative penalties.31

Thus, to avoid such liability, physicians must take care to ensure that each patient for whom a prescription is written is seen personally. Moreover, proper documentation of the visit and the patient’s medication needs will lower the chance that medical necessity is later questioned.32

V. Conclusion 

The government continues to crack down on compounding pharmacies and prescribing physicians for allegedly fraudulent billing of TRICARE and other government payors, particularly as it relates to potentially improper relationships between those pharmacies and physicians under the AKS. Understanding the underlying schemes and the causes of the recent uptick in enforcement will greatly aide physicians and pharmacies in maintaining compliance. 


Scott Grubman is a partner with the law firm of Chilivis Cochran Larkins & Bever (CCLB) in Atlanta, Georgia, where he represents healthcare providers in connection with government investigations, both civil and criminal, and False Claims Act litigation. Prior to joining private practice, he served as both an Assistant U.S. Attorney in Savannah, Georgia, and as a Trial Attorney for the DOJ in Washington, D.C. He may be reached at

Samuel Shapiro is an associate at CCLB, where he represents healthcare providers in connection with litigation and regulatory matters.  He may be reached at     


Devlin Barrett, U.S. Probes Possible Fraud Linked to Compounding Creams, Wall Street Journal (Feb. 8, 2016),

2, “Compounding and the FDA: Questions and Answers,” (last visited March 20, 2016).





5, “Information on Compounding,” (last visited March 20, 2016).


Thompson v. Western States Med. Ctr., 122 S. Ct. 1497 (2002).  Importantly, the constitutional issue in Thompson should not be confused with the constitutional issues that have arisen in off-label promotion cases brought under the Food, Drug and Cosmetic Act.   See, e.g., United States v. Caronia, 703 F.3d 149 (2d Cir. 2012) (holding that off-label drug promotion was protected by First Amendment).


Professional athletes have not only been the target of these pitches, but companies have actually used professional athletes in these pitches. Indeed, as noted in the Wall Street Journal, former NFL quarterback Brett Favre has promoted pain creams made by one of the Mississippi compounding pharmacies currently under investigation. See Barrett, supra note 1.


For reasons that have not been made clear by the DOD, TRICARE typically reimburses compounded medications at rates significantly higher than reimbursement paid by other payors such as Medicare or private insurance companies, thereby making the TRICARE program the primary target of recent fraudulent billing schemes involving these medications.


Patricia Kime, Pharmacies push pricier drugs to Tricare users, Military Times (April 10, 2015),


Although this particular scrutiny over potential fraud and abuse is relatively new, the compounding pharmacy industry is certainly no stranger to government scrutiny in general.  For example, in 2012 a large Massachusetts-based compounding pharmacy came under scrutiny after a meningitis outbreak was linked to its drugs.  See Toni Clarke and Aaron Pressman, Meningitis-linked firm sold drugs without requiring prescriptions – emails, Reuters (Oct. 13, 2012),  This led to a consumer alert from the FDA in December 2012 entitled “The Special Risks of Pharmacy Compounding.”  (Available online at


See Evan Sweeney, $300M spike in TRICARE monthly spending linked to compounded drugs, FierceHealthPayer (May 11, 2015), (“Similar spending spikes have occurred among private insurance providers in recent years. In 2013, Harvard Pilgrim said they were [sic] no longer covering compounded medications because of cost and safety concerns. Last year, other payers such as UnitedHealth Group and Blue Cross Blue Shield jumped on board.”).


See Dana Treen, $10 million settlement in Jacksonville prescription case part of $2 billion fraud probe, The Florida Times-Union (Feb. 11, 2016),


See Thomas Sullivan, States Target Compounding Pharmacies over Claims to Military Health Program, Policy and Medicine (Nov. 17, 2015),


See Treen, supra note 12; see also, Cheryl Pellerin, DoD Helps Protect Beneficiaries from Deceptive Pharmacy Practices, DoD News (May 14, 2015),


Pellerin, supra note 14.


DOJ Press Release, United States Announces New round of Compound Pharmacy Settlements Expected to Result in More Than $30 Million in Fines and Repayments (Nov. 25, 2015),; DOJ Press Release, United States Announces Approximately $10 Million Settlement with Four Physicians and Two Compounding Pharmacies (Feb. 11, 2016),


See id.; see also, Barrett, supra note 1; Treen, supra note 12.


Derek Gilliam, Jacksonville pharmacies accused of bilking military healthcare program reach multi-million dollar settlements, Jacksonville Business Journal (Nov. 23, 2015),


DOJ Press Release, United States Announces Approximately $10 Million Settlement with Four Physicians and Two Compounding Pharmacies (Feb. 11, 2016),




See Kevin Krause, North Texas pharmacy in federal probe is accused of paying kickbacks to doctors, Dallas Morning News (Feb. 5, 2016),; see also Barrett, supra note 1.


42 U.S.C. § 1320a-7b(b).


Id. § 1320a-7b(g).


31 U.S.C. § 3729.


31 U.S.C. § 3729.


The AKS safe harbors can be found at 42 C.F.R. § 1001.952.  It should be noted that, unlike exceptions to the Stark Law, which are mandatory (i.e., if a relationship triggers the Stark Law but does not fall squarely under one of the Stark exceptions, there is a violation regardless of intent), the AKS safe harbors are voluntary.  Because the AKS is an intent-based statute, a relationship that falls outside of a safe harbor does not violate the statute unless the requisite intent is present.


42 C.F.R. § 1001.952(d).




For example, healthcare providers submit claims to Medicare and Medicaid on the CMS-1500 form, which requires the provider to certify that the services were “medically indicated and necessary to the health of the patient.” A sample of the CMS-1500 form can be found at


See id.


OIG Special Fraud Alert, “Physician Liability for Certifications in the Provision of Medical Equipment and Supplies and Home Health Services,” (Jan. 1999), available at


Although not the focus of this article, it should be noted that the DOJ and OIG have, over the last year or so, increased their scrutiny of individual physicians.  See, e.g., the “Yates Memo” (available at  Now, instead of simply focusing on the corporate entity with the “deep pockets,” federal authorities will also take steps to punish individual physicians that violate healthcare rules and regulations and, therefore, attorneys that represent large healthcare corporations and those who represent individual physicians must be intimately aware of those rules and regulations and advise their clients accordingly.



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