CMS Oversight Found Lacking on Compounded Drugs in Medicare Part D, OIG Audit Reveals

A recent audit by the Office of Inspector General found that the Centers for Medicare & Medicaid Services lacked adequate oversight of compounded drugs in Medicare Part D from 2017 to 2019. According to the audit, incomplete data and the absence of standardized reporting requirements hindered CMS’s ability to verify accurate payments and ensure program integrity.

The audit, conducted by the Department of Health and Human Services Office of Inspector General, reviewed Medicare Part D claims data from 2017 through 2019 and found significant gaps in the Centers for Medicare & Medicaid Services’ ability to oversee compounded drugs dispensed to beneficiaries. According to the report, CMS lacked access to complete and standardized data on compounded medications, which impeded verification of accurate payments and compromised program integrity.

Between 2006 and 2015, Medicare Part D spending on compounded topical drugs increased by 625 percent, and the number of beneficiaries receiving compounded products rose by 281 percent, according to prior OIG reports cited in the audit.

The OIG highlighted that pharmacy claims data did not include detailed information on the active and inactive ingredients used in compounded drugs, making it difficult for CMS to confirm whether payments were appropriate. The audit noted that while the National Council for Prescription Drug Programs provides billing guidelines, there are no universal requirements for pharmacies to register as compounding pharmacies or to report the specific types of compounded products dispensed. This absence of standardized reporting has created challenges in evaluating both total and per-patient costs for compounded drugs in Medicare Part D.

This rapid growth in compounded drug use has raised concerns about potential fraud, waste, and abuse, as compounded preparations are not subject to the same regulatory oversight as commercially available medications. The Food and Drug Administration has previously expressed concerns about compounded drugs being distributed without adherence to proper safety requirements.

The audit also identified risks that some pharmacies may not have complied with federal and state compounding standards, which could affect patient safety and the integrity of Medicare Part D. The OIG has been increasing its investigations into fraud related to compounded drugs, reflecting systemic vulnerabilities in the program’s oversight of pharmacy compounding activities.

CMS plan sponsors typically calculate payments for compounded drugs based on the cost of FDA-approved ingredients or bulk substances. However, the lack of ingredient-level data in pharmacy claims complicates efforts to verify these payments. The audit used a 20 percent nationally representative sample of Medicare claims from 2017 to 2019 to conduct its retrospective analysis, underscoring persistent data limitations that affect outcomes research and regulatory oversight.

To address these issues, the OIG recommended that CMS collaborate with plan sponsors to improve the accuracy and completeness of reporting for compounded drug claims under Medicare Part D. The report also urged CMS to conduct a risk assessment of its oversight of pharmacies compounding medications for beneficiaries and to enhance data collection on the ingredients used in compounded preparations. Developing a framework for future studies was also suggested to improve regulatory oversight and cost transparency in this area.

The challenges identified in the audit reflect long-standing concerns. A 2016 OIG report first drew attention to the significant growth in spending on compounded topical drugs within Medicare Part D. Since then, the OIG’s work plan has included ongoing risk assessments of CMS’s oversight of pharmacy compounding, with an emphasis on mitigating fraud and ensuring patient safety.

State-level regulation remains the primary mechanism for overseeing compounding pharmacies, but the audit noted that federal oversight is hindered by incomplete national data. The OIG’s findings underscore the need for improved data collection and reporting standards to strengthen CMS’s ability to monitor compounded drug use and payments within Medicare Part D.