Beyond the Pestle and Mortar

Breaking down the trend toward compounded medications.

March 18, 2015 Photo

The use of compounded medications is trending nationwide as a reasonable alternative to commercially and readily available prescription care. This à la carte drug preparation is being billed as the therapy treatment du jour for injured workers nationwide, even when commercially manufactured medications are available at greatly reduced costs. Why? In many instances it is simply because the workers’ compensation system is available to foot the bill. Employers, payers, and claims professionals handling such matters should be happy to know that there are available solutions and, in most jurisdictions, a framework in place for employers and the claims community to curtail the trend.

Addressing compounded medications may be novel, but employers, workers’ compensation claims professionals, and litigators have been faced with demands for payment of nontraditional therapeutic medical care for years. We have all had to deal with a script from a physician prescribing an injured worker a hot tub, gym membership, or some newfangled device for therapeutic treatment. Where the efficacy of the care cannot be supported, denials have held in multiple jurisdictions for decades.

The same review strategy to address an obligation for payment of a compounded medication should prove just as successful. At the outset, an immediate focus should be on the documentation from the medical provider. If proper and sufficient, the inquiry next would turn to the reasonableness and necessity of the prescribed care and an examination of more proven, cheaper options. Finally, the matter can be placed in an administrative or peer review forum, where jurisdictionally appropriate.

Understanding Compounded Medications

The practice of compounding medications is as old as the pestle and mortar itself. A compound, at its definition, is combining, mixing, or altering several ingredients to make a new and unique medication. Once a routine activity of the pharmaceutical profession, as medications became commercially prepared and regulated, compounding remained primarily to address unique needs of the individual patient.

When not considered “manufacturing,” the practice of compounding is predominantly a state-regulated industry that, with exception, remains out of the crosshairs of the Food and Drug Administration (FDA). Most notably, compounders cannot be required to obtain FDA approval for “patient-specific” drug products. There is a fine distinction between the individual FDA oversight of the ingredients being compounded versus the nonregulation of the finished, compounded product. Manufacturers and “outsourcing facilities” remain subject to federal regulation, a landscape that remains in flux subsequent to the Compounding Quality Act of 2013.

Due to its patient-specific nature, a utilization analysis of compounded medication within a workers’ compensation setting requires an understanding and application of each state’s respective workers’ compensation, drug regulation, and cost containment laws. The starting point for reaching a solution requires an understanding of where these provisions intersect.

In April 2014, Express Scripts, the largest pharmacy benefit management organization in the U.S., released its Workers’ Compensation 2013 Drug Trend Report, which provided an analysis of workers’ compensation prescription drug costs and utilization. Key findings of the report included: 

  • A large portion of narcotic spend (84 percent) can be attributed to only 20 percent of injured workers.
  • The percentage of injured workers obtaining compounded medications doubled from 2012 to 2013, costing an average of $1,299.13 per prescription.
  • An increase in the utilization of compounded medications is a major contributor to the overall narcotic spend because commercially available alternatives are hundreds, if not thousands, of dollars less.

While it focuses on pain management drugs and multiple therapy classes, the report also addresses utilization concerns with the “batch-to-batch variability” of compounded medications. The landscape is absent reliable clinical studies that support the efficacy of compounded medications when compared to commercially available alternatives. As such, physicians and pharmacists will have a difficult time providing justification for the utility of compounded medications. The vigilant claims professional can navigate this framework to question the reasonableness and necessity of a compounded script.

Efficacy Concerns

Proponents of compounded medications often cite studies that reveal less long-term damage to the body in chronic pain patients than through traditional pain-pill usage. There also are situations where compounded medications may be the less expensive option for patients whose tolerance of traditional pain medications is at issue. Even in light of these potential benefits, however, efficacy concerns remain legitimate. Protocols for preparing each compound are not necessarily standardized, which raises concerns for strength, quality, and purity. While a licensed pharmacist must oversee the process, the actual compounding is often done by a technician who has received limited classroom training.

In a case focusing on the standards and practices within the compounding industry, a California baby died in June 2014 after he came into contact with his mother’s compound transdermal cream. The mother, who was being treated for a work injury, was prescribed a topical compound that included a synthetic pain reliever (tramadol) and cough suppressant (dextromethorphan). The coroner found a lethal dose of the compounded medication in the baby’s system. Workers’ compensation and court documents reveal that the filling pharmacy billed $1,700 for a 25-day supply of the compounded cream. Facts are in dispute, and lawsuits remain pending.

This tragedy also led investigators to evidence of a kickback scheme, with millions of dollars changing hands among broker doctors and pharmacists so that they will continue to prescribe the compounded cream to workers’ compensation patients. Kickback scheme or not, the profit margins in compounded medications remain the driving force. Often, brokers work with and for pharmacies and physicians to market and drive the “business.”

To combat the questions of purity, efficacy, and strength, the industry has a compass. The Professional Compounding Centers of America (PCCA) offers membership to compounding pharmacies to gain access to an extensive staff of highly experienced pharmacists. PCCA maintains an FDA-approved facility, and often is the main source for chemicals and formulas for its members.

Access to PCCA also affords members a means to have its compounds tested by a third party in order to verify the strength of the end product. While the compounding industry has established standards, in most nonsterile facilities, membership often is maintained for marketing purposes without regulation or guarantee that a standard is being followed.

Employer Protocols

For employers or payers, an effective documentation triage needs to be established at the outset. Vigilance is required to establish a practice to review requests for payment of compounded medications. Forms and proper medical documentation must comply with state regulations to ensure that charges are usual, customary, and reasonable. Direct communication with the medical provider to document the care and confirm the availability and utilization of commercially available alternatives is an effective initial plan of action.

Some states, such as Delaware and Mississippi, have enacted legislation to limit the cost of compounded drugs, and laws in other states are pending. In all instances, cost containment and fee schedule laws must be consulted for the individual ingredients. Formularies—a list of drugs that are covered—can be established and used to contain costs, although a formulary is not necessarily grounds for denial once a compound has been prescribed.

After initial triage of documentation, queries should be posed to the prescribing physician. “We are simply denying the medication in other jurisdictions and telling the medical providers that they need to prescribe something that is of usual and customary cost. No one has really pressed us on it, as I doubt they would be able to substantiate the cost in court compared to what a ‘regular’ pharmacy would charge to make the same concoction,” says Nicole Topper, team lead at Sedgwick Claims Management Services.

Coupled with this approach, it is a best practice to use a peer review or utilization review forum in states where available. This will shift the initial burden to the medical provider and demonstrate that the compounded script is reasonable and necessary, a central requirement in most state workers’ compensation statutes. A traditional independent medical evaluation, although sometimes cost-prohibitive, also can be employed in more complex situations.

Challenging Prescriptions

If the reasonable and necessary threshold is crossed, payers in states with cost containment and fee review regulations are encouraged to break down the compounded medication to its ingredients before considering payment. The purpose of most regulations is to curtail the escalating cost of medical expenses associated with treating a work injury. Breaking down a compounded script into individual ingredients is the logical progression to determine payment obligations. Failing to interpret cost containment regulations in this manner would be a reopening of Pandora’s Box.

“We are used to carriers questioning scripts and denying payment,” says William Gallagher, operations manager for CKC Inc., a parent company for multiple retail pharmacy locations. “It is no different with compounded medications.” Since 2012, Gallagher has been overseeing the compounding operations for CKC. He advises that his company remains vigilant and flexible to ensure coverage is available for the compounded medication prescriptions his pharmacies receive.

“Most insurance carriers require us to take a look at APIs—active pharmaceutical ingredients—when filling a script,” says Gallagher. “Many larger organizations, such as Express Scripts, have lists of ingredients that they have stopped covering. In such instances, we will often use a commercially available alternative. Or, if a compounded medication requires something such as pure gabapentin powder and the powder is denied, we often will grind a gabapentin tablet at much cheaper cost to complete the compounded medication.”

In Pennsylvania, for example, the medical cost containment regulations cap the cost of individual prescription medications at 110 percent of the average wholesale price (AWP). When repricing a compounded script, the APIs should be priced individually. For example, a submitted health insurance claims form for a compounded cream containing ketamine HCL powder, clonidine HCL powder, gabapentin powder, ketoprofen powder, and PCCA lidoderm base came to a sticker price of nearly $2,800. Taking the average generic price for each of the five ingredients and applying the appropriate regulations results in a much more economical $400 cream.

Unfortunately, this approach cannot be applied universally to yield cost savings for certain compounded scripts. While pharmacies are mandated to bill at AWP, Gallagher advises that not every compounded recipe is able to be reduced. “Often the mechanics of a compounded formula do not provide a commercially available alternative at the strength being prescribed,” he warns. “What happens is that there may be too much active ingredient and too little base to make an effective similar compound for the patient to apply.”

In such circumstances, it is best to approach the prescribing physician. While some may stand their ground with what has been prescribed, others will acquiesce when commercially available alternatives exist. If the medical provider does appeal the individual repricing strategy in the workers’ compensation setting, this should go to a fee review setting where a number of defenses would apply. In Pennsylvania, there have been recent fee review determinations that have curtailed repackaging of medication and have found that drug vendors do not have standing as would a traditional provider. These determinations could serve as precedent when reviewing payments for compounded scripts.

Compounded medication is far from being the snake oil of its time. Approved active ingredients are effective and regulated. However, the profit margins associated with uncontested scripts will continue to fuel the upward trend of injured workers and their physicians utilizing compounded medications as a treatment option. Requiring proper documentation, questioning reasonable alternatives, and utilizing administrative remedies will keep compounded medications from becoming the designer drugs of the future.   

About The Authors
J. Jeffrey Watson

J. Jeffrey Watson is a shareholder in the Harrisburg, Pa., office of CLM Member Firm Marshall Dennehey, where he represents employers and insurance carriers in a wide range of workers’ compensation litigation matters. He may be reached at

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