The first few months of 2016 have witnessed a rash of investigations, and even indictments, involving compounding pharmacies throughout the United States. Previously beset by contamination scandals, the industry now faces widespread allegations of fraud.
Significant Recent Developments
On January 26, the Federal Bureau of Investigations, the U.S. Postal Inspection Service, the U.S. Department of Defense Criminal Investigation Service, and state authorities conducted joint raids of nine compounding pharmacies in Mississippi. The agencies reported a seizure of more than $15 million in assets and reams of documents. Search warrants pertaining to the investigation were also issued in Florida, Alabama, and Utah.
Then, on February 5, the Dallas Morning News reported that federal authorities had begun investigating a compounding pharmacy, RXpress, and related entities in the Dallas-Ft. Worth (Texas) area. The investigation involved potential violations involving pay-for-prescription arrangements to sales reps.
Two weeks later, on February 18, the United States indicted Robert Cesario and John Paul Cooper, in the Northern District of Texas on one count of conspiracy to commit health care fraud, seven counts of illegal receipt of remuneration, and six counts of illegal payment of remuneration. According to the indictment, Cesario and Cooper, who marketed pain and scar creams for various compounding pharmacies, conspired with others to defraud the military healthcare program, TRICARE, by (1) receiving payments from pharmacies in exchange for referring TRICARE beneficiaries for prescription of their creams; (2) paying TRICARE beneficiaries to induce them to fill prescriptions for the creams; and (3) paying physicians in exchange for prescribing the creams.
These matters follow a 2015 federal investigation of compounding pharmacies in the Middle District of Florida for violations of the Anti-Kickback Statute and other allegedly fraudulent conduct. Numerous pharmacies and individuals, most in the Jacksonville area, reached settlements with the United States in order to avoid civil suit under the False Claims Act. According to the Department of Defense, a related criminal investigation is ongoing.
No End in Sight
All signs point to more investigations and prosecutions, as agencies throughout the federal government have expressed concerns about industry-wide fraud. The agencies’ rationale? Ballooning costs associated with compound pharmaceuticals, mostly pain and scar creams like the ones at issue in the case against Cesario and Cooper.
While the full array of government healthcare programs – including Medicare and Medicaid – may cover compound pharmaceuticals to varying degrees, TRICARE has taken the largest hit. The Department of Defense, which was involved in the January raids of the Mississippi pharmacies, limited its coverage of compound pharmaceuticals in 2015, after the claims for such prescriptions submitted to TRICARE increased exponentially. Compound pharmaceuticals cost the program $1.7 billion in the first nine months of fiscal year 2015 – up from $515 million in 2014 and $23 million in 2010.
The U.S. Postal Service, another participant in the Mississippi raids, has experienced similar issues. Its costs under the Federal Employees’ Compensation Act related to compound pharmaceuticals more than tripled from 2014 ($30.1 million) to 2015 ($98.7 million).
Given the current climate, it is imperative that compounding pharmacies ensure that their operations and contracts – including those with sales and marketing representatives – comply with relevant federal and state statutes and regulations. Two particular practices likely to attract the unwanted attention of federal investigators are: physician ownership of, or investment interest in, a compounding pharmacy; and compensating sales or marketing representatives as independent contractors based on the volume or value of their referrals, rather than hiring an employee sales force. Both practices may draw scrutiny for potential violations of the Anti-Kickback Statute and other laws.