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Fierce Exclusive: After explosion of compounded drug fraud, legal experts say party's over

High-priced compounded drugs attracted providers looking for an easy cash grab

In April 2015, Tricare, the government-run health program that covers military personnel and veterans, spent $545 million on compounded pharmaceuticals, which was more than 58 times its monthly spending just three years prior. In just one month, Tricare surpassed the total amount spent on compounded drugs during the previous fiscal year.

According to data provided by Tricare to FierceHealthPayer: Antifraud, the health plan saw a gradual rise in spending on compounded drugs over a three year period, which grew to more than $1.75 billion in FY 2015, accounting for nearly 18 percent of the total amount Tricare spent on all drugs dispensed through military treatment facility pharmacies.  

Within the last month, federal enforcement officials from the FBI, the Department of Justice (DOJ) and state agencies have launched a widespread investigation into fraudulent practices of compounding pharmacies in several states. The DOJ has estimated compounded drugs contributed to $500 million in fraudulent payments, most of which targeted Tricare. Experts say fraud schemes were orchestrated by individuals eager to capitalize on the willingness of insurers--both public and private--to pay as much as $10,000 for a tube of pain or scar cream with questionable effectiveness.

"If you take $10,000 and put it in a brown paper bag and lay in on the side of a road, someone's going to pick it up," Jeff Baird (pictured left), a healthcare attorney with Brown & Fortunato P.C. in Amarillo, Texas, said in an exclusive interview with FierceHealthPayer: Antifraud. "Well, that's what we've seen with compounding pharmacies."

In May, Tricare announced it would screen the ingredients in all compounded drug claims to ensure they were safe and effective, a move that essentially cut off the spigot of potentially fraudulent payments that had flooded the health plan. Spending promptly dropped from $75 million during the first 11 days of May, to less than $5 million during the remainder of the month, after Tricare strengthened its screening procedures. Spending has declined significantly ever since. In January 2016, Tricare spent $8.3 million on compound drugs, down from $194 million in January 2015.

Although the federal enforcement agencies have just begun investigating pharmacies across the country, the spike in claims from compounding pharmacies had a far-reaching effect that bled into the nation's defense budget. In July, Tricare officials sent a letter to the Senate Committee on Armed forces detailing a $2 billion funding shortfall in the Tricare budget "largely driven by the compounded pharmaceutical costs and utilization." Officials asked Congress to authorize a $900 million transfer from other parts of the Department of Defense budget, essentially pulling money away from the military to cover the gaps exposed by compounding pharmacies.

"To me, what makes this problem particularly egregious and noteworthy is this is the first time in my life I can think of a fraud scheme that targets the military," said Jason Mehta, assistant U.S. attorney for the Middle District of Florida in an exclusive interview with FierceHealthPayer: Antifraud. "It threatens the existence of a program."

Now, according to Mehta and other legal experts, DOJ investigators will be peeling back the layers of fraud, including whether pharmacies paid commissions to marketers to recruit Tricare patients, and whether the compounded drugs pharmacists were selling were medically effective.

"If they are selling a cream that literally is just a cream, and they are saying it's going to cure your arthritis, and it's going to cure your skin cancer, and it's going to cure gout, but there's no medical proof to that, they are exaggerating the effectiveness," Michael Weinstein (pictured right), chair of the white collar defense and investigations department at Cole Schotz P.C. in Hackensack, New Jersey, and a former DOJ attorney, told FierceHealthPayer: Antifraud. "I think the government gets concerned, and rightfully so, when companies do something like that."