Does Medicare Cover Compounded Drugs?

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Within days of reporting that a fatal outbreak of fungal meningitis was most likely caused by contaminated steroid injections prepared by a company doing business as a compounding pharmacy, patients and regulators asked why the U.S. Food and Drug Administration had not intervened to ensure the safety of the implicated custom-made medications.

What Is Drug Compounding?

The art and science of preparing personalized medications for patients is referred to as drug compounding. Based on a doctor's prescription, a compounding pharmacy will mix individual ingredients together in the exact strength and dosage required for the patient.

Medicare Beneficiary: Compounded Drugs

News outlets later asked whether the Medicare program, which appeared to have paid for several of the products administered to patients suffering from back pain, could have prevented the crisis. The Associated Press, for instance, noted that the Centers for Medicare & Medicaid Services (CMS) has rules against paying for compounded versions of medications generally available from pharmaceutical manufacturers.

The paper pointed in particular to CMS' decision to stop covering almost all compounded inhalation solutions administered via nebulizer.

Medicare continues to cover most compounded drugs, but prescribers and pharmacists must follow the agency's rules to ensure eligible patients get the dosage forms they need without having to pay the full cost out of pocket.

Medicare Rules

Unless otherwise specified, Medicare Part B covers compounded drugs administered in hospitals and long-term care facilities. This includes powders reconstituted with saline.

Denial of Coverage

Denial of coverage can result from a CMS or FDA determination that a medication is not medically necessary, illegitimately prescribed and or produced by a pharmacy producing as many dosages as a drugmaker.

The Feb. 19, 2010, update of the Medicare Prescription Drug Benefit Manual succinctly states the definition and coverage criteria for compounded drugs dispensed to Part D beneficiaries:

Compounded prescription drug products can contain: (1) all Part D drug product components; (2) some Part D drug product components; or (3) no Part D drug product components. Only costs associated with those components that satisfy the definition of a Part D drug are allowable costs under Part D.

The labor costs associated with mixing a compounded product that contains at least one Part D drug component can be included in the dispensing fee.

For compounds containing all generic products, the generic cost-sharing should be applied [i.e., charged to the patient]. If a compound contains any brand name products, the Part D sponsor may apply the higher brand name cost-sharing to the entire compound.

Generally, the CMS reimbursement rate for a compounded drug reflects the part B or Part D average wholesale or sale price for a commercially available product containing the active pharmaceutical ingredients plus usual dispensing costs. Payments for specific products vary based on quarterly prices for drug product and bulk supplies of APIs. Part D plans also adjust reimbursements according to pharmacy contract terms. Section 20.1.2 of this CMS coverage guidance report outlines basic reimbursement calculations.

How to Bill Correctly

Preparing, dispensing and administering compounded medications for a Medicare beneficiary must be billed "incident to." This means, first, that the patient must be under the treatment of the doctor, nurse practitioner or other CMS-recognized health care provider who prescribed the drug. Second, the compounded medication must be used as part of ongoing treatment. A billing guide for coders notes that claims for injectable and infused drugs billed under Part B are most likely to be paid without challenges.

Under the Healthcare Common Procedure Coding System, or HCPS J3490, compounded drugs get designated unclassified drugs. Current Procedural Terminology, or CPT, codes exist for many kinds of compounds. With both billing systems, the API should be specified.

What About Medicaid?

Reimbursements and billing procedures for compounded drugs dispensed to Medicaid beneficiaries differ from state to state because each state implements broad rules set by CMS in different ways. At the federal level, Medicaid requires coverage of compounded drugs when:

  • The APIs used are FDA-approved.
  • State programs have established payment and rebate rates for products containing the APIs.
  • The custom-made dosage was prepared and dispensed pursuant to a legitimate prescription order for a patient with an established need.

Detailing the rules for each Medicaid program would take a book. The National Association of Medicaid Directors points visitors to each state's Medicaid website, which will have the specifics on compounding drugs for Medicaid patients.

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