The Rising Costs of Compounded Drugs: Utilization and Cost Management

An emerging and concerning pharmacy cost trend observed by Excelsior Solutions is the rising costs of compounded drug claims.  But why would we see this increase?  We will examine some industry changes and other potential factors that could affect your plan’s compound trend, plus offer suggestions in managing compound spend.

Historically, compound drug expenditures have represented a fraction of overall pharmacy costs.  However, the industry was challenged with a lack of transparency regarding what ingredients actually made up a compound.  Prior to December 2011, limitations around the information submitted during claims adjudication meant that plans and their Pharmacy Benefit Managers (PBMs) reimbursed only the most expensive prescription ingredient.  All other ingredients in a compound were “blinded” to the adjudication and payment of the claim.  Thus, pharmacies were paid based on that prescription ingredient for the metric quantity of the entire compound, not just the active ingredient amount.

Factors Influencing Cost

Concerns about the lack of transparency led the National Council for Prescription Drug Programs (NCPDP) and PBM industry representatives to develop a way to process prescription compound claims with all ingredients accounted for.  As of January 1, 2012, this functionality became available to pharmacies.  This functionality required compound claims to include significantly more detail and addressed the concerns regarding:

  • Specific ingredients, both prescription and non, in the compound
  • Payment for each individual ingredient in the exact quantity used
  • Additional opportunities for oversight on the compounds

While transparency may not be the only reason, since 2011 there have been significant increases in both compound volume and cost.  One PBM is reporting an average spend increase of 218% year-over-year.  Similar trends were observed with other PBMs as well throughout 2013.  Further, since 2011, manufacturers have rapidly increased the price of bulk powder chemicals.  There have also been observed fraud trends, such as the submission of prescription ingredients for billing (i.e. an actual drug in a pill or liquid form), but compounding the drug using only the bulk chemical.

While this may seem overwhelming, Excelsior Solutions recommends a simple four-step strategy to understand compound utilization and address the likely increases:

  • Have your PBM perform a year-over-year analysis to identify compound drug spend.  Excelsior Solutions can review the reports with you and ask key questions such as:
    • Is compound spending on the rise?
    • What does the data tell you about utilization?  
  • Work with the PBM’s clinical team to identify immediately actionable controls and long term strategies specific to your utilization.  We have included several strategies for consideration in the next section.
    • Start with easily actionable items.  Re-evaluate the compound spend quarterly to determine if the strategies have an effect.  If not, continue to implement additional controls.
    • Implement reporting on the medical side to prevent or address cost shifts that could occur.

As you work with Excelsior Solutions and your PBM to control the compound costs, here are some more robust suggestions for managing compound dispensing:

  • Consider exclusion of compounds
    • Reject all compounds
    • Reject select compounds
    • Bulk chemicals strategy
    • Lack of clinical efficacy
    • Switch patients to commercially-available non-compound alternatives
  • Develop cost controls
    • Obtain reporting from PBM on price increases and utilization patterns
    • Introduce a compound-specific cost sharing tier
    • Implement select prior authorizations
    • Review medical spend to ensure cost shift does not occur
  • Pharmacy oversight
    • PBMs should re-credential pharmacies with high compound volumes and validate their compounding practices
    • Have PBMs conduct desk and onsite pharmacy audits to verify billing matches to drug/chemical inventory.  Fraud is possible!
    • Remove pharmacies from the network that demonstrate billing irregularities.

Numerous opportunities exist to reduce or better control compound drug spend.  By understanding the cost contributors and the trends, strategies may be implemented to aggressively address increases.  Contact your Excelsior Solutions Consultant to discuss the best strategies that fit your plan’s philosophy.

DeeDee Tillett Bio

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