Steering Clear of Trouble
By Joey Berlin Texas Medicine September 2017

Shady Workers' Comp Compounding Schemes Are a Must to Avoid

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Law Feature — September 2017

Tex Med. 2017;113(9):39-45.

By Joey Berlin
Associate Editor

When it comes to compounding topical medications, occupational medicine physician Bernard T. Swift, DO, is certain of one thing: "The scams are out there."

The managing partner of San Antonio's Texas MedClinic says some of his employees unwittingly put the clinic on the victim's end of one.

About a year ago, a local medical establishment "got the word out somehow that if you came into their storefront clinic, they would give you a $50 Walmart gift card," Dr. Swift said. Some of Texas MedClinic's employees decided to check out that offer, he says. 

When they did, they filled out "some sort of health history questionnaire" and were given a drug test. No physician was present, Dr. Swift says. Although there was allegedly a nurse practitioner or physician's assistant on site, Dr. Swift says none of his employees saw that person. But they handed over their insurance cards for Texas MedClinic's self-insured plan.

The employees left with their gift cards and, as far as Dr. Swift knows, without any sort of diagnosis. Several days later, they received prescriptions in the mail for topical lidocaine. Dr. Swift, who oversees the clinic's insurance plan himself, says the plan was then billed at $1,200 or $1,300 per claim for the topical medication.

"When I was starting to see these, I'm thinking, 'Wait a minute.' First of all, there is no efficacy for topical lidocaine. It's just not medically indicated," he said.

Dr. Swift says the clinic did its own investigation and found its insurance plan was receiving the bills from 10 or 12 pharmacies in the Dallas area. Texas MedClinic contacted its third-party administrator and put a stop to the payments, and then contacted the Texas Department of Insurance to report the fraud, Dr. Swift says.

Pharmacies that compound topical creams and gels of questionable or nonexistent efficacy and then bill insurance for huge amounts are a growing problem, especially in the Texas workers' compensation program. Sometimes, they convince physicians to play a part in their schemes, offering kickbacks or other inducements in exchange for referrals. It's a nasty business doctors need to know is out there — and strictly avoid.

The issue hit home in March when a federal grand jury indicted eight people, including three Texas physicians, in what prosecutors say was a compounding fraud scheme involving more than $150 million in false claims.

"If this doesn't make an impression on Texas doctors, I don't know what would," said Bruce Malone, MD, a Texas Medical Association past president and a consultant for workers' compensation carrier Texas Mutual Insurance Co. "I think the federal government's big fraud case … is probably the beginning of the end for this. But our members need to understand that this is not acceptable business enterprise, and it's shady. And it's one of those things when you look at it on the surface, and you see the cost, and you go, 'This can't be right.' It just doesn't pass the smell test."

Comp Compounding Costs on the Rise

Compounded drugs are meant to serve patients who can't get what they need from medicines approved by the U.S. Food and Drug Administration (FDA). In many cases, they serve an important and worthwhile role. Examples include a patient with an allergy who needs a medication to be mixed without a certain dye, or a patient who needs a liquid form of the medication because he or she can't swallow a pill.

Physicians such as Dr. Malone and Houston orthopedic surgeon Andrew Kant, MD, acknowledge the need for compound pharmacies.

"I think a lot of the podiatrists use it, a lot of the dermatologists use it, some of the neurologists use it because of pain and nerves, and to some extent, it's helpful," Dr. Kant said. "Plus, we have patients who can't tolerate the oral medications."

Compounds themselves, however, aren't FDA-approved. State boards of pharmacy generally have regulatory authority over state-licensed drug compounding pharmacies.

Compounded drugs have become more prevalent in the Texas workers' compensation system since the beginning of this decade. In fact, their prevalence as a percentage of total pharmacy prescriptions doubled between 2010 and 2016, according to a utilization and cost report the state's Workers' Compensation Research and Evaluation Group released in May.

In 2010, compounded drugs made up 1.6 percent of total pharmacy prescriptions in the system. In 2016, although the total number of workers' comp prescriptions had declined from two years earlier, the 20,751 compounded drugs in the system accounted for 3.2 percent of total prescriptions and cost $11 million.

The money involved has risen sharply during this decade. In 2010, the average cost of a compounded prescription in workers' comp was $356. In 2016, it had risen 133 percent to $829. The per-claim cost rose by almost 200 percent to nearly $6,000. (See "The Cost of Compounding.")

A High-Dollar Indictment

In March, a federal grand jury in Dallas indicted eight defendants in an alleged workers' comp compounding fraud scheme involving three pharmacies — two doing business in Fort Worth and one doing business in Arlington — and several other companies.

According to the indictment, Jamshid Noryian, a Travis County resident and one of the defendants, was an owner and operator of the named pharmacies.

Three of the named defendants were licensed physicians: McLennan County occupational medicine physician Leslie Benson, MD; Collin County orthopedic surgeon Michael Taba, MD; and Ellis County orthopedic surgeon Kevin Williams, MD.

According to the indictment, from approximately May 2014 to March 2017, Ability Pharmacy, Industrial & Family Pharmacy, and Park Row Pharmacy billed the Federal Employee's Compensation Act, through the federal Office of Workers' Compensation Program, "at least approximately" $158 million in claim payments "to which they were not entitled." The scheme involved the compounding of creams and vitamins for scars, wounds, and pain that were intended to maximize reimbursement from the federal workers' compensation program, according to the indictment. The creams had reimbursement rates of up to about $28,000 per container, the document said.

Mr. Noryian "marketed the creams to doctors treating [federal workers' compensation] patients and induced doctors to send unnecessary and excessive prescriptions for compound medications to the pharmacies with payments," the indictment states.

The indictment also says the three physicians sent prescriptions to the pharmacies in return for payments from other defendants. According to the indictment, Dr. Benson and Dr. Taba were provided prescription pads from the pharmacies "to ensure that all prescriptions written by these doctors for compound creams would be sent to the pharmacies." 

All three doctors are accused of prescribing creams unnecessarily when patients were already prescribed controlled substances for pain management. Mr. Noryian "controlled … medical treatment" for patients of Dr. Taba and Dr. Benson by providing inducements to office staff to "ensure compound prescriptions were written for the most patients and sent to Ability and Industrial & Family," the indictment states.

Mr. Noryian "told employees and others that he made $1 million a day off of the compound medications," the indictment said. Of the approximately $158 million in false and fraudulent claims, according to the indictment, the defendants received about $82 million.

All eight defendants have been charged with one count of conspiracy to commit health care fraud. The five nonphysician defendants are also charged with one count of conspiracy to launder money and engage in monetary transactions in criminally derived property.

All defendants have pleaded not guilty, according to court documents. At press time, trial was set for July 9, 2018. Mindy Sauter, an attorney for Dr. Williams, told Texas Medicine he wasn’t guilty but said she couldn’t comment on his defense. Attorneys for Dr. Benson and Dr. Taba did not respond to phone messages. 

Each count of conspiracy to commit health care fraud could result in up to 10 years in prison and a $250,000 fine, according to a press release announcing the indictment. The money laundering counts carry maximums of 20 years in prison and a fine of either $500,000 or twice the value of the property involved.

In the release, U.S. Attorney John Parker called the alleged scheme "yet another shocking example of how unmitigated greed can spawn a fraud so brazen that it almost takes your breath away."

A "Special Drug"?

The submission of questionable compounded pain creams for payment isn't new to Dr. Malone, who investigates such claims for Texas Mutual.

In the workers' compensation system, part of the potential for abuse rests in a nuance of the division's implementation of the closed drug formulary. Texas uses the drug formulary of the Official Disability Guidelines published by the Work Loss Data Institute. 

According to the workers' comp division's pharmacy webpage, the closed formulary includes all FDA-approved drugs. Drugs identified with "N" status, known commonly as N-drugs, need preauthorization before they can be prescribed and aren't recommended as a first-line treatment. Drugs that don't require preauthorization are known as Y-drugs. 

With compounds, though, there's something of a loophole. Although the guidelines do not consider compounds to be first-line products, the Texas workers' comp formulary rules allow compounds as long as they contain no N-drug ingredients. Phil Denniston, president of the Work Loss Data Institute, says allowing compounds that don't have N-drugs is unique to Texas. He recommends a preauthorization requirement for custom pharmacy compounds that aren't FDA-approved.

Austin orthopedic surgeon Stephen Norwood, MD, is a member of the guidelines' editorial board and also serves on the workers' comp Medical Quality Review Panel. Although the loophole exists in the Texas formulary, Dr. Norwood says, practitioners in the comp system also must adhere to treatment guidelines, "which are frankly not particularly supportive of compounded drugs since there is so little quality evidence for them." The state's regulations could be improved by requiring future preauthorization for all compounds, he says.

"I don't think it has been viewed as being rampant, the use of compounding pharmacies in our workers' compensation system," Dr. Norwood said. "But the utilization and cost analysis report just released … will certainly put this issue directly under the regulators' microscope."

Compounders have taken advantage of the loophole, Dr. Malone says, by picking out formulary-allowed drugs, combining them into a topical cream "and then claim[ing] this was a special drug because no one else had it." One example of compounders gaming the system is by combining the muscle spasm medication cyclobenzaprine, the neuropathy medication gabapentin, and a nonsteroidal anti-inflammatory drug (NSAID).

"You can buy a standard nonsteroidal anti-inflammatory agent and apply it to the skin's surface to try to avoid taking the pill, but that's an isolated nonsteroidal," Dr. Malone said. Gabapentin is commonly used, but it's used as a pill form, and cyclobenzaprine is used as a pill form. It doesn't exist in the commercial form to apply transdermally."

Another example is the drug diclofenac, which Dr. Norwood says is the only NSAID that's FDA-approved for use in a topical cream or gel.

"What happens is a person perhaps with limited medical training at a compounding pharmacy says, 'Well, let's try [mixing] this with that and that and that,'" Dr. Norwood said. "But that's never really been studied for safety and effectiveness."

When Dr. Malone gets a workers' comp claim for a questionable compounding prescription, he makes a personal phone call to the physician.

"And I ask him, 'Why is this being prescribed. What's the justification?' And then invariably, there is no justification," Dr. Malone said. "We're not going to approve this. We're certainly not going to approve it and pay $6,000 for this tube of medicine."

DWC does audit doctors who prescribe compounds, and insurers are keeping their eyes out for medically unnecessary prescriptions. A "Compound Medications Plan-Based Audit" the division posted in April 2016 stated its intention to audit physicians who prescribed a compound drug with an ingredient of either powder or adjuvant, and the drug was filled between Sept. 1, 2014, and Aug. 31, 2015.

According to the state's compounding utilization report in May, workers' comp insurance carriers denied about 35 percent of compounded drug prescriptions in 2016. A lack of medical necessity accounted for 13 percent of those denied bills.

Dr. Malone says commercial plans didn't take long to get hip to compounders' schemes with shady topical medications.

"Quickly, the commercial insurers saw the problem," he said. "[Compounders] never tried to sell them to Medicare patients because they wouldn't qualify under Medicare. They sometimes sold them at great discounts to Medicare patients for cash. But it could never be processed through the Medicare pharmacy [system]."

Just Say No

If physicians find themselves in a situation where a pharmacy rep is pitching a seemingly sweetheart deal involving a lucrative compound, it's time for those doctors to ask questions and do their homework.

In fact, Dr. Swift says you should first ask yourself why the pharmacy is even coming to you. While he concedes some physicians "believe this stuff has just amazing healing powers," he says there's nothing he's found in the literature that establishes the efficacy of a topical pain medication.

"Yes, some of the big pharmaceutical companies come to you and they attempt to get you to prescribe the latest and greatest specialty drug," he said. "But if you've got some small compounding pharmacy, and that's all they do, and they come to you and say, 'Hey, we've got these great topical creams,' you should say, 'Well, that's fine, show me the literature.' And if they have any, it's likely not based on a double-blinded, placebo-controlled, independent study. It's just not out there."

Texas MedClinic has 75 physicians caring for occupational medicine and urgent care patients, and Dr. Swift says the clinic has delivered "plenty of feedback to them about the non-efficaciousness of prescribing a topical pain medication for anybody, particularly given the prices that these so-called specialty compound pharmacies are charging. It's just absurd."

Dr. Kant has dealt with his share of solicitations from pharmaceutical companies and has had his share of questions about efficacy.

"I ask them what their data is: Do they have any data, is it all company-sponsored data, is it any university data, is it peer-reviewed? Most of them have company data. A few of them have university data. Very few have any peer-reviewed data. But the other thing I ask them is, how much does it cost my patients? Sometimes they know and sometimes they don't know" because it depends on the insurance plan, he said.

Ultimately, if the drug and arrangement the pharmacist is marketing to you seem suspicious and/or shady, take a page out of the War on Drugs playbook and just say no.

"[A physician] should investigate the details of the proposal, and if it looks to him that this might be something that is nonscientific, that the drug has not been primarily approved for transdermal use, then you want to avoid being involved with the manufacture and sale of a drug that is not scientifically proven and is not efficacious if applied to the skin," Dr. Malone said. "It's just that simple."

Joey Berlin can be reached by phone at (800) 880-1300, ext. 1393, or (512) 370-1393; by fax at (512) 370-1629; or by email.

Legal articles in Texas Medicine are intended to help physicians understand the law by providing legal information on selected topics. These articles are published with the understanding that TMA is not engaged in providing legal advice. When dealing with specific legal matters, readers should seek assistance from their attorneys.


Last Updated On

September 01, 2017

Originally Published On

August 22, 2017

Joey Berlin

Associate Editor

(512) 370-1393

Joey Berlin is associate editor of Texas Medicine. His previous work includes stints as a reporter and editor for various newspapers and publishing companies, and he’s covered everything from hard news to sports to workers’ compensation. Joey grew up in the Kansas City area and attended the University of Kansas. He lives in Austin.

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