Compound prescription drugs have increasingly become a target for DOJ health fraud enforcement activities. In early April, the SDNY U.S. Attorney’s Office entered into a civil settlement with two pharmacies and two individuals for submitting fraudulent claims for reimbursement for compounded prescription drugs in violation of the False Claims Act and the Anti-Kickback Statute.

Compounding pharmacies prepare prescription drugs in unique formulations, generally for a specific patient. Compounded drugs are viewed as presenting a significant opportunity for fraud as they are not approved by the Food and Drug Administration, so FDA does not verify the safety or effectiveness of the compounded drugs, and the drugs lack an FDA finding of manufacturing quality.

In U.S. ex rel. Jane Doe v. FPR Specialty Pharmacy LLC, two pharmacies dispensed a compounded prescription analgesic cream called “Focused Pain Relief” from their New York facility. They sold it to mail-order customers around the country. The defendants admitted to and agreed to settle claims alleging violations of both the False Claims Act and the Anti-Kickback Statute. The government accepted an ability-to-pay settlement amount of $426,000 from defendants. The one pharmacy that remained in business also entered into a corporate integrity agreement.  The two settlement agreements are here and here.

False Claims Act Violations Related to Licensing

Federal healthcare programs require pharmacies to be licensed in the state where the services are provided. Defendants admitted to violating the False Claims Act in two ways. First, defendants billed for dispensing Focused Pain Relief in states where they were not licensed. Second, they billed for drugs dispensed in states where they had obtained their state license under false pretenses, including the failure to inform state officials of prior dispensing without a license and of one individual’s criminal history.

Anti-Kickback Statute Violations to Induce Additional Billings

The Anti-Kickback Statute prohibits payments or discounts by healthcare providers to induce referrals. For example, healthcare providers such as pharmacies cannot generally waive or reduce co-payments to beneficiaries of federal healthcare programs, and they cannot pay distributors or sales agents based on the volume of sales or referrals. The submission of a claim that violates the Anti-Kickback Statute constitutes a false or fraudulent claim under the FCA.

Defendants admitted to violating the Anti-Kickback Statute in two ways. First, they induced patients to purchase the expensive compounded medications by waiving co-payments. Second, they induced sales representatives to obtain more prescriptions by paying them commissions on a per-prescription basis.

Settlement Shows Aggressive Action For Licensing And Sales Irregularities

The government’s case did not include any allegations that the compound drugs themselves were harmful or ineffective. Nevertheless, the civil prosecution shows that the government will continue to view licensing irregularities as False Claims Act predicates, and will continue to aggressively police healthcare providers’ payments or discounts for referrals, particularly with respect to compound pharmacies.