(Jason Bortz/U.S. Navy)

Federal agents on Oct. 14 charged 10 more defendants with fraud and conspiracy in a kickback scheme involving compound drugs and Tricare, the military health insurance program.

The alleged conspiracy to market and prescribe exorbitantly priced pain and scar creams of doubtful effectiveness and under false pretenses bilked Tricare out of $102 million in just 21 months, from May 2014 through February this year. This was just one of many companies that sprang to life recently to make fortunes off of unregulated compound drugs.

Defendants here include two physicians — Walter Neil Simmons, 47, of Mesa, Ariz., and William F. Elder-Quintana, 50, of El Paso, Texas — as well as owners and marketers of a Dallas-based company called CMGRX.

The scheme was to offer kickbacks to physicians and “grants” to hundreds of military and family members at Fort Hood, Texas, to have costly compound drugs prescribed and filled using Tricare, on the pretext of beneficiaries participating in a sham medical study.

An “exhaustive” investigation by the FBI and Defense Criminal Investigative Service led to the recent arrests, atop the first two in February, plus “seizure of millions in assets” defendants had derived from “this massive scheme,” said U.S. Attorney John Parker of the Northern District of Texas. More details are available in this case summary from the Department of Justice.

Compound drugs are produced not by traditional drug manufacturers but pharmacists in small companies that combine, mix or alter two or more ingredients to create customized medicines. Demand began to climb sharply in 2008 amid rising interest in alternative medicines and a burgeoning market for pain creams and ointments to substitute for addictive opiods.

While waiting for the Federal Drug Administration to decide how to regulate ingredients, Tricare saw compound drug costs explode from $23 million a year in 2010 to almost $500 million a month by April 2015, fueled by unethical compound drug companies and aggressive marketing.

In May 2015 the Defense Health Agency decided to act alone and adopted the same tough screens for compound drug ingredients used by commercial insurers. Its compound drug costs fell 98 percent, down to $10 million, by June. But the Defense Department that year still had to plead with Congress to reprogram at least $1 billion from other defense accounts just to sustain pharmacy operations through the end fiscal 2015.

Tricare now spends an average of $2 million a month on compound drugs, which is lower than in 2008 when scammers, blocked by commercial insurers, first began to turn their sights on Tricare.

In a phone interview Wednesday, Dr. George E. Jones Jr., chief of pharmacy operations for the Defense Health Agency, said Tricare and Express Scripts, its pharmacy benefits manager, weigh three factors to screen compound drug prescriptions received: clinical needs of patients; medical effectiveness of ingredients and cost. The result is “a very effective screen that has maintained access to appropriate compound prescriptions and reduced costs by well over 90 percent from what it was before.”

Tricare and Express Scripts found they had to tighten controls even more after the DOD Inspector General examined a sampling of compound drug claims paid from May to October 2015, and found 40 of 47 claims had ingredients on the Tricare “exclusion list.” That meant they should have been denied.

“This occurred because [Express Scripts] personnel did not follow their standard operating procedures, and their claims adjudication system inappropriately allowed claims with prior authorizations and claims where beneficiaries had both Medicare and Tricare coverage to bypass screening against a list of non-covered ingredients,” the report explained.

Jones said the IG finding covered a period when Tricare and Express Scripts were fine-tuning how to apply ingredient exclusions in special circumstances. Thirty-three of 40 claims mistakenly paid despite banned ingredients involved Medicare as first payer so pharmacists not properly trained mistakenly entered an override code to accept payment, the IG said.

“The IG results helped us to zero in and ensure fixes had been identified and put in place” to manage more complicated claims involving other health insurance and overlapping coverage of ingredients, Jones said.

The glitch with Medicare claims was “being addressed” when the IG pulled its sample, Jones said. “We provided validated information that [fixes] had been implemented prior to final report. But the IG felt it was still important to include in the final report” released July 1 this year.

Jones said some compound drugs are needed to meet unique patient needs. The marketing of pain-control creams and ointments to Tricare beneficiaries from 2013 to 2015 was particularly exploitive, however.

“Some of them were very legitimate. Some, as we’ve seen, were not legitimate at all, but saw the opportunity to jump into that marketplace [offering] ‘non-addictive’ pain management therapy. Unfortunately most of it was not only non-addictive, it was non-effective. It didn’t do anything.”

The Defense Health Agency receives just a few complaints a month from beneficiaries upset that Tricare won’t cover a compound drug, given a particular ingredient. DHA also hears from compound drug companies or their advocates. Since May 2015 it has tweaked its ingredient exclusion list three times, each time to expand rather than narrow the list.

“We have not found evidence to support removing any of the products we strain as excluded items. That’s been consistently maintained,” Jones said. “We’re adjusted the screening list over time to address new approaches the compounding industry or marketing firms have come up with to continue advocating for products [without] evidence they are safe and effective.”

Recently Tricare added an FDA-approved product, Lidocaine, to its compound drug exclusion list. Though Lidocaine is commercially available, compound drug companies had been “using it in exorbitant quantities and inappropriate to its labeling, based on data we had,” Jones said.

Send comments to Military Update, P.O. Box 231111, Centreville, VA, 20120 Twitter: @Military_Update

Sign Up for Daily Headlines

Sign up to receive a daily email of today's top military news stories from Stars and Stripes and top news outlets from around the world.

Sign Up Now