Editor's note: This is the second in a five-part series published in the Word on Workers' Compensation report, presented Saturday at the fifth annual WorkCompCentral Gala and Comp Laude Awards in Burbank.

There’s little if any evidence of the medical efficacy of compound creams, but these supposedly custom-made concoctions are accounting for an increasing amount of pharmaceutical spending in comp systems throughout the country and have been at the heart of several high-profile fraud cases.

While many states have treatment guidelines that identify which treatments are medically necessary and therefore reimbursable, loopholes allow providers and pharmacies to sell millions of dollars’ worth of compounded creams despite the lack of evidence that they actually work, according to medical experts and industry observers.

“The problem you have in many states is the laws are ambiguous or unclear as to how ‘compounds’ should be treated and whether you can deny the medication or deny payment for it,” said Brian Allen, vice president of government affairs for Optum. “They play a law of numbers. Submit 20 bills for $5,000 or $6,000 a piece, and if one gets paid, they’re still ahead. If more get paid, it’s just profit.”

Like many comp schemes, the epicenter of the compounding problem is Southern California. But the Golden State isn’t the only one feeling the burn from what critics say is little more than grossly overpriced Bengay. Regulators in Texas recently sounded the alarm about significant increases in the number and costs of prescriptions for compound creams, as has the U.S. Postal Service.

And the U.S. Attorney’s Office in June brought criminal charges against providers throughout the country who allegedly used prescriptions for compounds as part of a scheme to defraud Medicare, Medicaid and Tricare, the health insurance program for members of the military and their families.

Compound drugs of all varieties used to account for just a small percentage of workers’ compensation and health care spending, as would be expected. given the conditions under which these specially formulated drugs are considered to actually be appropriate.

Compounds are medically indicated in cases where a patient can’t tolerate commercially available medications approved by the Food and Drug Administration. If a person is allergic to one of the inactive ingredients in a drug, it would be appropriate for a compounding pharmacy to make a similar medication minus what would trigger an allergic reaction. If a person can’t swallow capsules, a compounder could formulate a liquid version of a commercially available drug. And no one is opposed to compounding in these cases.

Compound creams are another story. They are commonly marketed as a way to treat pain or inflammation without any of the side effects that can come with commercially available drugs. Fusion Specialty Pharmacy, a compounder in Santa Clara, Utah, says on its website that compound creams can treat arthritis, trauma, sprains, muscle strains, nerve damage and chronic inflammation.

And because “creams are absorbed into the bloodstream at minimum levels” there are no risks of the types of drug interactions that can come with oral medications.

But Allen said there are no studies documenting that compound creams actually do what proponents say.

“We’ve not been able to find any indication that these do anything more than what’s already available on the market for a much more reasonable cost,” he said.

Compounds are supposed to be used as a last resort, but they’ve become one of the first thing that some doctors prescribe, he said. And that raises the question of whether compounds are used because they’re actually good medicine, or because there’s money to be made in using them.

“Is it money, or is it medicine?” Allen asked. “What ultimately happens is you have an opportunity for a loophole to be exploited where prescribers and the compounding pharmacies that dispense this stuff have seen an opportunity to make some extra money in the workers’ compensation system by promoting these compound medications.”

‘Y’ is for compounds

The Texas Division of Workers’ Compensation reported earlier this year that the number of prescriptions for compounds increased after it adopted a formulary in 2011.

Employers in the Lone Star state paid an average of $316 for each of the 18,535 compound drug prescriptions that were covered in 2010. In 2014, employers paid for 21,200 compound prescriptions at an average cost of $646.

The cumulative change in reimbursement for compounds was a 133% increase from 2010 to 2014, a period in which total prescription reimbursements dropped by a cumulative 31%.

The Texas DWC also reported that a small number of providers are driving the trend. Ten individual physicians accounted for 48% of all compound bills that were submitted in 2014. The 11,614 bills submitted by the top 10 compound prescribers compares to 12,423 bills submitted by the remaining 986 providers who also prescribed compounds that year.

Under the Texas formulary rules, so-called “Y” drugs can be prescribed without preauthorization, while so-called “N” drugs need to be approved in advance before they can be prescribed. As applied to compounds, the formulary requires pre-approval only for those products made using N drugs.

Not surprisingly, the growth in costs is linked to a handful of compound ingredients that are designated as Y drugs on the formulary.

For example, Gabapentin, used primarily to treat epilepsy and neuropathic pain, is classified as a Y drug in the Texas formulary. And the DWC reports that from 2010 to 2015, the average cost for Gabapentin increased by 1,474%.

Average payments for Ketoprofen, a non-steroidal, anti-inflammatory Y drug, increased 518% over the same period. Payments for muscle relaxant baclofen, a Y drug, increased 427%.

“Texas said if it has an N ingredient, it’s not allowed,” Allen said. “Then, all N ingredients were gone and shortly after, there was a big spike in compounds with all Y ingredients. How do you argue medical necessity when that’s the game that’s being played?”

Allen said he thinks all compound drugs should require preauthorization. Requiring doctors to document the medical necessity for using a custom-made medication rather than something that’s commercially available should ensure that workers have access to these drugs, but only when necessary.

He said it’s too easy for some providers to exploit loopholes in the formulary rules. And as long as it’s easy and profitable, providers will keep prescribing compounds.

“We need to create barriers, speed bumps — and that will help, I think, over time curb the practice and get it to where it needs to be,” he said. “We’re all for having compounds. There are some cases when they’re appropriate — just not as many as we’re seeing.”

The Texas Division of Workers' Compensation showed its concern about the problem in May, when it adopted an audit plan that will include a review of up to 10 physicians who prescribe the largest number of compounds to ensure the doctors are complying with the Workers' Compensation Act.

Prescriptions down, prices up

The experience in California suggests that reining in compounds is no easy feat.

Lawmakers and regulators in the Golden State have been dealing with the compounds for nearly 10 years now. Compounds emerged as a cost driver almost immediately after the state’s Division of Workers’ Compensation in 2007 adopted rules that eliminated the ability for doctors to profit by dispensing repackaged drugs.

In 2011, lawmakers passed a bill that attempted to control costs by requiring that compounds be billed at the ingredient level based on rates paid by Medi-Cal, the state’s Medicaid program.

The bill was successful in reducing the number of prescriptions for compounds, according to a 2013 report by the California Workers’ Compensation Institute. Compounds accounted for 2% of all prescriptions in the first half of 2012, compared to 3.1% in the first half of 2011, CWCI reported.

However, the average amount paid per compound increased 68.2% over the same period, to $774.21 from $460.42. The higher average payment was the result of a 13% increase in the average number of ingredients used per compound, and a 48.7% increase in the average cost of the ingredients being used.

The average payment has fallen a bit since then, with the Workers’ Compensation Insurance Rating Bureau reporting employers were paying an average of about $575 per compound through the last six months of 2015. There is, however, a significant difference in average compound costs depending on who receives payment and where they’re located.

Statewide, the average compound payment to pharmacies is $862, compared to an average payment to physicians of $293. This disparity is driven almost exclusively by the Los Angeles area.

The average payment for compounds to pharmacies in Southern California is about $1,000, while the average payment to physicians in and around Los Angeles is $325, according to the WCIRB. In San Diego, the average payment to pharmacies was $216, compared to an average payment of $247 to physicians. And in the San Francisco Bay area, the average payment was $104 to pharmacies and $292 to physicians.

The high cost and volume of compound payments in California persisted despite the limited situations under which they’re authorized by medical treatment guidelines that have been in effect since 2009.

The chronic pain section of California’s medical treatment utilization schedule says topical analgesics are experimental and primarily recommended to treat neuropathic pain when trials of antidepressants and anticonvulsants have failed. The state’s treatment guidelines also say there is scant research supporting the medical efficacy of compounded topical creams.

But the only outright prohibition on compound creams is when they contain at least one drug or drug class that is not recommended. Lidocaine is recommended in the MTUS if it used to treat localized peripheral pain, assuming other first-line therapies have failed. It is not recommended for non-neuropathic pain.

Gabapentin is not recommended in any topical analgesic. But other sections of the guidelines say the anti-epilepsy drug is recommended for chronic neuropathic pain as well as complex regional pain syndrome.

Dr. Gary Franklin, medical director of the Washington state Department of Labor and Industries, said it’s not difficult to exploit rules that prohibit compounds if they contain a drug or drug class that is not recommended.

“It’s not too hard to put together a compound for stuff that is approved for other uses orally,” he said. “You could drive a truck through that policy. Compounding firms are pretty smart. Knowing that policy, they’re not going to put anything in compounds that’s not already approved for oral use.”

In recent years, California has had some success in rejecting compound prescriptions based on those guidelines, thanks to an administrative review procedure to resolve treatment disputes that was created as part of legislative reforms passed in 2012. The independent medical review process created in the 2012 reforms has overwhelmingly found that compounds are not medically necessary, and therefore not authorized.

Out of 12,617 IMR decisions addressing compounds that have been issued since 2013, 99.9% of these prescriptions were declared medically unnecessary. A total of 12,615 IMR decisions sided with the utilization review physician, who said that the compound was not appropriate. Just 56 decisions said there was a legitimate reason to use a compound drug.

Crossing the line

If state and federal prosecutors are to be believed, the compound drug trade is so lucrative that some pharmacies are paying doctors kickbacks in exchange for prescribing the medications.

In 2014, the Orange County District Attorney’s Office in Southern California announced that a grand jury indicted Kareem Ahmed, the president and chief executive officer of Landmark Medical Management, on charges of paying more than $25 million in kickbacks to doctors who prescribed compound creams to injured workers. According to the indictment, Ahmed intentionally formulated the creams using the most expensive ingredients available to maximize his profits.

Ahmed is fighting the charges — his attorney insists Ahmed is innocent — and it hasn’t been easy going for county prosecutors. An appellate judge in March threw out all but one of the counts in the original case after finding that the District Attorney’s office charged more than what the grand jury alleged.

A new complaint filed in June alleges Ahmed was paid more than $105 million for compound creams provided to injured workers since 2009. The fraud allegations have nothing to do with the appropriateness of the prescriptions. Instead, prosecutors say any bills for medical services that were occasioned by kickbacks are inherently fraudulent, regardless of whether the worker actually needed the service or prescription.

In July 2014, the U.S. Attorney’s Office for Eastern California charged Bahar Gharib-Danesh, manager of Pain Relief Health Center with offices in Bakersfield, Fresno, Los Angeles, Reseda and Visalia, of directing medical staff consisting of doctors, chiropractors and psychologists to churn bills by making sure every injured worker treated at the clinic received a host of treatments, including compound creams.

The feds don’t provide much in the way of additional detail in the charges filed for the case scheduled to go before a jury in August 2017. But a related whistleblower case filed in Sacramento claims that part of the alleged scheme to prescribe compounds included a list of drugs that was used to try to avoid drawing unwanted attention from claims administrators.

The whistleblower in the civil case is a former billing manager at one of Danesh’s clinics who said that a spreadsheet was used to monitor the number of compounds that were prescribed to injured workers and to stop those prescriptions at a predetermined threshold so as not to raise suspicions in adjusters or regulators.

State comp systems aren’t the only ones that have been targeted in the alleged compound schemes. In March, the U.S. Postal Service’s Office of Inspector General reported that compound drugs accounted for 34% of prescriptions and 53% of prescription drug costs in 2015. In 2014, compounds accounted for 22% of prescriptions for injured USPS workers and 27% of costs. In 2011, compounds accounted for just 8% of prescriptions and 6% of costs, according to the report.

The Postal Service said it was paying an average of $390,000 a day for compound drugs in 2015.

Not long after that report was released, the U.S. Justice Department announced a “coordinated takedown” of 301 people accused of generating $900 million in fraudulent bills targeting federal health care programs. Several of the defendants in what federal prosecutors called the largest anti-fraud action in its history were accused of paying kickbacks to doctors who prescribed compound drugs.

A grand jury indictment filed June 16 with the U.S. District Court for Southern California accuses Hootan Melamed, owner of New Age Pharmacy, RoxSan Pharmacy Inc. and Concierge Compounding Pharmaceuticals Inc. of bribing doctors to prescribe his products.

David M. Jensen, owner of Valley View Pharmacy, was also accused in a complaint filed the same day with the U.S. District Court for Central California of paying kickbacks to marketers who convinced doctors to prescribe compounds to people covered by Medicare, Tricare and the federal Office of Workers’ Compensation Programs.

A complaint filed on June 20 in the federal court for Central California charges Randall J. Jett, a marketer for Products for Doctors, of arranging kickbacks for doctors who prescribed compound creams.

Another complaint accuses John Garbino, president of Trestles Pain Specialists, of receiving nearly $1 million in kickbacks in 2015 for arranging compound prescriptions for patients covered by the federal Tricare program.

At the same time, prosecutors charged Robert Paduano of operating telemedicine sites based in Florida to generate fraudulent compound prescriptions on behalf of Trestles Pain Specialists.

Sticking to the evidence

Given the number of health care systems that appear to be struggling with compound drugs, it may seem like there’s no easy solution. But Franklin, the medical director of the Washington state Department of Labor and Industries, says that’s not really the case.

L&I pays for compound drugs in a limited number of situations, such as special medications needed to wean people off opioids, or antibiotics that a patient may need. But there is no situation in which the state will pay for compound creams.

“I’m not going to say anything nasty about other states,” he said. “But ever since I came here, we’ve been using evidence to make decisions.”

Billing rules based on evidence-based medicine allow claims administrators — whether they’re working for the state-run comp program or third-party administrators hired by self-insured employers — to refuse payment for compounds as well as other questionable treatments and services.

“Most of these states, do they have anything that they don’t pay for?” Franklin said. “What don’t they pay for? This is only one example. Do they ever not cover a lumbar fusion? What don’t they pay for? And how do they make that decision?”

Franklin said it’s difficult for a claims manager being hounded to pay for expensive compounds or treatments to say no unless there are clear regulations and policies in writing. Compound creams are just one example of fee-for-service schemes that pump money out of other comp systems.

Franklin said there is simply no evidence that compound creams are medically effective and as far as he’s concerned, that’s the end of the conversation.

“There’s no compromise solution,” he said. “There’s no evidence, and we don’t pay for stuff that doesn’t have evidence.”