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Compounding concerns in Texas - is a change on the horizon?

Optum Workers' Comp
| Jun 14, 2016

The Texas Closed Formulary is constructed such that any compounded medication containing all “Y” ingredients (contrasted with “N” drugs) will process as presumptively-approved and thus be subject only to retrospective review. The exception is a non-FDA approved or experimental medication, which is subject to a preauthorization process. As a result, since 2011 the cost and utilization of compounded medications in Texas has increased, sparking concern among stakeholders and increasing disputes between pharmacies and payers.

In 2015, the Texas Division of Workers' Compensation (DWC) initiated a data call and earlier this year, adopted an audit rule to review the medical necessity and utilization patterns of compounded medications in the Texas system. The Texas legislature also held hearings this past spring during which testimony was heard on the issues associated with the prescribing and dispensing patterns of compounded medications. These actions revealed that payers are scrutinizing the use of compounded medications, especially when they are prescribed as initial medications or in the early stages of a claim, before commercially available and oral medication therapy has been tried. In many cases payers are denying payment for the compounded medication(s) prospectively based on a lack of demonstrated medical necessity while in other cases payers are challenging the use of compounded medication(s) based on the fact that compounded medication(s) are not FDA-approved and that the mixing of various ingredients in ways that are not FDA-approved constitutes the creation of an experimental or investigational drug. In response, compounding pharmacies are pushing back and filing medical fee disputes with the DWC.

A quick review of a small sample of decisions shows outcomes on those cases have been mixed.

  • In situations where the compounded medication contained an ingredient that is listed as an “N” drug in the closed formulary, the DWC consistently upheld the denial of payment by the payer was justified when no preauthorization was obtained. For example, American Specialty Pharmacy v Midland County Hospital District, MFDR # M4-15-2952-01, May 12, 2015. A link to the decision is here.

  • Other cases where a compounded medication that contained only “Y” ingredients was denied for lack of pre-authorization, the DWC ordered the payer to reimburse the pharmacy since preauthorization is not required for “Y” medications. For example, Memorial Compounding Pharmacy v Ace American Insurance Co, MFDR # M4-16-1099-01, December 28, 2015. A link to the decision is here.

However, when the issue of medical necessity was involved, of the few fee disputes we could find where the carrier denied payment using the non-FDA approved and experimental drug argument, the DWC universally found in favor of the compounding pharmacy and the payer was ordered to provide reimbursement. For example, American Specialty Pharmacy v Travelers Indemnity Company of Connecticut, MFDR # M4 -15-2937-01, May 11, 2015. A link to the decision is here. Recently, this case was appealed by the insurance carrier.

On June 2, 2016, the appellate body, the Texas State Office of Administrative Hearings (SOAH) issued a ruling in Travelers Indemnity Company of Connecticut v. American Specialty Pharmacy reversing the earlier DWC finding and ruling in favor of Travelers on their denial of payment. The actual decision of SOAH can be found here. One of the critical elements of the decision is that SOAH reasoned the combination of the various ingredients constituted a new medication that was not FDA-approved and was investigational and experimental and therefore subject to preauthorization.

This is a single decision and it’s difficult to say if the decision is precedent-setting or if regulators will view the case as factually unique and isolated. Complicating the application of the decision is the fact that American Specialty Pharmacy failed to appear at the hearing making it unclear if the merits of the case could be fully explored without their presence. Whether or not the decision will be appealed to the District Court is also unknown. With this latest ruling, however, there is a sense that a perfect storm for resolution of stakeholder concerns associated with the cost and utilization of compounded medications may be brewing. As we continue to follow the developing situation we are hopeful the efforts will guide future rulemaking on compounded medications to a place that is based on credible medical evidence and best serves the needs of payers and injured workers alike. Please direct questions to your account manager or to Brian Allen, Vice President of Government Affairs, at 801.230.8379 or via email at

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