Compounding Fraud on the Rise as Sixteen Individuals Are Charged in $175 Million Fraud Scheme

On September 1, 2016, the United States Attorney for the Southern District of Florida announced the filing of a five-count criminal Information charging sixteen people with various federal crimes related to a massive $175 million compounding pharmacy fraud scheme.

According to the Information, the defendants used various business entities including Numed Care, LLC; ClinicalCorp, LLC; RX of Boca Raton, FL and a compounding pharmacy located in Dallas, Texas to perpetrate an extensive fraud on numerous health care insurance providers.  The defendants, led by Clifford Carroll of Boca Raton, FL, who was charged with conspiracy to commit racketeering, prepared and sold medications in bulk quantities which were falsely represented to be compounded medications, which must be prepared in small quantities for specific individualized patient needs and are thus exempt from FDA inspection.

The health insurance providers then compensated the defendants based on such false representations for the alleged costs of the ingredients for the medications.   However, these reported costs, referred to as the Average Wholesale Price (AWP), of the purported compound prescriptions was consistently and fraudulently inflated to fetch the highest price possible.   The co-conspirators utilized cosmetic grade solvents to increase payments without regard to medical necessity or safety and charged and received up to $31,000 for one tube of compounded cream medication.

The defendants also implemented dubious schemes to ensure they had patients and prescriptions for which they could fraudulently bill.  To acquire patients, the defendants used mass marketing techniques and call centers to solicit potential patients.  The defendants cold-called these potential patients without prior request or referral after procuring their personal information from the internet and elsewhere.  These tele-marketers would then read from prepared scripts, making false representations about the products to induce the patients to authorize the tele-marketers to fax unnecessary prescriptions to the patient’s physician.  The defendants, three of whom are physicians, also developed a kickback scheme to induce corrupt physicians to prescribe compounded pharmaceutical creams on illegally provided pre-printed prescription order forms, regardless of medical necessity.

This fraud was perpetrated primarily against private insurance companies, which is why the defendants were charged with various racketeering, conspiracy, mail and wire fraud counts, not False Claims Act violations which require fraud against the government.  However, similar schemes involving unnecessary compounded medications, kickbacks and aggressive tele-marketing tactics that targeted government programs have been progressively discovered and prosecuted.  The epicenter of this fraud has been operations with some connection to Florida.  In February 2016, the Department of Justice announced a $10 million settlement regarding a similar fraud scheme perpetrated against TRICARE, the military healthcare program in the Jacksonville, Florida area.  There have also been recent indictments in the Southern and Central Districts of California, charging individuals with similar schemes involving TRICARE and Medicare patients.

With compounding fraud cases on the rise, whistleblowers coming forward with information regarding these types of fraudulent schemes are necessary to stamp out this dangerous and wasteful fraud.  Under the qui tam provisions of the False Claims Act, whistleblowers with information about compounding fraud against the government may bring a civil case on behalf of the United States. If successful, the government can recover three times the amount the defendants fraudulently billed the government.  The whistleblower, who originally filed the case, is entitled to 15-30% of the government’s recovery as well as their attorney’s fees.

To report fraud, contact Frohsin Barger & Walthall.