The Bottom Line Pharmacy Podcast: Navigating The Legal Maze of 503B Compounding Featuring Dae Y. Lee, PharmD, Esq., CPBS

Many independent pharmacies are dealing with low reimbursements from PBMs which has forced them to look for other revenue sources. One of those sources being semaglutide!  

In this episode of The Bottom Line Pharmacy Podcast, we explore the world of 503B and 503A pharmacies! We sit down with Dae Y. Lee, PharmD, Esq., CPBS and Partner at Frier Levitt to discuss the latest regulations, compliance requirements, and best practices for both 503B outsourcing facilities and 503A compounding pharmacies, trends in PBM audits, marketing semaglutides, and more! 

Join the discussion with us! 

ASK A QUESTION

More resources about this topic:  

Podcast – Driving Independent Pharmacy Profitability in 2024

If you prefer to read this content, the video transcript is below:

Dae Y. Lee: I’m a partner and a pharmacist attorney at Frier Levitt. I also have a degree in the pharmacy benefits design. I represent, you know, our firm has a, you know, is a national firm representing healthcare as well as life science clients. That’s all we do. I personally represent a lot of independent pharmacies, manufacturers, employers, and client sponsors with their dealings against PBMs, whether it be PBM audit or enrollment denial, wrongful network termination, spread pricing tactic, rebate tactic. I also advise my clients on the general practice of pharmacy and regulations. 

Scott Sykes, CPA, CFP®: Well, Dae thanks again for hopping on. Of course, we do have several clients who work with Frier Levitt with the work you guys do in pharmacy specifically. We’ve done some podcasts with you guys before and we appreciate all the hard work you do for independent pharmacies. But I know today we wanted to talk about 503B pharmacies and the compounding space, the semaglutide. I’ve had pharmacists ask me, they wanna get into the compounding. They may do some small compounding there in the pharmacy. They wanna get into it. There are some kind of unknowns or regulatory concerns maybe around there. Why don’t you just talk about maybe what issues or concerns pharmacies that do want to get into semaglutide compounding, what things they should consider or review before maybe jumping into this so-called trend right now? 

Dae Y. Lee: Sure. Semaglutide has been a hot topic for pharmacies throughout the country, especially independent pharmacies, because many of them are dealing with low or below water reimbursement rates pushed out by pharmacy benefit managers, in short, PBMs. So, they have been trying to find another source of revenue. And I applaud their efforts. And semaglutide has been one of those revenue sources or new revenue sources for independent pharmacy. So back in June of last year, 2023, the FDA issued a draft guidance which permitted 503A pharmacies, so, you know, regular retail compounding pharmacies to purchase compounded medication from 503B facilities for dispensing to a specific patient. So since then, our firm has been getting a lot of interest and a lot of clients who want to purchase the semaglutide finished product from 503B facilities and then dispense it directly to patients. So, but there are, as this segment of compounding practice has gotten a lot of attention from the independent pharmacy owners and the pharmacists themselves, there has been a lot of scrutiny as well as uncertainty as to what is the best practice for independent pharmacies. So, we have been advising our clients both on the federal level, but also on the state level, and navigating certain complex issues involving semaglutide compound prescription. 

Scott Sykes, CPA, CFP®: So, I guess there’s two things. There’s pharmacies that are already compounding that wanna start compounding it there in-house. There’s pharmacies that want to go to a 503B facility, acquire the kind of off-the-shelf if you will, product and distribute that to patients. Is that the correct? And so what are some of those areas of concern or risks rather that pharmacies need to explore and check off the box when it comes to looking into that. 

Dae Y. Lee: So many of the pharmacies, obviously in the current pharmacy industry, there are not that many 503A compound pharmacies. One of the main reasons is PBMs do not like compound pharmacies. So many of these pharmacies are just regular retail pharmacies and that are now interested in purchasing the semaglutide product from 503B pharmacies. And the 503B to 503A model is for the movement of semaglutide compound at the community pharmacy level is fairly new, so that pharmacies are very important for them to 503A pharmacies, important for them to stay ahead of any development. So, one of the area is to make sure that 503B, the products that they’re getting from the 503B are the right products and has the right documentation, but also the facility itself has the right credentials. For example, the 503B must be registered with the FDA, but also the 503B must be registered with the State Board of Pharmacy for each state that it is shipping the compound drugs into. So that is one of the hot area where regulatory scrutiny has been seen. And for 503A, who is purchasing from 503B, they can’t resell it to other practices like physicians or even another pharmacy. That’s not allowed, you have to dispense it directly to the patient. And the prescription must be a, you know, for 503A, it must be a, for a specific patient need and it’s for the specific patient prescription. And we advise our clients, 503A clients, to have a contract with 503B. And because, you know… we need to address the, you know, potential adverse events, quality of the product sold, recalls, or auto specification notification, all those have to be fleshed out before 503A pharmacies start purchasing from 503B. But unfortunately, 503A pharmacies, these are retail pharmacies. They don’t have, not only financial resource, but also a lot of times have a shortage in staff. And whenever they see a new revenue source, they jump on it. But whatever is done, it’s done. You can’t fix that. So you have to, we always advise our clients to contact us or contact other industry experts before taking any action on the 503B Pharmacy, and the semaglutide product and certain state board of pharmacies, they don’t allow even though there’s a federal draft guidance, right? They don’t allow 503A to purchase from 503B. So not only you have to comply with the federal level at the federal level. You have to comply with the state level.  

Scott Sykes, CPA, CFP®: So due diligence is paramount here. 

Dae Y. Lee: Mm -hmm 

Scott Sykes, CPA, CFP®: Like you said once you’ve started the process you’re in it so you got to do that due diligence upfront and then some states like you said also don’t recognize that. Don’t allow that. 

Dae Y. Lee: Correct. Right. Well, I had a couple of cases where the specific state board has state boards have not issued any written guidance. But when the 503A pharmacies contact the board by calling them and they get a response from the board indicating that you cannot purchase from 503B. So it’s just a little bit of a… So every state has different rules and regulations. So you have to treat that very carefully. 

Scott Sykes, CPA, CFP®: And they’re kind of making it up as they go, right? You know, this is a new area maybe. And like you said, they haven’t issued any official guidance and there’s just some correspondence here and there about how to handle it. So, I imagine that can get pretty tricky. So due diligence is paramount here.  

Dae Y. Lee: Correct. 

Scott Sykes, CPA, CFP®: Dae, how about a little background on how we got here? You know, the Mounjaros and so forth. There’s a shortage there in terms of manufacturing, I believe is the case and the FDA opens this up. Can you kind of expand on that and how we got here in general? 

Dae Y. Lee: Yes, I mean, there, you know, as you, as you said, there are shortages of those brand products and there’s, you know, at the same time, almost at the same time, there’s a, you know, the FDA draft guidance happened, but I think the core, I guess the movement where it all stemmed from is the, the current pharmacy industry and, the scrutinies and the low water reimbursement thrown upon the independent pharmacies by the PBMs. And as we all know, 80% of the Americans’ prescriptions are controlled by top three PBMs. And these PBMs, in order to get into their retail network, you have to sign a contract and those contract terms  for independent pharmacies are non-negotiable, is take it or leave it. And the reimbursement rates that they push out is take it or leave it. And many times, maybe over 90, 95% of times. I mean, our firm has helped certain providers to get better rates using certain legal arguments, but majority of the independent pharmacies are, you know, they’re not going to be successful in negotiating the terms of the contract or reimbursement. So what do they need to do? They need to increase the margin by, you know, profit margin by finding new revenue source or buy drugs at a very cheaper price. But when you buy drugs from cheaper price, when you buy drugs at cheaper price, you tend to use secondary wholesaler. And PBMs also implemented different terms and conditions of the sourcing of the drugs. Some PBMs say, you must buy products from only NABP approved distributors. Or if you’re going to buy the test strips, you got to buy from manufacturer or manufacturer authorized wholesaler. And that limits the sourcing of the drugs for independent pharmacies. And you know, and then at the same time, there’s a lot of audits going on, fraud ways and investigations going on. And the pharmacy, whenever they get hit with audit, they have to shift their focus and responding to the audit. Otherwise, you not only get the financial or penalty in dollar amounts in the form of recruitment by the PBM, but also there might be other sanctions, right? Sanctions being network termination, payment suspension or adjudication suspension. And once a pharmacy gets terminated, ultimately terminated by one PBM network, then it can spread to other commonly owned, affiliated, or related pharmacies, but also it can spread to other PBM contracts. And as I said before, only three PBMs control 80% of the entire prescriptions. So losing one could be devastating to the pharmacy. So that’s why the pharmacies are now trying to look for new revenue source such as semaglutide. 

Scott Sykes, CPA, CFP®: Of course. What are the current trends in the PBM audit space you’re seeing? 

Dae Y. Lee: I mean, PBMs, they have different types of audit discrepancies that they try to attach to each claim on top of the, you know, their traditional invoice reconciliation audit. Some of the hot, discrepancy types are copay, you know, failure to provide a proof of copayment collection, or, you know, patient denial, prescriber denial, drug invoice shortage. And nowadays they request documents that are not readily available from the pharmacy. Like for example, let’s say pharmacy gets audited and then there’s a copay discrepancy. In the past, PBMs would accept like receipt showing that the pharmacy did in fact collect copays from the patient. Nowadays, they request credit card merchant record. They even request the deposit slips for cash payment. And on top of that, they want patient attestation. But these are claims that got filled by a pharmacy a year, two or three years ago. And the patient at issue might not be the current patient, might pass away. Right? Might have passed away or the patient is mentally unstable and the pharmacy cannot obtain the attestation. And the end result would be full recruitment on the drug claim, not the copay amount, the reimbursement that the PBM paid out to the pharmacy. And that is inclusive of the, it doesn’t account for the acquisition cost. So the pharmacy is, you know know, minus 100% on that claim. And for drug invoice shortage, if we do a back of napkin math, it’s pretty simple. It’s comparing what you bought versus what you billed. So if you have surplus or the exact amount of the drug that you bought against the billed amount, there shouldn’t be any shortage. However, PBMs can create and they do create shortage by different means such as, as I said before, the sourcing of the drug. Even if a pharmacy bought the same NDC product and dispensed it in accordance with the facially valid prescription, but if you bought it from unauthorized wholesaler or non-NABP approved distributor, they don’t recognize. They don’t give any credit on those drugs. And of course, we deal with these discrepancies and we were very successful in terms of reversing the audit discrepancies. But for pharmacies, they need to spend their resource to not only collect the document, but also pay attorneys and then try to dispute them. So those are the pretty hot topics that we see. and one more thing, I’m sorry for keep going on this route, but now PBMs are focusing on the online platform where the pharmacies purchase their products from. From other, you know, the… 

Scott Sykes, CPA, CFP®: Like the wholesaler? Secondaries? 

Dae Y. Lee: No, like, for example, like if pharmacy bought it from or bought through online platforms, the online platforms may include RxSeed, MatchRx, Trexade, EZRx, and they upload, right? Or they sell the overstock inventory on a specific patient needs. But nowadays, PBMs are very, very hot on that aspect. And it became a hot topic, more of a hotter topic, almost after RxSeed filed a lawsuit against CareMark. 

Scott Sykes, CPA, CFP®: What can pharmacies do to make these audits go as easy and quickly as possible? What’s the best practices that pharmacies should be doing? 

Dae Y. Lee: In an ideal world, I would recommend a pharmacy to do a mock audit, maybe once or twice a year, internal audit to check their inventory and then focusing on the highly reimbursable drugs, right? And then also do a mock prescription related audit and continue that practice. And whenever they get hit with a notice of audit, they have to really spend their time. They really have to spend their time collecting the right documents and then send submitting in the most organized manner because at the audit level you’re dealing with, you know, lack of a better word, low level employee at a PBM. So that employee just has a checkboxes to go through and then doesn’t really take time to review the documents submitted by the pharmacy. So, when we submit an appeal response or notice of dispute, we tick and tie our arguments with the specific sections of the supporting documents that we submit. And we put our own unique page number on those supporting documents. And then we point to that page during any dispute resolution call or dispute resolution meeting. 

Scott Sykes, CPA, CFP: We do the same thing with the IRS. You gotta, you gotta dumb it down.  

[Laugh break] 

Dae Y. Lee: Yes, yes. 

Scott Sykes, CPA, CFP®: Bonnie, are you asleep over there? 

Bonnie Bond, CPA: I’m not, I’m just taking this all in. It’s a lot of good information. 

Scott Sykes, CPA, CFP®: Yeah, we’re used to that with the IRS. Tying it down piece by piece. What other bits of knowledge you want to share with the audience out there Dae? 

Dae Y. Lee: In going back to a semaglutide issue, I want to, you know, advise the, or educate the 503A pharmacies that, you know, not only they have to vet the 503B facility, but also they really have to watch out when, promoting or marketing I don’t want to say promote more of a marketing right? You can, because compound products in and of itself is not FDA approved. So, a pharmacy cannot say anything about the safety or efficacy of that product. They cannot make any health claims. Okay. And then, you know, they should stay away from, advertising using the, like a pre-printed prescription form. Which has been tied to a lot of government investigation as well as indictments. And they have to make sure that they’re marketing their service instead of focusing on a certain product. And they shouldn’t say that, we are compounding Ozempic or we are compounding Mounjaro or Wegovi. You can’t say that. Because it affects the brand manufacturer, the trademark or brand name. In association with that, I believe there are several lawsuits out there. 

Bonnie Bond, CPA: So, what is a good thing to say if you’re putting it out there without saying that? 

Dae Y. Lee: I mean, you know, you have to stay away. I mean, I don’t think there’s an ideal way to market because every pharmacy is different. Every market is different. But they definitely should stay away from those red flags.  

Bonnie Bond, CPA: Yeah. Using the brand name drugs. Yeah, yeah. 

Dae Y. Lee: Yeah. Yeah. And then we’re making any health claims. It’s just that’s not a good practice. Sometimes pharmacies, and I actually had cases where pharmacies got looped into the pending lawsuits as a non-party witness per se or a non-party to the lawsuit and received subpoenas from the manufacturer asking the pharmacy to provide certain documentation. 

Scott Sykes, CPA, CFP®: You don’t want to find yourself in that position. 

Dae Y. Lee: Right, right. Yeah. And then, and one more thing, and there’s a lot of clinics out there, right? Whether it be weight loss clinic or Mespa or whatnot. And then those clinics roll out subscription based, you know, monthly products to their patients. And then, you know, rolled into it is the pharmacy service. So, you and the pharmacies, you know, before getting into that or creating that arrangement, you obviously the pharmacies must vet the provider must, you know, take time to craft a compliant agreement and, you know, make sure that arrangement is kosher. 

Bonnie Bond, CPA: And that’s a big thing people are doing. I mean, I’ve got a friend that got her some of the weight loss compounds from, you know, like you mentioned a medspa is where she gets hers.  

Dae Y. Lee: Mhm. Right. I mean. 

Bonnie Bond, CPA: And then, you know, on social media, people are definitely marketing, you know, to sign up with this group and you get your, you know, consultation and they’ll ship you the drugs, ship you the drugs direct to your home. So.  

Dae Y. Lee: Yeah. So, you know, the, you have to make sure that arrangement is compliant with the applicable federal and state law, you know, who’s paying what kind of, who’s paying the pharmacy, who’s paying the prescriber, you know, where the pharmacy is shipping the products into, whether that, whether the pharmacy has the licenses to ship into the state, you know, and whether the pharmacy actually established a patient, pharmacy provider relationship and verify the prescriber patient relationship. I mean, there’s a host of issues that need to be vetted. 

Bonnie Bond, CPA: So the bottom line is if you want to get into any of this, you better call Dae . 

Dae Y. Lee: Mm -hmm. Yes, yes, call me. Call any of our attorneys. Yeah. 

Scott Sykes, CPA, CFP®: All day. 

Bonnie Bond, CPA: Yes early… I would call today. I do something similar when I work with startups. Those looking to purchase stores and you would probably rather someone call you earlier than later, right? After they’ve made a mess of it. So maybe just in the initial phases. Probably want to reach out to someone that can help you on the legal side of things. Sounds like to me. 

Dae Y. Lee: Yes. 

Scott Sykes, CPA, CFP®: Well, in pharmacy case Bonnie, we’re dealing with maybe IRS issues or accounting issues. You’re dealing with patient health over here. This is a whole other animal. 

Bonnie Bond, CPA: Exactly. Exactly. 

Scott Sykes, CPA, CFP®: Which I’m glad it’s not me, I’d rather be dealing with the book side of it. 

Bonnie Bond, CPA: The financial part of it. 

Dae Y. Lee: Yeah. 

Scott Sykes, CPA, CFP: But yeah, due diligence is key here, I think, when it comes to any of this. And, you know, it’s not gonna last forever. I’m sure the FDA is gonna crack down on it sooner rather than later. If I had to guess, Dae, what’s your take on that? 

Dae Y. Lee: Yeah, once the semaglutide injection form is off the shortage list, 503B cannot compound. So 503A can still compound, but there’s got to be medical needs. So it is very important for 503A to make sure that they record or document the medical needs for such compound product. And that’s the same case for Rebelsis-based product or all Semaglutide. But nobody knows when the FDA will take it off of the market or off of the list. 

Scott Sykes, CPA, CFP®: All right, well. Bonnie, you wanna do the bottom line segment? I think we covered that. I mean, due diligence, bottom line. 

Bonnie Bond, CPA: Sure. Yeah, that’s kind of what my bottom line was a few minutes ago. You really just got to get somebody to help you. Things are complicated. Like you said, Scottie, even in the accounting world, whether it be that, whether it be on a regulatory side, legal side, you just have to dive into the industry and find people who are really good in their sweet spots in the industry and get their help and assistance with stuff like this. Make sure you’re set up right from the beginning. That’s my bottom line. 

Scott Sykes, CPA, CFP®: Dae, what’s your takeaway for the listener today? 

Dae Y. Lee: There are a lot of potential areas of concern, but those areas should not deter pharmacies from entering into this new revenue source. And we can navigate those complex issues. 

Scott Sykes, CPA, CFP®: Good. Yeah, because I’ve had some pharmacies ask me about it and that’s beyond my expertise. And I’ve recommended, you know, speak with other experts, including you guys on this topic. So good to know for those out there listening, for sure. But Dae, we appreciate your time and insight today and hope to have you guys back on again soon.