Dodgy companies peddling pricey compound pharmaceuticals have fleeced the Tricare program so severely this year that they are largely to blame for a $2 billion defense health budget hole.

In fiscal 2010, military outpatient pharmacy costs totaled $6.6 billion, with $23 million spent on compound drugs. By fiscal 2014, outpatient pharmacy costs had risen to $7.7 billion, but compound drugs costs soared to $515 million. In the first nine months of fiscal 2015, compound drug costs tripled again for Tricare, to $1.7 billion, or more than 20 percent of the $8.2 billion Tricare expects to spend on outpatient drugs for the year.

“It’s really unheard of to see this kind of a spike, and it threatens our program,” said Jon Rychalski, deputy assistant secretary of defense for health resources management and policy, in a phone interview.

Compound pharmacies combine more than one medication or ingredient to create drugs not available commercially. But compound drugs have been at the center of abusive marketing and pricing schemes. After the private sector health industry clamped down on these operations a few years back, they refocused on the military and Tricare beneficiaries, officials said.

Many retirees, it seems, got unsolicited calls asking if they had aches or pains and informing them of special drugs that would bring relief and that the Tricare retail pharmacy benefit would cover. In two years Tricare’s average cost for a compound drug jumped from $192 to $2,595.

“There were unscrupulous people out there taking advantage of this, heavily marketing in many different ways,” Rychalski said.

Dr. Jonathan Woodson, assistant secretary of defense for health affairs, joined with the military surgeons general and director of the Defense Health Agency last month to send a letter to the armed services and appropriations committees. It seeks swift approval of two reprogramming requests and a new one to shift defense dollars between accounts and close a more than $2 billion funding gap “largely driven by the compound pharmaceutical costs and utilization.”

While new screening rules for compound drugs “have successfully curbed the inappropriate and potentially fraudulent activity in this area,” the letter says, two other factors add to the budget shortfall: medical inflation and more beneficiaries using Tricare than forecast.

Rychalski, however, gave assurances that beneficiaries will see no “disruption to care through the Tricare network or in the direct health care system.” A worst-case scenario, if Congress delays action on reprogramming until it returns from summer recess in September, is that Tricare could be forced by mid-August to delay doctor reimbursements.

With its first two reprogramming requests, the department seeks to use more than $500 million in unspent health care dollars. That could be money available due to delays in staff hiring or unspent contract dollars. For the third reprogramming, almost $900 million, the target is budget savings from lower fuel costs, also to be diverted to Tricare to offset the cost of compound drugs as well as new, costly Hepatitis C treatments.

All four defense committees, House and Senate authorizers and appropriators, “seem supportive” of reprogramming, Rychalski said. The House Appropriations Committee was first this week in clearing the largest reprogramming request.

Congress should also know that $400 million of the shortfall reflects rising health costs unrelated to drugs, a harbinger perhaps that a long period of modest medical inflation is ending. If so, Rychalski warned, the House and Senate appropriations committees have added more risk to military health programs by whacking the health budget for fiscal 2016 by $1.4 billion and $786 million respectively, off the department’s budget request.

“We are seeing what we believe are generally increasing health care costs, and we think that’s going to endure,” he said. So the deep cuts by appropriators “are really too great for us to be able to fully fund the defense health program. . Based upon our current-year experience and trends we’re seeing, these reductions are really not sustainable.”

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