Federal And State Program-Integrity Scrutiny Of Pharmacies Is Increasing: What Pharmacies Need To Know

Government scrutiny of pharmacies is not new. Pharmacies have always been subject to oversight by federal agencies, state Medicaid programs, Boards of Pharmacy, Pharmacy Benefit Managers (PBMs), Medicare Part D plans, Medicaid managed care organizations, DEA and law enforcement. However, what we are seeing now is different in degree. There has been an uptick in investigations, audits, payment reviews and program-integrity inquiries involving pharmacies. These reviews are not limited to one payer, one state, one drug class or one pandemic-era billing issue. They are broader, more data-driven and more coordinated than many pharmacy owners realize.

Federal and state agencies are reviewing pharmacy claims, billing patterns, documentation, dispensing records, prescriber relationships, controlled substance activity, COVID-19 test-kit claims, Medicaid billing, Medicare Part D claims, telehealth-related prescriptions, compounded medications, specialty drugs, high-cost drugs, diabetic supplies and other areas where reimbursement is significant or where claims data shows unusual patterns. The pharmacy industry is already under pressure from PBM audits, network terminations, reimbursement cuts, wholesaler issues, DEA scrutiny, Board of Pharmacy investigations and staffing challenges. Federal and state program-integrity investigations add another layer of risk because they can involve overpayment demands, civil monetary penalties, False Claims Act exposure, Medicaid payment suspension, exclusion risk, criminal referrals, and collateral consequences with PBMs, wholesalers, banks and licensing boards.

The Federal Government has also ramped up scrutiny of state Medicaid programs. The Center for Medicare & Medicaid Services (CMS)has made rooting out alleged Medicaid fraud a top priority. This will likely result in increased enforcement by state regulators in response to federal pressure. Congress is likewise increasing its oversight over state Medicaid programs. In the last few months, one Congressional committee sent letters to eleven states seeking “information and documents on the actions each state is taking to strengthen Medicaid program integrity.”¹

Enforcement is ratcheting up on both the state and federal levels, and pharmacies need to treat government audits and investigative requests differently from ordinary payer audits. A PBM audit can be financially painful. A government investigation can threaten the business itself.

What Agencies Are Involved?

When pharmacies hear “OIG,” they often think of the U.S. Department of Health and Human Services Office of Inspector General. HHS-OIG is the federal watchdog agency responsible for protecting the integrity of federal health care programs, including Medicare and Medicaid. It conducts audits, evaluations, investigations, enforcement actions and exclusion proceedings. But federal OIG is only part of the picture.

At the state level, different entities, depending on the state, can serve the role that HHS-OIG does on the federal level. Some states have an Office of Medicaid Inspector General. Others rely on a state Medicaid agency, Medicaid program-integrity unit, Attorney General’s Office, Medicaid Fraud Control Unit, Department of Health, Department of Human Services or other enforcement body. These various state actors all participate in “state program-integrity scrutiny.”

A pharmacy should not assume that an investigation is only serious if it involves HHS-OIG or the Department of Justice. A state investigation can create serious legal and business exposure. These agencies may act independently, or they may coordinate with federal agencies, CMS, DOJ, U.S. Attorneys’ Offices, HHS-OIG, PBMs and managed care organizations.

In other words, a pharmacy may think it is responding to a routine Medicaid records request, but the issue may already involve a broader data review, beneficiary complaint, whistleblower report, managed care referral or a joint federal-state enforcement coordination.

Why the Uptick Matters

The increased scrutiny is not happening in a vacuum. Pharmacies sit at the center of several enforcement priorities: public health program spending, high-cost drugs, controlled substances, specialty medications, compounded products, Medicare Part D claims, Medicaid claims, telehealth prescribing, and post-pandemic billing. The government has also become better at using claims data. Investigators no longer need to wait for a complaint to begin asking questions. Data can identify pharmacies with unusual billing volume, high reimbursement per prescription, concentrated prescriber patterns, repeated refills, high-cost drug utilization, beneficiary overlap, inventory mismatches, excessive reversals or sudden shifts in drug mix.

A data anomaly does not mean the pharmacy did anything wrong, but it may mean the pharmacy becomes an outlier. Once a pharmacy is flagged as an outlier, the government may request records, compare claims against inventory, review prescriber relationships, examine marketing arrangements, contact beneficiaries, review delivery records or refer the matter to another agency. This is where pharmacy owners need to be careful. Many pharmacies assume that if the prescription was real and the patient received the medication, the claim is safe. That is not always how government program-integrity reviews work. The question is not only whether the pharmacy dispensed something. The question is whether the claim was payable under all applicable rules.

Was the prescription valid? Was it medically necessary? Was the prescriber properly licensed? Was the drug dispensed as billed? Was the quantity correct? Was inventory available? Was the claim supported by purchase records? Was the patient solicited? Was a kickback paid? Was a telehealth arrangement involved? Was the pharmacy operating within state and federal requirements? For government program-integrity purposes, the issue is whether the government should have paid the claim in the first place.

Common Issues That Trigger Government Scrutiny

Many federal and state program-integrity matters begin with data. Others begin with complaints, PBM referrals, beneficiary reports, whistleblowers, former employees, competitors, prescribers or managed care plans.

Common pharmacy risk areas include high-dollar claims, excessive refill activity, billing without proof of delivery, failure to reverse unfilled prescriptions, inventory shortages, insufficient invoice support, questionable prescriber relationships, suspect telehealth prescriptions, improper marketing, waived copays, gift cards, patient inducements, billing for drugs not picked up, billing under the wrong NPI or location and dispensing drugs that were not properly sourced. Filling of medically unnecessary prescriptions enhances the risk of an investigation under the Anti-Kickback Statute.

Controlled substances remain a separate and significant risk area. Pharmacies that ignore red flags, fill questionable prescriptions, or fail to document corresponding responsibility analysis may face not only government program-integrity scrutiny but also DEA action and Board of Pharmacy discipline.

Compounding is another high-risk area. Government agencies continue to examine whether compounded medications were medically necessary, properly prescribed, properly billed and supported by documentation. Pharmacies involved in compounding should pay close attention to prescription validity, ingredient sourcing, formula records, patient-specific need, marketing arrangements and payer-specific coverage requirements.

COVID-19 Test Kits Remain a Post-Pandemic Enforcement Risk

COVID-19 test kits are a good example of how pandemic-era billing can become a post-pandemic enforcement issue. During the public health emergency, Medicare created a demonstration program that allowed eligible beneficiaries to receive over-the-counter COVID-19 tests. The purpose was understandable: increase access to testing during an emergency. Many pharmacies participated in good faith and helped their communities during a difficult time.

However, pandemic-era flexibility does not erase documentation obligations.

The government is now reviewing whether COVID-19 test-kit claims complied with program rules. The issues being examined include whether the beneficiary actually requested the tests, whether the pharmacy actually dispensed or shipped the tests, whether the pharmacy maintained proof of delivery, whether claims exceeded monthly quantity limits, whether tests were billed before fulfillment, whether beneficiary information was obtained through improper marketing and whether claims were reversed when tests were not provided. This does not mean every pharmacy that billed COVID-19 test kits engaged in misconduct. Some issues may have resulted from confusion, operational challenges, system limitations or lack of clear claim edits during the public health emergency. But once the government identifies a large payment vulnerability, pharmacies with high-volume test-kit billing, repeated monthly claims, insufficient documentation or third-party marketing relationships may face closer review.

Highly Reimbursable Drugs Are a Major Enforcement Trigger

Highly reimbursable drugs are another major focus area for federal and state program-integrity review.

Pharmacies that dispense high-cost medications, specialty drugs, HIV medications, Hepatitis C medications, oncology drugs, transplant medications, dermatology products, compounded medications, diabetic supplies, continuous glucose monitors, GLP-1 drugs and other highly reimbursable products should expect greater scrutiny. The government follows the money. So do PBMs, Medicaid managed care plans, Medicare Part D sponsors, auditors, whistleblowers and law enforcement agencies.

A pharmacy does not need to be doing anything wrong to become an outlier. A small pharmacy dispensing a large volume of expensive drugs can appear unusual in claims data. A pharmacy with a limited number of prescribers generating high-cost claims can appear unusual. A pharmacy that suddenly shifts from traditional retail dispensing to high-reimbursement therapeutic categories can appear unusual. A pharmacy billing expensive products without matching purchase records can appear even more problematic.

For highly reimbursable drugs, documentation is everything. Pharmacies should be able to support the prescription, patient need, dispensing record, purchase history, inventory, counseling, delivery, refill authorization and payor-specific requirements. If the pharmacy cannot connect the claim to the drug that was actually purchased, stored, dispensed and received by the patient, the pharmacy may face overpayment demands, fraud allegations or referral risk.

This is where many pharmacies get into trouble. They focus on whether the prescription was valid, but the government may focus on whether the entire transaction was compliant from start to finish. That includes sourcing, acquisition, invoice support, inventory reconciliation, dispensing, delivery, billing, reversal practices, copay collection and patient communications.

Federal and State Reviews Are Different From PBM Audits

Pharmacies are used to PBM audits. They know the routine: prescription records, signature logs, invoices, copay documentation, prescriber confirmations and appeal deadlines. In short, the audits examine whether the documentation supports the reimbursement claim.

Government investigations are different.

A federal or state program-integrity investigation may involve subpoenas, civil investigative demands, interviews, search warrants, Medicaid payment suspension, referral to licensing boards, exclusion analysis, or coordination with criminal prosecutors. Most inquiries begin with a document request, but those should not be treated casually. The pharmacy should immediately determine who issued the request; what authority the agency is using; what time period is at issue; what claims are being reviewed; whether the request is civil, administrative, or criminal in nature; and whether any affiliated entities, owners, pharmacists, marketers, prescribers or vendors are involved. Pharmacies should also preserve documents immediately. That includes prescription records, invoices, wholesaler statements, inventory records, delivery logs, patient communications, prescriber communications, software records, reversal reports, billing records, contracts, marketing agreements, call logs, emails, text messages, and policies and procedures.

Destroying or altering documents after receiving a government request can create an entirely separate and more serious problem than the underlying issue.

Medicaid Program-Integrity Risk Should Not Be Underestimated

State Medicaid enforcement should not be underestimated, and is often more serious than PBM audits. State Medicaid programs have their own provider manuals, billing rules, documentation standards, enrollment requirements, ownership disclosure rules and fraud, waste and abuse provisions. Medicaid managed care organizations may also have their own audit and program-integrity processes. A problem with one Medicaid MCO can become a state Medicaid program-integrity issue. A state Medicaid issue can become a licensing issue. A licensing issue can become a PBM credentialing issue. A PBM termination can become a cash-flow crisis.

That is the domino effect pharmacy owners need to understand.

State agencies investigate more than whether there was proper dispensing and reimbursement documentation. They can investigate whether drugs were medically necessary, whether the pharmacy complied with prior authorization requirements, whether claims were properly submitted, whether beneficiaries actually received medications, whether inventory supports dispensing, whether the pharmacy billed for excluded products and whether owners or employees have exclusion or disciplinary issues. For multi-state pharmacies, mail-order pharmacies, specialty pharmacies, central-fill pharmacies, and pharmacies serving Medicaid patients across state lines, the risk is even greater. One state investigation can lead to questions from another state.

Critically, government investigations can trigger more than just recoupments. They can result in program exclusion, substantial fines and penalties, and criminal referral.

The Role of Whistleblowers

While the government is increasingly relying on claims data to identify outliers, many investigations start the old-fashioned way: with a whistleblower picking up the phone and calling a prosecutor. A whistleblower could be a current or former employee, marketer, billing company, pharmacist, technician, patient, competitor or business partner.

For pharmacies, whistleblower complaints often involve allegations that prescriptions were billed but not dispensed, patients did not request medications, inventory did not support billing, prescribers were pressured, copays were waived, marketers were paid improperly, claims were submitted through improper arrangements or owners ignored compliance concerns. Whether the allegations are true or false, they can trigger a serious investigation.

That is why internal compliance cannot be treated as mere paperwork. Pharmacy owners need to create a culture where employees can raise concerns internally, where documentation is taken seriously, and where questionable billing practices are corrected before they become enforcement matters.

What Pharmacies Should Do Now

Pharmacies should not wait until they receive a subpoena, civil investigative demand, Medicaid investigation letter, payment suspension noticeor records request. By then, the pharmacy is already playing defense.

Pharmacy owners should proactively review high-risk areas, including COVID-19 test-kit billing, high-cost drug claims, Medicaid claims, Medicare Part D claims, compounded medications, telehealth-related prescriptions, delivery documentation, invoice support, copay collection and marketing arrangements. They should also conduct internal audits to confirm that dispensing records match purchase records, claims records match patient records, and delivery records support billed claims. For expensive drugs, pharmacies should be able to trace the product from purchase to dispensing to payment.

Pharmacies should review contracts with marketers, consultants, referral sources, telehealth companies, call centers, management companies and vendors. Any arrangement tied to patient referrals, prescription volume, reimbursement or federal health care program business should be carefully reviewed for Anti-Kickback Statute risk. Pharmacies should also review their exclusion screening process. Owners, employees, contractors, vendors and certain referral relationships may create risk if excluded individuals or entities are involved in federal health care program business.

Most importantly, pharmacies should have a response plan. If HHS-OIG, a state Medicaid agency, Attorney General, Medicaid Fraud Control Unit, Medicaid managed care plan or law enforcement agency contacts the pharmacy, employees should know who is authorized to respond, who must be notified, and what documents must be preserved.

Do Not Treat a Government Request Like a Routine Audit

One of the biggest mistakes pharmacies make is treating a government inquiry like a routine document request. That is dangerous.

A pharmacy should not submit records without understanding the scope of the request. It should not guess. It should not alter records. It should not create documents after the fact. It should not contact prescribers or patients in a way that could be viewed as witness coaching. It should not allow employees to be interviewed without understanding their rights and the risks involved.

The pharmacy should identify the claims at issue, preserve all relevant records, evaluate the facts, determine whether there are overpayment issues, assess whether any corrective action is needed and respond strategically. Sometimes the right response is a narrow document production. Sometimes it is a legal objection. Sometimes it is a voluntary repayment. Sometimes it is a broader corrective action plan. Sometimes it is a full defense strategy.

The worst response is an uncoordinated one.

The Bottom Line

Federal and state program-integrity scrutiny of pharmacies has always existed, but there has a deliberate increase in investigations, audits and enforcement activity. The scrutiny is broader, more data-driven, and more likely to involve coordination among payers, agencies and enforcement authorities. 

For pharmacy owners, the lesson is simple. Do not assume that paid claims are safe claims. Do not assume that a PBM audit is the only risk. Do not assume that old claims are immune from review. Do not assume that a state Medicaid issue will stay contained.

Pharmacies need strong documentation, clean billing practices, defensible inventory records, compliant vendor relationships and a clear response plan for government inquiries.

Footnote

1. E&C Leaders Expands Investigation into Medicaid Fraud Nationwide, Press Release dated Mar. 5, 2026, Congressional Committee on Energy and Commerce, available at https://energycommerce.house.gov/posts/e-and-c-leaders-expand-investigation-into-medicaid-fraud-nationwide.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.