Federal Audit Finds Medicare Part D Paid $587.7 Million for Drugs That Should Have Been Over-the-Counter

Every dollar spent on Medicare comes from somewhere: payroll taxes, premiums, general tax revenue. When that money gets spent on things it shouldn't, it's not an abstract accounting problem. It's money that could have gone toward drug coverage for someone who actually needs a prescription, or toward shoring up a program that millions of older Americans depend on for their medications.

That's the backdrop for a new audit from the Department of Health and Human Services Office of Inspector General, which found that Medicare Part D plans made an estimated $587.7 million in improper payments between 2021 and 2023. The money went toward five drugs that had been reclassified by the FDA from prescription-only to over-the-counter, but were still being labeled and billed as if a prescription were required.

Think of it like a store that keeps ringing up a candy bar as a controlled substance because nobody updated the price tag. The product changed. The paperwork didn't catch up. And Medicare kept paying the higher, prescription-tier price for something anyone could grab off a shelf.

OIG's explanation is fairly straightforward, even if the consequences were expensive. The Centers for Medicare & Medicaid Services relied on outdated FDA data to determine which drugs required a prescription. When a drug's status changed from Rx-only to OTC, that update didn't always make it into the systems CMS and Part D plans use to decide what's eligible for payment. On top of that, CMS never set a firm deadline for plans to stop paying for these drugs once the labeling issue became apparent. Without a clock ticking, improper payments just kept flowing.

How the Gap Opened Up

The roots of this problem trace back to how drug labeling actually works in practice. When the FDA approves a brand-name drug for over-the-counter sale, that's usually a well-publicized shift. Generic versions of the same drug, though, don't automatically follow suit. Manufacturers of generics have had to separately update their own labeling, and until recently, there was no strict timeline forcing them to do it quickly.

That gap matters more than it might seem. A generic drugmaker could, in theory, keep selling a product under old Rx-only labeling for months or years after the brand name equivalent went OTC, even though the underlying medication was chemically identical. Part D plans, relying on labeling and CMS guidance, kept treating those generics as prescription drugs eligible for reimbursement. Pharmacies submitted claims. Plans paid them. Nobody along the chain was necessarily doing anything wrong by the rules as written; the rules themselves just hadn't kept pace with the FDA's own regulatory actions.

This isn't a hypothetical concern dreamed up by auditors with too much time on their hands. OIG notes that the audit was prompted in part by a 2022 case in which a drugmaker agreed to pay $7.9 million to resolve allegations tied to exactly this kind of obsolete labeling being used to bill Part D plans. That settlement should have been a warning sign. Instead, it appears to have been treated as an isolated incident rather than a symptom of a broader systemic problem.

To its credit, the FDA has already moved to close part of this gap. In December, the agency released a policy requiring generic drugmakers to update their labeling within six months of a drug being approved for OTC use, rather than letting that transition drag on indefinitely. That's a meaningful fix on the manufacturing and labeling side. But it doesn't address the other half of the equation: how quickly Part D plans stop paying for a drug once its status has changed, and whose job it is to make sure that happens on schedule.

That's where OIG's central recommendation comes in. The agency wants CMS to issue clear guidance directing Part D plans to reject payment claims for drugs that have shifted from prescription-only to over-the-counter status. Right now, there's no such mandate with teeth. CMS said it agrees with the recommendation, which is a good sign, but agreement isn't the same as implementation. Guidance documents can sit in draft form for a long time if there's no external pressure to finalize them.

It's worth pausing on why this particular type of error is so easy to miss. Improper payments in Medicare often get attention when they involve fraud: someone billing for services never rendered, or padding claims for higher reimbursement. This is different. It's a case where the underlying products didn't change price or formula. What changed was their regulatory classification, and the systems meant to track that classification simply lagged behind reality. That's a quieter, less dramatic kind of failure, but the dollar figure attached to it, nearly $588 million, shows it's no less costly.

Why It Matters

Government watchdogs exist precisely to catch this kind of slow-moving leak before it becomes a permanent feature of the system. Nearly $600 million is a meaningful sum by any measure, and in a program that serves tens of millions of beneficiaries, every dollar spent on outdated labeling technicalities is a dollar not spent on actual care.

There's also a broader lesson here about the plumbing of federal health programs. Rules and data systems need mechanisms to stay current, not just at the moment they're written, but continuously, as underlying facts on the ground shift. The FDA's new six-month labeling requirement is a step in the right direction. So is CMS's stated agreement with OIG's recommendation. Whether that agreement translates into a firm, enforceable timeline for rejecting improper claims will determine whether this particular leak actually gets plugged, or whether it just quietly reopens the next time a drug's status changes and nobody updates the paperwork in time.