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

For millions of Medicare beneficiaries, the difference between a "prescription" drug and an "over-the-counter" one isn't just paperwork. It can mean the difference between a modest copay and a bill that taxpayers, through Part D, end up covering at a much higher rate. A new federal audit suggests that distinction broke down on a massive scale, and nobody caught it for years.

The Department of Health and Human Services Office of Inspector General estimated that Medicare Part D plans made $587.7 million in ineligible payments between 2021 and 2023. The money went toward five drugs that had already been approved by the Food and Drug Administration for over-the-counter sale, but were still being labeled and billed as if they required a prescription.

Think of it like a store that keeps charging premium prices for an item long after it's been moved to the discount aisle. The label never got updated, so the register never adjusted. In this case, the "register" was the Medicare Part D payment system, and the tab ran into the hundreds of millions of dollars.

How the Oversight Gap Happened

The root of the problem, according to OIG, wasn't fraud in the traditional sense. It was a data lag. The Centers for Medicare & Medicaid Services relied on outdated FDA information about which drugs were prescription-only. When a drug's status changed to over-the-counter, that update didn't always make its way into the systems Part D plans use to decide what's eligible for payment.

Compounding the issue, CMS never set a firm deadline for plans to actually reject claims for these reclassified drugs. Without a clear timeline, plans kept paying. OIG's report put it plainly: the agency's oversight "did not prevent" Part D sponsors from making these payments, even though federal rules are designed to block exactly this kind of coverage gap.

It's worth understanding why the labeling matters so much. When the FDA shifts a drug from prescription-only to over-the-counter status, it's usually because regulators have decided consumers can safely use it without a doctor's involvement. Medicare Part D, which is built to cover prescription drugs, generally isn't supposed to pay for medications once they've crossed that threshold. But if the packaging still says "Rx only," and the government's own database agrees, a plan has little reason to question the claim.

This isn't a hypothetical risk that OIG stumbled into by accident. The audit was launched after a drugmaker agreed in 2022 to pay $7.9 million to settle allegations that it had submitted claims to Part D plans under obsolete prescription-only labeling for drugs that had already moved to over-the-counter status. That single case was enough to raise a red flag large enough for investigators to ask: how widespread is this, really? The answer, it turns out, was considerably larger than one company's conduct.

To its credit, the FDA has already moved to close part of the loop. In December, the agency released a policy requiring generic drugmakers to update their labeling within six months of a drug's approval for over-the-counter use. That's a meaningful fix on the manufacturing side. Manufacturers can no longer sit on outdated prescription-only labels indefinitely once the FDA has changed a drug's status.

But labeling is only half the equation. Even with faster label updates, CMS still needs a system that catches the change and pushes it downstream to the plans processing claims. That's the piece OIG is asking the agency to fix. The inspector general recommended that CMS issue clear guidance directing Part D plans to reject payments for drugs that have shifted from prescription-only to over-the-counter status. CMS said it agreed with the recommendation, though the audit doesn't specify a timeline for implementation.

There's a broader pattern worth noting here, too. This isn't the first time OIG has raised concerns about how well CMS oversees the Part D program. The agency has previously flagged unresolved questions about the effects of vertical consolidation, the trend of insurers, pharmacy benefit managers, and pharmacies merging under single corporate umbrellas, on Part D costs and competition. Taken together, these reports paint a picture of a program that has grown complex enough that even well-intentioned oversight struggles to keep pace with how money actually moves through it.

None of this is to suggest bad faith on the part of Part D plans. Sponsors are working from the data CMS gives them. If that data is stale, the plans have limited ability to catch the error on their own, especially at the volume of claims processed nationally. The failure here is systemic, not individual. That distinction matters, because the fix has to happen at the systems level, not through penalizing plans that were simply following the information they were given.

Why It Matters

Every dollar spent on ineligible drug payments is a dollar that isn't available for the parts of Medicare that genuinely need it. Part D operates on premiums, taxpayer subsidies, and beneficiary cost-sharing, all of which are calibrated based on assumptions about what the program will actually cover. When hundreds of millions of dollars leak out through a labeling technicality, those assumptions get quietly distorted.

There's also a fairness dimension here that shouldn't get lost. Beneficiaries trust that the drugs they're prescribed, and the costs attached to them, reflect accurate, current information. When outdated labeling data drives real financial outcomes, that trust takes a hit, even if no single actor intended to deceive anyone.

The fix OIG has proposed is not complicated in concept: keep the labeling data current, give plans a clear deadline to act on it, and close the gap before it costs another half-billion dollars. Whether CMS can execute that fix quickly, and whether the FDA's new labeling rule speeds up the process on the manufacturing side, will determine whether this becomes a one-time correction or a recurring drain on a program millions of older Americans depend on.