Defending Fair Market Value (FMV) Assessments

“Fair market value” is a legal term that tries to define the appropriateness of payments when there are conflicting or at least multiple justifications for those payments. FMV turns up in many business transactions, but specifically in payments occurring where government funds are involved. FMV in the pharma industry can affect contracts between trading partners (when the ultimate payor is CMS), or in physician-manufacturer relationships where physicians can be both advisors and clients. This article will focus on the latter situations.

The difficulties in establishing fair market value (FMV) are well known — little or no concrete guidance is available, and the guidance that is available deals almost entirely with issues surrounding the company-physician relationship. In order to understand and effectively deal with physician relationships and FMV, companies need to focus on creating a comprehensive framework for engaging physicians and not just on developing a specific fee schedule.

From an enforcement perspective, FMV is really shorthand for legitimacy. FMV fees reflect a legitimate business relationship that provides identifiable value to the company, and not just an opportunity to influence prescribers. Prosecutors and the HHS Office of Inspector General (OIG) are becoming increasingly frustrated with companies that violate (sometimes repeatedly) the anti-kickback law, engage in sham consulting agreements with doctors, pay doctors for “seeding” studies, or entice doctors by using use speaking fees. The trend is clear: Enforcement activity will increasingly focus on holding individuals responsible for the legitimacy of relationships between pharma companies and the physician-consultants they engage. Demands on the compliance function are likely to increase proportionally to enforcement activities. Companies will increasingly need a defensible framework for engaging physician consultants that includes a clear method of determining FMV fees.

Generally, companies have compliance practices in place that address interactions with healthcare providers, including, at least to some extent, fees paid to physician-consultants. Despite having institutional policies and procedures in place, companies usually find that a variety of challenges remain to be resolved. Going forward, one of the most significant of these will be ensuring that a consistent approach is used across functional groups in the organization to determine consulting fees. In addition, companies will need to capture the entirety of their relationship with physicians for aggregate spend reporting requirements and the Physician Payments Sunshine Act (part of PPACA, the Patient Protection and Access to Affordable Care law). Together, these regulatory concerns will require consistency across the entire organization in calculating and reporting FMV.

Going forward, it will become more difficult to separate FMV from related compliance issues, such as conflicts of interest or inducements/kickbacks. Past practices such as compensating researchers with offers of company stock, creating post-market clinical studies that are in any way intended to pay doctors to prescribe a product, or hiring more consultants for a speakers bureau or advisory board than are actually needed are just some of the practices that will face increasing scrutiny from investigators regarding their legitimacy. For example, if a clinical trial is a sham (as is claimed by the DOJ in Biovail’s September 2009 settlement) [REF] the issue of whether the fees paid to physicians are FMV is moot. Similarly, if a physician has multiple consulting agreements with a company, such as consulting on product development and working as a clinical investigator, a FMV fee may not prevent critical examination of the relationship and concerns about the integrity of research data.

The implication is that if FMV continues to be considered shorthand for legitimacy in a relationship by regulators and enforcement agencies, companies must keep in mind that the fee determination is only a part of the picture. The larger issue is the entire physician/company relationship — the comprehensive framework used by companies to engage physicians as consultants.

In the meantime, what is FMV?

As a practical matter there is no clear guidance on determining FMV from the OIG — they advise only that the method must be “reasonable”.[1] It is easier to say what an FMV determination is not. It is not established through a) consultant request or demand; b) opportunity cost or other substitution methodology, or c) reliance upon internal historical rates or “tainted” market values. These methods are not defensible because they do not base fees on the value of the work performed by a qualified individual; instead, they look outside of the specific relationship and service being performed.

The challenge is that, unlike valuing a commodity, it is difficult to value the type of specialized services provided to pharma companies by physician consultants. Nor is it feasible to pinpoint a specific dollar amount as FMV. Many companies have found that the best approach is to develop a fee range that can be used for similar types of engagements. Another issue is that the business need and the importance of a service that can be provided by a particular HCP may be much greater to one company than to another, so each company would likely view a “reasonable” fee for the services of a particular physician differently.

Yet, companies must look at factors such as experience, specialty area and other credentials, including professional standing — even though these factors can only partially reflect the company’s specific situation. This valuation issue can be illustrated by asking, “Should a company hire a PhD in automotive technology and design that charges $350/hour to handle an oil change?” For most companies, in most situations, the answer would be no – which means companies need to look at the service, and not only at a physician’s CV. Developing fees based solely on a CV does not take into account the company’s business need and what is actually required for a specific consulting engagement.

For example, a company may decide that physicians for its speakers bureau should have certain baseline qualifications, such as a certain number of years of practice that includes treatment of the condition at issue, and other experiences or credentials that increase credibility and influence, such as teaching or other speaking experience, board memberships, or related publications. These criteria reflect value issues both to the company and physician and can be used to establish hourly fee ranges. In this situation, each physician speaker provides a similar, if not identical, value consideration to the company, which means the baseline could also be used to develop a flat fee for the specific service of a speaking engagement (the company’s rationale being that significant variations in credentials beyond a certain point do not justify increasing the fee for this service, given the relative value of the service to the company).

Consistency in fee determinations for this example also means accounting for matters such as travel or preparation time. At times, companies will have speakers for the same program appearing both in-person and online. Using a real-world example, if a company pays its speakers $1,000 for a 45-minute online presentation and $1,650 for the same presentation in-person, it raises questions about the consistency of the fee amounts. It also may raise questions about the amount of the fee itself and how the fee was determined. Can the company’s valuation methodology defend what amounts to an hourly rate of approximately $1,000 per hour? Would (or does) the company pay physicians the same effective hourly rate for other services, such as reviewing clinical research protocols? Recent government settlements with device companies [REF] that required an independent FMV determination for hourly rates above $500/hour for physician-consultants suggest that payments of this type could invite scrutiny.

The better approach is to establish a consistent fee for the service (i.e. speaking) which is based on a reasonable hourly rate (for physicians with the desired characteristics) even if a flat fee is paid. Companies should account for variables such as reasonable travel time separately. This approach would ensure consistent valuation for the desired service — and should be part of ensuring use of consistent fee ranges for HCPs across an organization. It also would avoid questions about what the amounts actually cover – or what the intent of such a high fee actually is.

In developing FMV fee ranges, then, consider using the following valuation process:

• Examine the service activities and qualifications needed
• Develop fee ranges based on relevant professional qualifications
• Compare and analyze cost and market valuations
• Use multiple compensation data sources
• Cross-walk analogous consulting arrangements
• Balance qualifications with the value of the service to the company
• Use fee ranges to reflect variables such as experience, project complexity, performance impact, etc.

Key elements of a defensible framework

As noted above, a FMV fee by itself will not save a questionable business relationship. FMV fees must reflect the overall legitimacy of a physician’s business relationship that provides value to the company. FMV fees must be part of a framework used to engage physician consultants and starts with determining the business need for a service. Determining bona fide business need covers all consultant engagements, from commercial to clinical, and starts by identifying the reason or purpose of the service. Commercial groups may want to ask how many individuals or how many activities are required to meet a particular need, such as how many speakers or advisory board members are needed, or how many events or meetings are necessary. Clinical groups may need to ensure that investigator-initiated studies will provide useful data as well as determine an appropriate fee. Determining business need involves the following:

• Clarifying a legitimate business need — what is the reason for or purpose of the service

• Not over-hiring or over-engaging (i.e. more consultants or more events than actually needed)

The next step is to identify the activities required to perform the service, whether acting as speaker, advisory board member, or clinical investigator, and then to specify services to be performed. While the activities that make up certain engagements may be obvious, part of ensuring a FMV fee is linking the amount of the fee to the activities required. Payment despite incomplete service raises FMV and other issues.

Consultants should be selected based on the qualifications or experience needed for the type of consulting engagement. While it sounds obvious to select potential consultants based on qualifications relevant to the service activity, this process includes maintaining firewalls between, for example, sales and marketing groups who “recommend” physicians, and those making the hiring decision. The government’s overriding concern is that a consulting relationship or set of relationships can influence matters such as physician clinical decision-making or clinical research data integrity. In the eyes of a prosecutor, an FMV fee will not legitimize a hiring decision prompted by an intent to induce a physician to use a company’s products or to reward a high prescriber. The selection process must also recognize and take into account consulting engagements a physician may have with other groups in the company, or with other companies. Policies should be developed to ensure various conflicts of interest are avoided.

For example, product development consultants should not also work on clinical trials for the product. Companies need to decide issues such as whether speakers also can be engaged as clinical investigators. Similar issues are involved for physicians participating in advisory boards or data-monitoring committees.

In developing FMV fee ranges as described above, companies should not rely on internal data (historical fee data). Use independent external data (e.g., compensation data from different sources) and consider analogous services for comparison purposes when determining FMV fee ranges (e.g., expert witness fees or other comparable professional fees). Using a basic salary or fee survey translated into an hourly rate usually is inadequate; these basic calculations do not consider the business value of the service provided to the company or take into account the specific skills needed or important to the company. In developing fee ranges for physician specialists providing certain types of consulting services, compensation data can be used to narrow the fee range based on characteristics of the segment of physicians providing that particular type of service.

For example, compensation data can be developed for physicians with at least ten years of practice experience, previous research experience, or fellowship training — all of which may be desired qualifications for clinical research investigators. Fee ranges can be different for different services: Some services may not require certain credentials, or recognition in the physician’s particular field, so lesser fee ranges can be used. On the other hand, specific engagements may require consideration of unusual aspects or qualifications of a physician that could affect valuation by raising fee ranges.

The final piece of a defensible FMV framework includes confirming that the service was actually performed (e.g., by monitoring, auditing, or event attendance) and documentation. The process of confirming that the service was performed should also consider the outcome of the consulting engagement — whether the business need was met by the results of the consulting engagement. Finally, each step in engaging a physician, from business need to service confirmation, should be documented appropriately.

Conclusion

In these unsettled and changing times, determining FMV fees will remain a challenge for companies for years to come. Valuing a specialized service cannot be easily accomplished, and always reflects factors specific to each company’s situation. Using a consistent and transparent valuation methodology that creates fee ranges based on relevant professional qualifications and balances qualifications with the value of the service to the company may be analytically challenging, but it is worth the effort. Going forward, companies must make sure that the fee ranges they develop are part of a defensible framework for engaging physician consultants. Today’s environment demands consistency and transparency in FMV determinations and engaging physician consultants. Creating and using the type of framework that takes into consideration the factors discussed here will enable companies to ensure compliance and to effectively meet their business needs. PC