Asia-Pacific Dispatch: How do you determine Fair Market Value when interacting with third parties?

01.18.17 | By Dana Liu

Pharmaceutical and medical device manufacturers routinely engage the services of customers, including distributors, academic research organizations, travel agencies and industry/medical societies.

In the Asia-Pacific region, partnering with professional societies for Continuous Medical Education programs (CME) and engaging medical research organizations for clinical trials or Investigator Initiated Studies (IIS) are especially common. The behavior of these third parties can have an impact on a company’s reputation and present legal challenges. Therefore, with the high frequency and large payments involved, it is essential for companies to have a structured methodology to assess and act upon risks associated with these third-party interactions.

Manufacturers must focus on defining what types of payments may be deemed improper, and how to build an effective program or process to assess payments to third parties. Beyond the legitimacy of the engagement, consideration must be given to ensure all remuneration is fair market value. This consideration has been increasingly important element of recent enforcement actions as the allegations often include overpayment for legitimate services, whereby the excess compensation has been used for illicit purposes. For example, payments to third parties above normal and customary charges may be perceived as improper influence on product sales inducement; selective publication of study results; or patient selection and endpoint analysis/classification in trials. Fair market value is also an important element of defenses and exceptions under most kickback/anti-bribery statutes.

There are several challenges that companies face in determining fair market value for Academic Research Organization, Medical Society and Healthcare Organization (HCO) fee-for-services, performing cost-value analysis, and negotiating contracts. First is the complexity of IIS grant budgets, or of more significant risk the services procured which may include direct marketing to physicians, pharmacies or patients; or procurement of data to support health economic research activities. Some companies do not have consistent review and documentation processes to start with. Many companies find that they cannot compare rates for specialized services, such as data lists, and without a usable framework of the offerings and prices across the industry and vendors, they are left with ineffective negotiating leverage.

Key questions to address when engaging third parties:
• What is the objective of the collaboration?
• How to evaluate the third-party risks?
• Does the payment align with fair market value?
• How to determine the fair market value per service?
• Do you have a standard operating procedure in place to process third party engagements and payments?
• What documentation to keep in case of audit?

Engagements with third parties can be evaluated both individually and in aggregate across a given country or the APAC region. Polaris has designed a robust global risk analysis model based on our extensive experience in the Life Sciences industry that helps clients determine the appropriate evaluation strategy.

Lower risk actions typically include activities or organizations for which the company is not the sole sponsor. Business as well as compliance risk is also lower when the volume of budgets and the amounts involved are more modest. Compliance risk is more limited if the company has established policies for approving HCO budget requests and for tracking the total amounts spent per HCO on a regular basis. Therefore, it is appropriate and more cost effective to assess risk in aggregate rather than focus on individual budget requests.

The risk increases in cases where the volume of budget requests is more significant or if the amount per activity increases. In these cases, it is still appropriate to assess and control risks in aggregate, but companies should also to be able to address specific budget requests. For example, exhibits and displays can be assessed using cost benchmarks, but the outliers would require more scrutiny.

The risk is most significant when the company is the sole sponsor of an activity or an organization, or requested amounts are large. The inherent corruption and bribery risk is also high when the company is partnering with a government entity (for example, government run hospitals). In cases such as these, it is appropriate to focus on controlling risk stemming from individual budget requests. For example, high-value sole-sponsorships may require a detailed budget assessment.

When developing a benchmarking methodology for submitted fee-for-service contracts, internal company historical data and/or broad industry data are typically used. First, define 3-6 categories of program or contract types, and collect submission process and forms for each program type. Then create a standard budget template breaking down the budget so that line items can be compared and benchmarked. Additional key metrics, such as the number of impressions or HCPs, can be used to develop ratio benchmarks, for example costs per HCP or patient, to determine whether the overall budget is in line. Depending on the volume of activities within each category, arrangements may be assessed at the regional level, while leveraging our healthcare economic indexing methodology to normalize costs for further analysis.

Benchmarking will streamline the review and approval process by focusing review on the relatively expensive fee requests. It is important to note that the benchmarks are meant to serve as “guide posts” to help assess costs for allocability, reasonableness, and consistency. Being outside of the benchmarks should not lead to automatic rejection, instead an exception process should be put into place to handle any deviations. In addition, all critical steps of the review process should be clearly documented for audit purposes.

Developing an effective third party fee-for-service assessment process is not only a good business practice, but a crucial step in avoiding kick-back issues. Moreover, dissecting a budget into a template format can often bring out assumptions third parties made when developing the pricing, which in turn leads to a better understanding of program execution and intentions. This can be an eye opener for Life Sciences companies. In addition, having a reliable assessment model can give life science companies more leverage when negotiating contracts with third parties, and can be a money-saver in the long run.

Since 2001, Polaris has been solving challenges regarding FMV and third party interactions for Life Sciences companies of all sizes.