Criticality: Robust FMV Methodology and Tiering Model as a Critical Compliance Risk Control

By Darren Jones, Jennifer Bang and Mario Prohasky

Life Sciences companies’ interactions with Healthcare Professionals (HCPs) carry inherent risks, as remunerative relationships with HCPs may potentially implicate global anti-bribery laws such as the Foreign Corrupt Practices Act (the FCPA).

Companies have a variety of tools in their risk management toolbox to help mitigate some of this risk – from business rationale forms and careful venue selection practices to retaining a central repository of all HCP engagements. However, an often overlooked, but critical risk management tool, is the use of repeatable Fair Market Value (FMV) methodologies across a wide range of service types. The mitigation of those risks should occur throughout the entire HCP engagement process, from having an appropriate business engagement rationale to the final engagement reconciliation and documentation. The use of a repeatable and consistent FMV methodology, including a process for evaluating HCP expertise through tiering, is an integral part of effective HCP engagement risk mitigation.

Globally, there is continuous scrutiny on the compensation provided to HCPs for bona fide services. Such scrutiny comes in the form of local laws, regulations and industry code guidance related to both the type of work HCPs can be compensated for, as well as the appropriate amount of compensation. Although most local guidance is not binding, breaching such guidance exposes Life Sciences companies to potential investigations and invites negative publicity. In France, the National Board of the French Professional Association of Physicians (CNOM), which provides opinions on FMV compensation to HCPs, recently reported that it rejected over 70% of contracts because proposed HCP fees were too high – above FMV. CNOM does not prevent companies from executing unapproved contracts, but this paper trail of companies’ high compensation fees could potentially be interpreted by French authorities as a red flag indicating insufficient compliance controls.

Similarly, in the US, the Office of Inspector General (OIG) has been emphasizing the importance of FMV compensation to HCPs for their bona fide services to companies. For example, the OIG’s Compliance Program Guidance for Pharmaceutical Manufacturers states that, in general, payments to physicians for bona fide consulting or advisory services are less likely to raise a concern if the compensation is at Fair Market Value. It also stipulates that the manufacturers should periodically review arrangements for physicians’ services to ensure that the compensation is at Fair Market Value.

FMV is also a key component of certain safe harbors of the Anti-Kickback Statute (AKS), Stark Law, False Claims Act (FCA), and the FCPA. For example, an AKS violation may be avoided by meeting a “safe harbor” exception, which protects certain compensation arrangements between an HCP and an entity, where the HCP is an independent contractor for the entity.[1] However, companies can only avail themselves of this safe harbor if the HCP’s compensation is at Fair Market Value, is established in advance, and does not take into account the volume or value of any referrals or business generated between the parties. Thus, the OIG has clearly endorsed the fundamental use of a robust FMV methodology.

It is important to note that FMV is a range of rates that provides a defense against allegations of impropriety. However, calculating the rate from time to time is not sufficient; rather, there must be consistent application of a FMV rate as a lack of consistency is more difficult to defend (particularly when the methodology does in fact exist). For example, suppose Company A engages several neurologists for an advisory board.  Two of those doctors, Doctor B and Doctor C have identical expertise in neurology however Company A pays Doctor B twice as much as Doctor C per engagement for the same type and duration of advisory board. While acknowledging their same level of expertise, suppose the company decides to pay Doctor B and Doctor C differently by adding in an “illegitimate” extra program and additional preparation hours to Doctor B’s total compensation, because Doctor B happens to be practicing in a region where the company is trying to generate market penetration. Should any allegation of impropriety against Company A arise, its practice of basing physician compensation calculation on FMV hourly rates may not be sufficient for avoiding the charges. Company A may have FMV rates data in place, but its inconsistency in applying the rates could essentially invalidate the effectiveness of its FMV defense. On the other hand, if Company A engages physicians with varying levels of expertise, building a robust tiering methodology would also be critical to ensure competitive rates are consistently applied to HCPs of similar distinction. A robust tiering methodology will also prevent the company from making frequent FMV exceptions, which is a common challenge to the consistent application of FMV rates.

Additionally, not only is FMV a tool for compliance, but it is also a useful tool for business partners to foster competitive, consistent and efficient business decisions. Compensating within FMV ranges helps companies retain world-class HCPs, and their expert knowledge provides companies a competitive edge in the market. Consistent implementation of FMV methodology and rates are also an important component of maintaining business relationships with valuable KOLs. In our example above, if Doctor C found out that Company A is paying Doctor B more money than him (despite the fact that they have nearly identical expertise and specialty and conduct the same speaker programs), Doctor C may opt to end his/her business relationship with Company A because he/she is being paid less. Consistent FMV payments will also create efficiencies in contract processing by ensuring that each contract made with an HCP is a viable business decision for the company.  Moreover, the cost savings resulting from the efficient contract processing can be re-directed to other departments or expenditure types for more resourceful usage.

Then how can companies establish a FMV payment system that ensures compliance as well as commercially reasonable and viable business decisions?

FMV fee determination should be grounded in objective and transparent data analysis. However, achieving this objectivity can be challenging as the compensation data used for FMV calculations represent national averages, while Life Sciences companies do not only engage “average” physicians.  For this reason, focusing only on developing the FMV rates is not enough to establish an effective control system. An effective FMV methodology should be designed to be flexible, consistent, objective and auditable. It should support higher fees for higher expertise and create an effective process for evaluating physician expertise and determining “Thought Leader” status. FMV as a control is also strengthened if companies pay similar fees for similar activities based on standard service level expectations. Establishment of consistent activity fees can eliminate vigorous and often exhausting negotiation processes.

Additionally, while FMV rates based on objective data are a key control in the HCP engagement process, they need to be supported by robust tiering models and the consistent application of standard fees for standard activities. A robust tiering model should differentiate each tier based on the HCP’s level of expertise, and recognize that the markets typically compensate higher levels of expertise with higher levels of payment. It is important to note that tiering HCPs must be recognized as a separate process from identifying and selecting HCP consultants. A tiering model is not designed to facilitate the HCP selection process, but to objectively identify HCP’s level of expertise within their field. HCP selection for consulting opportunities often focuses on criteria such as the company’s prior experience with an HCP or an HCP’s effective communication style, which are not appropriate to incorporate into the FMV fee determinations. On the contrary, the tiering model’s sole purpose is to objectively identify HCP’s level of expertise within their field. Expertise is the only basis that can be used to support tiered FMV fee structure, and the criteria must be based on recognition of HCP’s expertise by their peers within their field, such as research or clinical experience, as well as the leadership experience.

An effective expert tiering methodology should also be objective, flexible, and not overly complex. Tiering assessments must be consistent and not subject to significant business judgment. Tiering criteria should assess concrete achievements that can be easily measured. Recognizing that not all experts will have a similar career path or pattern of professional participation, an effective model should capture physician expertise regardless of different career paths. Additionally, tiering criteria should be simple and clear, as overly complex models that may limit access to certain HCPs or significantly lengthen the time frame for evaluation.

Finally, for consistency, companies should maintain a centralized tiering process. Tiering should be done by the same individuals within the company or through the same third party vendor, using the same tiering methodology regardless of the originator of the request. This will provide consistent scoring for those HCPs that are engaged in multiple types of services within the organization, as well as for the HCPs with similar background or level of expertise.

FMV rates are a necessary but insufficient compliance risk control. Rather, it is one among many tools in the risk management toolbox, along with a robust tiering model, consistent activity fees, and an effective FMV methodology, which are all equally important. Implementation of all four control systems will establish a FMV payment system that ensures compliance as well as commercially reasonable and viable business decisions.

Learn more about Polaris’ FMV consulting services here or contact us to find out how we can help you solve your compliance challenges.

[1]“Personal services and management contracts” safe harbor requires the following seven provisions to be met: (1) The agreement must be in writing and signed by the parties, (2) the details of the services to be provided must be included in the agreement, (3) If the agreement is not on a full-time basis, the precise length and the exact charge must be specified in the agreement, (4) the term of the agreement must be at least one year, (5) the compensation paid must be set in advance, consistent with FMV, not taking into account the volume or value of any referrals or business generated between the parties, (6) the services performed under the agreement do not involve the counselling or promotion of a business arrangement or other activity that violates any State or Federal law, and (7) The aggregate services contracted for do not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services. 42 C.F.R. § 1001.952(d).