The Patient Protection and Affordable Care Act (“PPACA”) requires manufacturers to record, aggregate and report to the federal government “payments and other transfers of value” to a covered recipient. This article will focus on the two key, convention-related, reportable items under PPACA: food and educational items.
In our business, we are being called into crisis meetings every week as our pharmaceutical marketing customers scramble to determine how to organize and budget food and educational items provided to their main customers, health care professionals (HCP). Beginning in March – assuming implementation isn’t further delayed by CMS – everything given to the HCP must be reported and will become public record. The last thing our pharma clients want is to upset their customers by reporting giveaways to HCPs which are unrealistic and will make them look bad. On the surface, this doesn’t seem like such a big issue, but given the way things have been done over the years, it’s a huge issue!
Deep in the recesses of pharmaceutical headquarters, lawyers along with other compliance staff have agonized over the value of these items. The value of a cash payment is, by definition, the value of the cash. Unfortunately, the value of food and gifts requires a more complex formula.
Let’s take a look at hospitality or food and beverages in the exhibit booth. PPACA requires the recording of value, NOT cost; and, in many convention-related situations, the two vary significantly. The spirit of PPACA calls for the current fair-market value (FMV) of the item, while many internal compliance rules demand that actual cost is used.
In United States tax law, the definition of fair market value is found in the United States Supreme Court decision in the Cartwright case:
The fair market value is the price at which the property would change hands between a willing buyer and a willing seller.
Unfortunately, FMV has an interesting twist when it comes to gifts to health care professionals. Generally the recipient is not an actual “buyer” and therefore is unaware of the “value” amount that is being posted against his or her “gift account” by the pharmaceutical company.
For example, in 1999, a consultant to a major pharmaceutical company was standing in its booth at a large infectious disease convention. The vice president of acute care turned to one of the booth staff and asked, “How much do those apples cost me?” (The apples represented the brand’s logo.) The staffer replied “$3.87 delivered to the booth.” The surprised vice president responded by saying, “My wife and I usually pay around $0.49 for an apple; how can we be claiming $3.87 per apple here?” The staffer explained that the apples had to be purchased through the booth catering department of the convention center and this is the direct cost they would pay for each apple. Does that make the value of an apple worth $3.87? No. But is it correct that the pharma company would report it that way? In 1999, yes. Beginning this March, no.
In the above scenario, there was a significant “gap” between the current FMV and the pharma company’s actual cost. Some companies will take it even further by including all of the costs associated with providing the “gift” to the health care professional. In one instance when a company was providing free coffee, they factored in the cost of the required workspace, storage area, 30-amp/3-phase/5-wire electrical service, trash removal, in-booth hostesses and cleanup. They totaled all of these costs and divided it by the total number of cups served during the conference. The cost came to $13 for a cup of coffee. This is not a cappuccino or some other fancy drink to be found at your local Starbucks. If you walked into a Starbucks and ordered a vente mild coffee and they asked you for $13.00, would you accept that as a fair price? No. So the government is now saying, when you report the coffee served at a medical conference, provide the fair market value for the food or drink provided, not what it cost the company to serve it. Simple, right? Wrong. How are those other costs going to be covered or written off later by company accountants as an expense? Is the pharma company willing to eat those costs? As a director, are you willing to report that level of spend for those giveaway items in a business environment where people are losing their jobs every day?
And let’s not forget the penalties that will be charged to pharma companies for each violation, which can range from $10,000 to $100,000 with an annual limit of $1,000,000.
To clear this issue up, the current fair market value of food or beverages should be determined either by a schedule published by the Centers for Medicare & Medicaid Services (CMS), which would set forth the current fair market value for all common food and beverage items (“Scheduled FMV”), or simply by matching costs at the local venue (“Local FMV”). So to determine the FMV cost:
Step 1: Identify 3 vendors who are selling the item (or similar item) in or around the convention center
Step 2: Determine each items selling price
Step 3: Determine the current FMV by simply averaging the 3 selling prices
If an HCP can buy a great apple for $1.28 at a stand in the convention center, that is the current FMV!
FMV should also be consistent—a standard cup of coffee is a standard cup of coffee! However to date, cost variability of the same cup of coffee has occurred within the same pharma at the same event as well as among various pharmas at the same event. Here is how:
Example 1: Variance among booths of the same pharma company:
In many cases, this apparent double-standard does not result from arbitrary compliance decisions; rather, it results from a significant variability in, or lack of, employee training and policies/procedures. It is not uncommon for one convention manager to include all direct and indirect costs while another includes direct costs only. The Scheduled FMV and the Local FMV methods will completely eliminate this issue.
At the end of the day, this is going to impact your customer, because it is being publicly reported. Do you really want to give your HCP “sticker shock?” Under PPACA there is a period of 45 days in which an HCP can object to any item that is posted on his/her account by a pharma company. You certainly don’t want to reach that point; Scheduled FMV or Local FMV eliminates the problem.
Educational items, which are distributed to HCPs in the booth, are the next problem area. We all know that the current PhRMA Code prohibits the distribution of practice-related items such as pens, stethoscopes and diaries, but it does allow for the distribution of educational items.
The overall category “Educational Items” can be divided into HCP educational items and patient educational items; both of which can be further divided into anatomical models, books, other literature, electronic storage media, cloud-delivered educational portals, software, coupons, and many others.
The value of educational items is a very complex matter. Take for example a simple 5 GB flash drive, which is fully locked under PhRMA. This means that the HCP cannot use the flash drive for any personal use and therefore it has no personal value to him or her. It is simply a transport device. If you look-up the street value of a 4 GB flash drive, you will find an average of $12.00. On the other hand, a DVD, with equivalent storage capacity costs around $0.40. Both serve exactly the same transport function; and both are of absolutely no personal value to the HCP.
The value of this educational item is the value of the educational content. If it is strictly for patient use, it is exempt, and not reportable under PPACA. If it is for HCP education, what is its true FMV? Let’s say it cost the pharma $100,000 to develop the content; and they plan to distribute it to 1,000 HCPs. Is the value actually $100.00 per flash drive? Not likely! If they decide to target 100,000 HCPs, is the value $1.00? No again. The actual value is the amount an HCP would expect to pay for similar information using the Internet; and, as we all know, that is a very small amount. CMS’s published schedule need to address these different forms of educational items.
Finally, there is the debate over proration with respect to those educational items, which are designed for both HCP and patient education. To determine the correct value the cost of the patient educational component should be separated out, deducted from the total value, and considered exempt from reporting. Only the incremental HCP educational component should be allocated and then reported on behalf of HCPs. Clear guidance from CMS would also be very appropriate here.
Until the day CMS delivers guidance on the value of these giveaways, it would be to a company’s advantage to create a consistent list of items for conventions, attach a fair market value to those items and use those values throughout the year. This will create consistency in the eyes of any HCP.
In conclusion, the point of all this data collection and reporting is to significantly reduce healthcare costs, not increase them. Guidance documents, safe harbors and other similar tools will allow pharmas to be fully compliant with PPACA and at the same time greatly reduce the cost of compliance.
Joe Scrocco is the president & CEO of OneWorld Inc., a pharmaceutical marketing firm.
Jim Hladnik is the former Convention Manager of Strategic Initiatives for the pharmaceutical group at Abbott Laboratories.