Fair Market Value - Pharmaceutical Executive


Fair Market Value

Pharmaceutical Executive

The government does not provide any guidance on how firms should calculate FMV. This leaves government prosecutors with considerable latitude in developing theories about excessive payments. They may argue, for instance, that pharmaceutical companies use the fees for these advisory and speaking services to influence doctors' treatment decisions and prescribing behavior.

Events by Type: 1998-2004
Prosecutors could view high consultant fees as encouraging a "quid pro quo" relationship between medical professionals and pharmaceutical companies. Historical prescription data identifies a company's highest-prescribing physicians, who are in some cases the most sought-after consultants. But from the point of view of a prosecutor free to theorize, they may also be likely candidates for bribes or kickbacks.

Rather than end up on the defensive, facing OIG's requirements armed only with good intentions and vague recollections of payment decisions, companies need to develop a consistent and transparent methodology for determining FMV for services provided by healthcare professionals.

The challenge is coming up with that theory. To begin the process, a pharmaceutical company might look to the IRS, which has defined FMV as "the price of a service between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of the relevant facts." While this definition appears simple, it does not go far toward determining a pharmaceutical company's proper fee for consulting doctors.

OIG published seven elements of an effective compliance program
There are other methods. One intuitive method that doesn't work: conducting a survey of the historical rates paid to doctors by pharmaceutical companies. Unfortunately, such survey results may not provide real market rates, since the overall industry standard of payments for consulting and speaking engagements may have been inflated over the past several years. More important, relying solely on a broad survey of historical payments may not have the granularity appropriate to an individual company's compensation decisions. If a company needs to hire a recognized expert, it may have to pay a premium. Finally, it is difficult to compare payments when there are so many factors, such as specialty, tenure, type of services, and level of involvement.

A better way to look at FMV: Use unbiased market information. Combining external data from national physician-compensation surveys with internal information from an individual pharmaceutical company can generate a rate schedule for the time and expertise of doctors. There are three phases in the process of calculating this schedule. The result is a defensible, procedural definition of FMV that a company can present as an alternative to a FMV theory presented by a federal prosecutor.

I. Defining hourly base rates

OIG requires payments to meet five conditions
Several research companies and medical associations survey the labor market, so it is possible to compile several surveys and generate an integrated view of annual physician compensation by location and specialty. The analysis of compensation surveys can provide a range of annual or hourly base-compensation rates that includes an upper value, a lower value, and a central tendency value, such as mean or median. Once an initial base rate has been determined, additional adjustments may be required to reflect differences between salaried employment and independent consulting (e.g., fringe benefits). Including these adjustments provides an all-inclusive annual and hourly compensation rate for doctors.

II. Determining activity base rates

Here the focus shifts to obtaining internal company information. Analyzing interviews, internal surveys, physician questionnaires, and other data reveals the scope of current and future business requirements. The internal analysis specifically identifies activities performed by doctors and the time and effort required to accomplish them.


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