Managing Fair Market Value Challenges in a Dynamic Life Sciences Regulatory Environment

and | May 17, 2017                               

In today’s fast-evolving and complex pharmaceutical ecosystem, measuring and managing Fair Market Value (FMV) has become progressively challenging. With the intense scrutiny on transparency and pricing and ongoing government inquiries and litigation, drug and device manufacturers, distributors, pharmacies, Group Purchasing Organizations (GPOs), Pharmacy Benefit Managers (PBMs), and other supply chain intermediaries should continue to pay close attention in this area.  Drug and device manufacturers are required to evaluate their arrangements with Health Care Providers (HCP) and customers to confirm that payments for services are within FMV for purposes of complying with the Anti-Kickback Statute, US Federal Pricing Regulations, Centers for Medicare and Medicaid Services (CMS’s) Bona Fide Service Fees (BFSF) four-part test, and the Foreign Corrupt Practices Act (FCPA) anti-bribery provisions.

A recent industry FMV conference reinforced the importance of accurately analyzing and documenting FMV and BFSF and brought key trends to the forefront, including:

  1. Increased awareness and scrutiny related to third-party Fee for Service arrangements with customers, both in US and US territories and globally.
  2. Given the scrutiny in this area and opportunity for value creation, pre-commercial and small to mid-sized manufacturers are taking a more robust and sophisticated approach to analyzing and documenting FMV and BFSFs.
  3. Large pharma is shifting toward having a dedicated internal FMV team for evaluating third-party FMV arrangements and is implementing more standardized processes for evaluating service arrangements. Some manufacturers are starting to shift their attention to global FMV needs and Anti-Bribery and Corruption (ABAC) risks.
  4. FMV in clinical arrangements and settings is becoming an increasingly important consideration.
  5. HCP FMV is generally handled by a separate group than the third-party service arrangements. For example, based on the attendees at the conference, there were no companies that handled HCP and third-party FMV in the same group.
  6. Manufacturers are shifting toward a global view on HCP FMV and have an increased focus on clinical study FMV analyses.

Based on our observations during the aforementioned FMV conference and recent work with large Pharmaceutical manufacturers, biotech companies, medical device companies, and other companies in the life sciences industries, share many similar FMV challenges, such as:

Service Arrangements with Customers and Trade Partners

  • Determining which service arrangements with customers are subject to a FMV evaluation. Given the consolidation in the industry, vendors may become customers or affiliates of customers.
  • Valuing and assessing unique arrangements and service fees wherein limited or no description of the activities being performed by the vendor is itemized in the contract.
  • Limited availability of data (i.e., data may not be publicly available or manufacturers may not have current data points to reference) and determining which data points to use in an analysis.
  • Performing FMV and BFSF analyses at the time of negotiation in accordance with CMS guidance. Given the volume of arrangements being negotiated, large generic and branded manufacturers struggle with a process to ensure FMV and BFSFs are evaluated timely.  Project owners may be made aware of a need for FMV with limited time to perform an analysis.
  • Determining which business department owns the FMV process and is responsible for verifying that each payment is at FMV.
  • Determining which activities are legitimate services performed on behalf of the manufacturer, especially as it relates to BFSF determination and FMV analysis for PBM administrative service fees and Specialty Pharmacy services.
  • Limited internal resources with valuation experiences and expertise and difficulty determining when to involve a third-party to assist with a FMV assessment.
  • Many manufacturers are under estimating the time and cost associated with valuing third-party service arrangements.
  • Determining which approach and methodology should be used to develop FMV ranges.
  • Following a consistent process to evaluate all service arrangements subject to FMV and maintaining documentation of prior analyses and approvals.

Engaging and Paying HCPs for their Services

  • Considering the availability, timeliness, and reliability of data regarding HCP compensation, market adjustments and benefits and specialty information in your FMV process and determining where to procure your benchmarking and data from (i.e. third party vendor).
  • Establishing the appropriate qualifications to use as criteria points when configuring the HCP’s stature and determining what the tiering process should be and at what tier level they belong.
  • Implementing a structure around paying HCPs for their travel time due to complex factors where travel times vary significantly depending on location, availability and the activity.
  • Developing an appropriate and well-documented exceptions and approval process that captures special circumstances and one off arrangements.
  • Creating rates for HCPs globally due to lack of consistent or up-to-date salary information, varying benchmark and data availability, and unique circumstances and regulations in each country around what individuals are considered HCPs and how they should be paid.
  • Implementing a workflow, documentation, policy and process to ensure consistency across the organization domestically and internationally.

Collaboration Arrangements

  • Collaboration arrangements are on the rise and drug and device manufacturers are struggling to understanding the various arrangements and determine which collaboration arrangements require an FMV analysis.
  • Identifying which services or products provided by manufacturers to customers are subject to FMV due to Anti-kickback/ Sunshine statues versus those services part of a manufacturers’ value proposition.
  • Estimating the exchange of value being provided by a customer in a collaboration agreement.
  • Limited availability of data to use as a benchmark and internal resources with valuation expertise. There are many collaboration arrangements that are complex and unique (i.e., developing tools that add value to patients and HCPs, development of research and educations materials, etc.) and the manufacturer may not have a benchmark, tools, or the expertise internally to value these arrangement.
  • Determining which FMV approach and methodology should be used in developing FMV.

Here’s how Deloitte is helping

We are not only helping manufacturers analyze and document FMV for HCP, clinical, collaborations, and third party arrangements, but are also assisting with developing and implementing an efficient, practical, and defendable process for evaluating service arrangements with customers on an ongoing basis by employing a collaborative approach.  This includes assisting manufacturers with identifying the need for a FMV analysis, performing FMV analyses, preparing FMV models, and/or developing other tools to assist the manufacturer with performing the FMV analyses internally. We educate our clients on the intent and scope of the regulations and guidance, identify gaps in government guidance, discuss options to create processes that our clients can defend, and help implement the changes. Our services are designed to reduce disruption to the business by providing consistent and streamlined methodologies that satisfies both government and market expectations.

By understanding contractual agreements and the governing laws, evaluating service fees and HCP payments, implementing an action plan to achieve efficiency and regulatory compliance, and maintaining systematic and organized records, manufacturers can effectively manage FMV on an ongoing basis and strive toward continuous improvement.

Our recent webcast on FMV of third-party service arrangements can be found (here). For more information, please contact:

Prateep Menon
Principal | Deloitte Risk and Financial Advisory
Deloitte Transactions and Business Analytics LLP

Donna Vinluan
Senior Manager | Deloitte Risk and Financial Advisory
Deloitte Transactions and Business Analytics LLP

Rick Moore
Senior Manager | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Nick Lynch
Manager | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Rick Moore

Rick Moore

Rick oversees projects including Commercial Compliance Assessments, Government Programs (GP) Compliance Assessments, Government/Statutory Pricing calculations and reviews, Government Pricing Programs, and Compliance Policy and Standard Operating Procedure (SOP)/Work Instruction (WI) development for lar...

Nick Lynch

Nick Lynch

Nick Lynch is an experienced finance and accounting professional with over 6 years of experience in performing Fair Market Value assessments and Gross-to-Net analyses, conducting audits, advising on Commercial and Government Pricing matters, and providing regulatory compliance consulting services...



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