Fair Market Value Considerations in Industry Relationships

1
Fair Market Value Considerations in Industry
Relationships

• Wendy C. Goldstein, J.D., M.P.H.
• Partner
• Epstein Becker Green, P.C.

Tom Gregory, CPA, CFA Partner Ernst Young LLP
2
Presentation Overview

• Industry Relationships
• Relevant Legal Principles
• Recent Enforcement Activity
• Defining Fair Market Value (FMV)
• Incorporating FMV Approaches into Pharma
  Compliance Programs

3
Disclaimer

• This presentation is intended to highlight key
  regulatory and financial considerations in
  structuring certain industry relationships. It
  is not intended to convey legal or accounting
  advice, nor is it intended to advocate any
  particular position. Each situation is unique
  and subject to individual facts and
  circumstances.
• The content is the responsibility of the
  individual speakers and does not represent any
  position of by their respective firms.

4
Industry Relationships

• Direct Payments to Healthcare Professionals (fee
  for service relationships)
• Consulting arrangements
• Speaker training
• Speaker programs
• Advisory board participation
• Market research
• Medical education or CME events
• Researchers

5
Industry Relationships

• Payments to Customers (Direct and Indirect)
• Data purchase agreements
• Service agreements
• Indirect Payments to Healthcare Professionals or
  Customers (fee for service relationships)
• Affiliations

6
Relevant Legal Principles

• Legal principles govern the evaluation of the
  appropriateness of each payment to a health care
  professional or customer by a pharmaceutical
  manufacturer or biotechnology company
• Appropriateness assessment begins with an
  evaluation of the intent of the arrangement
• What is the payment intended for?

7
Relevant Legal Principles

• OIG Compliance Program Guidance for Pharma (5/03)
  identifies certain relationships that present a
  significant potential for abuse
• Key Considerations
• Is there a potential to interfere with clinical
  decision making?
• Is there potential to interfere with the
  integrity of the formulary?
• Is there potential to increase costs to the
  federal health care program (FHCP) beneficiaries
  or enrollees?
• Is the arrangement a disguised discount that
  amounts to a circumvention scheme for government
  price reporting obligations?
• Is there a potential for overutilization or
  inappropriate utilization?
• Are there patient safety issues or quality
  issues?

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Relevant Legal Principles

• It is a felony under the Federal Anti-Kickback
  Statute to knowingly and willfully
• Solicit, receive, offer, pay
• Any remuneration (kickbacks, bribes or rebates)
• Directly or indirectly
• Overtly or covertly
• In cash or in kind
• In return for
• Referring an individual to a person for the
  furnishing or arranging for the furnishing of an
  item/service or
• Purchasing, leasing, ordering or arranging for or
  recommending purchasing, leasing or ordering any
  good, facility, service or item
• For which a FHCP may pay

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Relevant Legal Principles

• Violators may be subject to the following
  penalties
• 25,000 for each offense
• Prison for up to 5 years
• Exclusion from the Medicare, Medicaid and/or
  other Federal or State health care programs
• Civil monetary penalties calculated as 50,000
  per act in addition to damages of up to three
  times the amount offered, paid, solicited or
  received
• Violations also may create liability under the
  False Claims Act (government price reporting)

10
Relevant Legal Principles

• Exceptions to the Federal Anti-Kickback Statute
  adopted by Congress
• Congress also gave DHHS authority to issue Safe
  Harbor regulations to describe financial
  arrangements that fall outside of the
  Anti-Kickback Statute
• Compliance with a Safe Harbor should offer
  protection against protection under the
  Anti-Kickback Statute
• Conduct outside the Safe Harbors must be analyzed
  based on the facts and circumstances to
  determine whether a violation exists

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Relevant Legal Principles

• Personal Services and Management Contracts Safe
  Harbor
• Written and signed agreement for not less than
  one year that states the services and if the
  services are not intended to be full-time
  services, the agreement must specify the
  intervals precisely (including the charge for the
  intervals). The services must not involve the
  counseling or promotion of a business arrangement
  or other activity violative of any law.

12
Relevant Legal Principles

• Personal Services and Management Contracts Safe
  Harbor (continued)
• The Services contracted for do not exceed those
  that are reasonably necessary to accomplish the
  commercially reasonable business purpose of the
  service.

13
Relevant Legal Principles

• Personal Services and Management Contracts Safe
  Harbor (continued)
• Aggregate payment amount must set in advance,
  consistent with fair market value in arms length
  transactions and isnt determined in a manner
  that takes into account the volume or value of
  any referrals or business paid for by FHCPs.

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Relevant Legal Principles

• What is a commercially reasonable business
  purpose?
• Originally the safe harbor required legitimate
  business purpose
• Replaced in November 1999 Safe Harbors
• Preamble to the November 1999 Safe Harbors
  explains the change as follows

the test is not whether a business arrangement
is lawful, but whether it serves a commercially
reasonable business purpose, that is, whether the
space and equipment leased or purchased have
intrinsic commercial value to the lessee or
purchaser. (emphasis added)
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Relevant Legal Principles

• What is a commercially reasonable business
  purpose? (continued)
• The OIG further states in the November 1999 Safe
  Harbors

By commercially reasonable business purpose,
we mean that the purpose must be reasonably
calculated to further the business of the lessee
or purchaser. In other words, the rental or the
purchase must be of space, equipment, or services
that the lessee or purchaser needs, intends to
utilize, and does utilize in furtherance of its
commercially reasonable business objectives.
(emphasis added)
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Relevant Legal Principles

• What is Fair Market Value?
• The Personal Services Safe Harbor does not
  include a definition of FMV.
• In July 1991, OIG addressed FMV in connection
  with comments regarding the restrictive
  definition of FMV in the space rental Safe Harbor

The safe harbor provision for space rental does
not contemplate a single figure for fair market
value. Rather, it contemplates a rental fee
falling within a reasonable commercial range, but
not taking into account any value attached by
either party based upon the property's proximity
or convenience to referral sources.
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Relevant Legal Principles

• What is Fair Market Value? (continued)
• Pursuant to SSA, the OIG is not authorized to
  opine on FMV for the purposes of Advisory Opinion
  requests.

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Enforcement Activities

• Regulatory agencies and Congressional scrutiny of
  payments to health care professionals
• Department of Justice
• Centers for Medicare Medicaid Services
• DHHS Office of the Inspector General
• MEDICs
• State Attorneys General
• Congressional Subcommittees

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Relevant Legal Principles

• Significance of FMV in connection with state law
  reporting requirements relating to sales and
  marketing of pharma products
• Vermont, Maine, Minnesota
• State laws require the reporting of payments to
  health care professionals with certain exceptions
  including, in some instances, bona fide
  payments that do not exceed fair market value
  
• Certifications

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Enforcement Activities

• AdvancePCS Civil Settlement (9/8/05 137
  million, 5 year CIA)
• APCS allegedly, among other things, solicited and
  received kickbacks from pharmaceutical
  manufacturers in the form of
• Excessive administrative fees
• Over-priced services agreements as a reward for
  favorable formulary treatment

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Enforcement Activities

• AdvancePCS Civil Settlement (continued)
• U.S. alleges that during 1/1/96 1/27/04, APCS
  allegedly solicited and/or received payments of
  (a) administrative fees from pharmaceutical
  manufacturers for services related to the
  negotiation and administration of rebate
  contracts with those manufacturers, and (b) fees
  for products and services agreements from
  pharmaceutical manufacturers for the provision by
  APCS to those manufacturers of pharmacy medical
  data, outcomes research studies, RXReview and
  Clinical Consulting services, and ReSolve 500
  programming and data.

22
Enforcement Activities

• AdvancePCS Civil Settlement (continued)
• U.S. alleges that to the extent that the
  payments exceeded the FMV of the above-referenced
  services and products provided, APCS knowingly
  solicited and/or received the payments as an
  improper reward or favorable treatment in
  connection with FHCPs and FEHBP contracts.
• to the extent the payments exceeded FMV false
  claims were made and were caused to be made to
  OPM and HHS.

23
Enforcement Activities

• Schering-Plough Settlement (E.D. Pa.
  Investigation)
• Criminal Civil Settlement (350 million)
• Guilty Plea to federal Anti-Kickback Statute
  Criminal plea by Schering Sales Corporation (a
  subsidiary of Schering-Plough corp.)
• Schering Sales excluded from federal health care
  programs for at least 5 years
• Company products continue to be available for
  federal healthcare program reimbursement through
  Schering-Plough Corp.
• 5 year CIA
• Schering II (D. MA) 8/06 (permanent exclusion)
  and an addendum to the CIA

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Enforcement Activities - Schering

• U.S. Attorney charges included generally
• Kickbacks to managed care customers in exchange
  for preferred formulary treatment for Claritin
• False claims in connection with failure to
  accurately report Medicaid Best Price

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Enforcement Activities - Schering

• Among other things, Schering Sales Corp.
• 25. Schering Sales disguised the true nature
  of the 2 fee by calling it a data fee, to give
  the appearance that the payment was
  fair-market-value transaction rather than a
  hidden inducement to the HMO to keep Claritin on
  its formulary. As part of its concealment of the
  true nature of the 2 fee, Schering Sales agreed
  to pay the HMO a data fee to purchase an annual
  cumulative report from the HMO. In fact, the
  annual report was to contain the identical
  information that the HMO was already providing to
  Schering Sales in its quarterly reports, as
  required under its pre-existing reimbursement
  contracts. The annual report provided no
  additional value.
• The report that contained the exact same
  information the HMO already provided in previous
  quarters was received and never used.
• Schering Sales had difficulty accessing the
  report

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Defining Fair Market Value

• Statutory Authority
• (e.g., IRS 2002 Business Valuation Guidelines)
• Case Law / Legal Precedent
• (e.g., IRS Revenue Ruling 59-60)
• Accepted Industry Practice
• (e.g., USPAP)
• Relevant Professional Guidance
• (e.g., AICPA, ASA, NACVA, IBA)

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Defining Fair Market Value

• A widely accepted definition
• The price at which a good or service would trade
  hands between a willing buyer and a willing
  seller, neither being under any compulsion to buy
  or sell, and both having reasonable knowledge of
  all relevant facts as of the date of valuation.

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Defining Fair Market Value - Approaches

• Cost
• Sum of Individual Asset Values (Asset Approach)
  
• Cost Build-Up
• Market
• Comparable Transactions
• Public Company Valuation Multiples
• Income
• Discounted Cash Flow
• Capitalization of Earnings

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Defining Fair Market Value Cost Approach

• Measures FMV by estimating the current cost of
  replacing the utility of an asset or service.
• Cost Build-Up Approach Actual or expected
  costs incurred are analyzed and an assumed profit
  level is added to derive an indication of FMV.

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Defining Fair Market Value Market Approach

• Measures FMV by examining transactions in the
  marketplace involving the sale of assets or
  services similar to those of the subject.
• Requires the existence of reasonably similar
  transactions with active trading markets and
  publicly available data.

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Defining Fair Market Value Income Approach

• Measures FMV based on the present value of
  future economic benefits associated with the
  asset or service.
• Cash flows are adjusted to a present value
  based on the markets required rate of return and
  the risk associated with the cash flows.

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Incorporating FMV Approaches into Pharma
Compliance Programs

• Approaches observed in the industry
• Cost build-up approach
• Market Approach
• Custom industry surveys
• Proprietary survey data
• Additional analyses?
• Other approaches for corroboration
• Sensitivity analysis
• Professional judgment

33
Incorporating FMV Approaches into Pharma
Compliance Programs

• Articulate policy regarding the triggers for
  appropriate payment of services in all relevant
  compliance program documents
• Code of Conduct
• Relevant SOPs
• Identify relevant relationships (sales,
  marketing, contracting, clinical research, supply
  chain )
• Definitions are key
• Example Customer (direct, indirect, past,
  current, future, nexus to FHCPs, prescribers,
  recommenders )
• Establish and adopt a process required for
  assessing the appropriateness of payments in
  advance of the approval of such payments
• Different payments may have different additional
  requirements

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Incorporating FMV Approaches into Pharma
Compliance Programs

• At a minimum, a formal review process should be
  required for each potential relationship prior to
  the approval and funding
• Bona fide, reasonably necessary and commercially
  reasonable business practice
• Arms-length
• FMV
• Satisfaction of personal services safe harbor
  requirements
• Written rationales should be submitted by funding
  requestor
• No one size fits all regarding a review process
  structure
• Consider carefully the committee composition
• Cross-functional teams?

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Incorporating FMV Approaches into Pharma
Compliance Programs

• Criteria for assessing bona fide services
• What is the business purpose?
• What is the supporting documentation?
• Are the services required by the company?
• What are the qualifications of the service
  provider?
• Are the services duplicative with other purchase
  agreements or functionalities within the
  organization?
• What is the output of the services provided
  (e.g., how will the organization use the services
  to create a work product?)

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Incorporating FMV Approaches into Pharma
Compliance Programs

• Criteria for assessing payment is FMV in advance
• Detailed budget broken down by components
• Independent third party?
• Industry surveys?
• No guarantee fee arrangements
• Review of payment schedules
• Criteria for assessing arms-length
• Independence of the relationship no quid pro
  quo
• May require firewalls

37
Incorporating FMV Approaches into Pharma
Compliance Programs

• Satisfy Safe Harbor Requirements in Written
  Agreements
• Address payments terms detailed invoices,
  deliverables prior to payment
• Cancellation policy
• Return of funds
• Term of the relationship
• Specific services and intervals

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Incorporating FMV Approaches into Pharma
Compliance Programs

• Maintain thorough, transparent business records
  in accordance with relevant company/department
  document retention schedule
• Establish and/or ensure that a process exists for
  collecting and archiving
• Documentation submitted for approval by requestor
  
• Review committee documents, including FMV
  documentation
• Detailed, verifiable record of all services
  performed including any/all deliverables
• Address document retention and/or return of data
  provisions in all service provider contracts

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Incorporating FMV Approaches into Pharma
Compliance Programs

• Monitor the process
• Audit the process, including documentation

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• QUESTIONS ?

Wendy C. Goldstein Epstein Becker Green,
P.C. 250 Park Avenue New York, New York
10177 [phone] wgoldstein_at_ebglaw.com
Tom Gregory Ernst Young LLP 600 Peachtree
Street Atlanta, Georgia 30308 (404)
817-5205 Tom.gregory_at_ey.com