Fair Market Value, Part 2: Embracing the Practice

Specialty Pharmacy Times, November 2011, Volume 2, Issue 4

The interpretation of Fair Market Value is not so black and white. Here's how a pharmacy or pharmaceutical manufacturer can put policies on place to bring clarity.

In our last article, “Navigating the Perils of Fair Market Value” (Specialty Pharmacy Times, October 2010), we reviewed and defined Fair Market Value (FMV), bona fide services, and how organizations can establish a process and create a benchmark of their service offerings. The overall intent of the FMV contracting methodology is to bring clarity and transparency to the financial relationship between 2 contracted organizations.

This sounds easy in principle, but the reality is that due to the wide variety and complexities of products and their required services, it is not so black and white. So how can a pharmacy or pharmaceutical manufacturer put policies in place to adhere to the interpretation of the law?

The first step for a pharmacy is to embrace the contracting practice and methodology of Fee For Services (FFS) at FMV. This can be difficult for pharmacies to fully execute, as some pharmaceutical manufacturers have not yet transitioned or are partially transitioned to FFS contracts, but the trend is certainly shifting toward a more transparent and benchmarked process. Many manufacturers over the past 18 to 24 months have been steadily researching ways to properly transition contracting methodologies, and are also evaluating services and their associated fee structures. This is partially due to general awareness of these trends, but more recently there has been a dramatic shift and urgency to the process.

Why? There is a perception that this is partially due to the awareness of “new” government practices. Numerous articles have discussed how the government is now enforcing the practice of holding pharmaceutical manufacturer executives accountable for “misbehavior” on their watch. This bold step has direct repercussions for the manufacturer and all of its vendors down the entire supply chain.

If a manufacturer is held accountable for violations of health care laws, the organization or executives could be excluded from participation in any federal health-related programs— meaning Medicaid, Medicare, and an extensive list of other federally sponsored programs. As such, anything that touches a government program is being re-reviewed internally at most manufacturers. With state, federal, and employer budget shortfalls continuing, pharmaceuticals prices/contracts and related services are targets of focus. When audits occur, any participant in the supply chain can be impacted.

The second step for a pharmacy includes:

  • Identify current services offered to the marketplace
  • Stratify/break down services into basic (offered to everyone), enhanced, and custom
  • Investigate the internal cost of each service; this will serve as your internal benchmark for the low end of your organization’s FMV range
  • Make sure no fees are for referrals or the marketing/promotion of the product
  • Make sure services are bona fide and have a commercial need
  • Gain independent external input as to the valuation of services; this will serve as a potential benchmark for the high end of your organization’s FMV range
  • Finalize the “list of services” and the associated “FMV range”/grid
  • Develop a “standardized process” to benchmark each contract/ opportunity to the grid
  • Document, document, document all communication and evaluation transparently
  • If a deviation from the grid is needed, assure a fully documented escalation process
  • Routinely evaluate if the services that are contracted are being completed and discrepancies are being documented

The goal for a pharmacy is to have a solidified process, benchmark/grid of what it is consistently charging for services, audit accordingly, and document everything. If it is not documented, you did not do it.

The first step a manufacturer will need to take is to have the legal/regulatory team embrace the contracting methodology of FFS at FMV. Most trade relations teams ultimately manage the process with legal team oversight. The process is easier to establish for new emerging companies than existing companies. With established manufacturers, existing contacts are in place that could be many years old before the advent of FFS at FMV practices.

The next steps for a manufacturer are unique to each individual manufacturer but can be stratified into the following categories:

  • Identify all existing contracts
  • Break down services and fees by product
  • Develop a grid of all services offered for all product lines
  • Identify any inconsistencies between products/contracts (does one contract have a different fee than another contract for a similar/ same service?)
  • Identify contract expiration/termination dates and evergreen (renewal) clauses
  • Identify contract renegotiation or change clauses
  • Externally/independently benchmark industry fee ranges for all services provided by product and all products
  • Stratify client base by importance: this can be by payer coverage, data collection and reporting abilities, location, size of patient population serviced, general services, unique differentiated services, and other. This process can be done from historical experience but is often supported and documented via a transparent RFP process.
  • Development of implementation/ outreach strategy
  • Development of a solidified contracting process if not already established
  • Development of a solid audit process based on the frequency of services performed by the vendors. (If weekly activities, there should be monitoring weekly to insure services are completed and timely according to the parameters of the contract. If not documented, risks for the manufacturer increase and could be perceived as paying for a service that is not actually performed.)

The goal for a manufacturer is virtually the same as a pharmacy—with a few nuances. It is best to have a solidified process, benchmark/grid of what you are consistently charging for services, audit accordingly, and document everything. Additionally, many manufacturers now use the information of capabilities reviewed through a request for proposal process for documentation and justification for limiting distribution networks.

Similarly, if a pharmacy does not have such best-in-class processes with an understanding of FMV methodology, it is increasingly perceived as a potential risk for the manufacturer, and thus another reason for exclusion in a distribution network.

In summary, embrace the practice, develop a solidified process, establish a benchmark/reference grid with both internal and external information, audit consistently, and always document, document, document. SPT

David Suchanek, RPh, is senior vice president of Biotech and Specialty Services at D2 Pharma Consulting LLC (D2), a consulting firm focusing exclusively on pharma services in the life sciences industry. D2 assists emerging and established pharmaceutical and biopharmaceutical companies to develop and execute strategic business initiatives, including the development of contracts that meet Fair Market Value requirements. Mr. Suchanek is a member of the Specialty Pharmacy Times editorial board.