Navigating the Perils of Fair Market Value


The challenge of staying abreast of legal requirements has a broad impact on the commercial marketplace and Fair Market Value for services.

Value, Quality—Two buzz words of the health care industry that have gained growing attention due to the landmark legislative reform recently signed by President Barack Obama. Regardless of your politics, you know enhanced regulation and reform have been a growing part of the changes in health care—more so in the last 10 years than ever before.

HIPAA, MMA, DRA, PPS, PFP, PAP, REMS, ICD-10, GLN, registries, ePrescribe, EMR—so many abbreviations and mechanisms to capture utilization and measure effectiveness have evolved that it can be a challenge just to stay abreast of legal requirements, let alone provide the customized, hightouch care that clinicians pride themselves on delivering.

With these legislative changes have come many programs around quality metrics and reporting tools—PQRI, CQI—that relate directly to reimbursement under government funded programs. These initiatives have broad impact in the commercial marketplace as well. When reporting can incent a practice, and failing to report, or reporting less than favorable data, results in lower reimbursements, it is a direct tie to valuation of the health care provided. These together lead easily to one of the hottest topics in industry— Fair Market Value (FMV).

Adherence to the Law

Identifying bonafide services, creating a tangible valuation for them, independently testing it against the market, and keeping it all within legal frameworks have created a host of new entities engaged in new contracts and arrangements that require careful scrutiny and documentation by participants, but more importantly open the door for ongoing government oversight to assure adherence to the law.

Guidelines in PDMA not only regulate interaction between parties, but prohibit certain activities and require education to be necessary in the best care of the patient. Self-referral and general referral guidelines affect who can direct a patient to a service and what sort of disclosure must be made to the patient if the provider of the services is in any way tied to the referring entity. Such complexity of relationships has never before been under closer review by government and third party entities.

This expanding role of health care reform to drive automation and capture data, along with new relationships between parties, now means many more players could be part of an arrangement that deserves a closer look at FMV:

  • Manufacturers
  • Contractors
  • Specialty Pharmacies
  • Hospitals
  • Clinics
  • Infusion Pharmacies
  • Physicians
  • Wholesalers
  • Specialty Distributors
  • PBMs
  • Payers
  • Retail Pharmacies

42 CFR 447.502: “Bona-fide service fees are fees paid by a manufacturer to an entity that represent fair market value for a bona fide, itemized service actually performed on behalf of the manufacturer that the manufacturer would otherwise perform or contract for in the absence of the service arrangement and that are not passed on in whole or in part to a client or customer of an entity whether or not the entity takes title to the drug.”

Although the regulatory intent is to put clarity and transparency to financial relationships between independent parties for services, many questions still remain a matter of interpretation and continuously evolve. Here are some of the questions:

  • Who defines a bona fide service?
  • What services are part of the normal course of business or a “Basic Service”?
  • Are “Basic Services” offered to everyone and are they always offered? (patients, manufacturers, payers, physicians)
  • At what point does a “Basic Service” become an “Enhanced Service” and nontraditional fees can be assessed?
  • Do regionality, uniqueness, skill sets, or other factors further increase or decrease the value of the service?
  • How do REMS services get categorized?
  • Do previous “Basic Services” become “Enhanced Services” for which fees can be assessed due to FDA REMS requirements (eg, Basic HIPAA authorization or waiver now might include detailed attestation of patient or physician)?
  • How often should FMV be re-evaluated and internally benchmarked?

Fair Market Value BREAKDOWN

✓Payment must be for bona fide services, for which there is a commercially reasonable need; this should be validated by the party requesting the service and providing it.

✓ Fees can not be for referrals or marketing/ promotion of the product.

✓ Independent input as to the valuation of services is recommended, as determination by interested parties is not appropriate; this is also known as Reasonable Compensation.

✓ Fees should be established prior to commencing services, and should not be based on volume or value of business generated, unless a legitimate reason exists to structure on a per prescription basis.

✓ Valuation may be further defined as the price that would be paid if the transaction were between 2 unaffiliated third parties.

✓ Commercial reasonableness applies—a balance to the FMV, this establishes whether the service being offered should even exist, with a look into the underlying economics of the transaction without taking into account any potential for referrals between parties.

Industry Ranges of FMV

As a consulting firm focused on pharma services, D2 Pharma Consulting LLC has identified 59 core service functions that SPs and similar entities may provide as part of contract arrangements with pharmaceutical manufacturers, payers, or PBMs. In executing these arrangements, we have examined the industry ranges of FMV and the level of the services, classifying them into Basic, Enhanced, and Custom. The financial dollar ranges of these services are further varied by “levers” that can increase or decrease the fees. For example, higher data fees can be assessed if the frequency of reporting increases or if manual intervention is required. Conversely, service fees can be lowered if a telephonic satisfaction survey is administered by a customer service agent vs an RPh.

Each interaction between a provider and a patient represents not only solid patient care and HIPAA challenges, but incremental focus and tangible documentation must be in place as service functions are added to that offering.

We have seen fee for service (FFS) agreements frequency shift from one third of contracted revenue streams in 2008 to as much as one half of revenue via qualified service fee under one of these validated agreements. While such programs can drive revenue for entities, there are key items we recommend should be examined prior to entering into any such agreements. It is of note that many of these apply to both contractor and contracting parties in an agreement.

This brings to mind a universal comment regarding such service programs— it is like documentation tied to billing/coding an office visit made by a patient with a physician provider. The rule is: “If it isn’t documented—you didn’t do it.” This cautionary notice for proper coding on the CPT level of a patient encounter is just as important as entities look to enter into service agreements and programs.

At the end of day, it is a balance between charging a fair price for a true pharmacy service, but in this regulatory environment we need to doublecheck our benchmarking methodologies—and always fully document what was done.

Fair Market Chart

About the Author

Mr. Suchanek is Senior Vice President of Biotech and Specialty Services at D2 Pharma Consulting LLC (D2), a best-in-class consulting firm exclusively focusing 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 contacts that meet Fair Market Value requirements. Mr. Suchanek is a member of the Specialty Pharmacy Times Editorial Board.

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