FMV Tips and the Sunshine Act: A Roadmap for Compliance

Vol. 10 No. 9

AuthorOn February 18, 2014, manufacturers and group purchasing organizations in the life sciences industry could begin to report to the Centers for Medicare & Medicaid Services (“CMS”) payments or other transfers of value to physicians and/or academic medical centers (“AMCs”). This reporting requirement, established under Section 6002 of the Patient Protection and Affordable Care Act of 2010, is referred to as the Sunshine Act or the Open Payments program.1 A major goal of the Open Payments program is to increase transparency by making information about certain payments to physicians and AMCs available on a public, searchable website. These compensation arrangements may include payments to healthcare providers who provide administrative services as well as clinical services, both of which must be set at Fair Market Value (“FMV”). Various laws and regulatory guidance, including The Anti-Kickback Statute, Stark Act, False Claims Act and the Department of Health and Human Services’ Office of Inspector General (“OIG”) reference the importance of payments to physicians to be established at FMV. Since payments are now being disclosed, the possibility of them being viewed as not FMV could trigger the government or whistleblowers to scrutinize such payments.  

Much of the life sciences industry has been overwhelmed by the task of gathering this compensation data, and may soon be faced with an even larger challenge, defending the data. As information regarding these payments is required to be disclosed, questions are likely to arise from the industry, public and government related to the amount of compensation paid for certain services. All parties involved (AMCs, physicians and industry) must ensure that compensation is at FMV. The following will discuss methodologies in setting FMV compensation for physician services and provide guidelines to assist organizations in documenting a defensible compensation arrangement. 

FMV Basics

There are several arrangements within the life sciences industry whereby companies are compensating physicians and/or AMCs for their clinical expertise. The referral relationship between a life sciences company and an AMC is similar to that of the referral relationships between physicians and hospitals. Since the latter has historically required strict adherence to the FMV standard, it is advisable to note the prior regulatory guidance put forth as it relates to acceptable methodologies for determining FMV. A FMV glossary of terms was jointly developed by representatives of the American Institute of CPAs, the American Society of Appraisers, the Canadian Institute of Business Appraisers, the Institute of Business Appraisers, and the National Association of Certified Valuation Analysts. According to that glossary of terms, the definition of the term FMV is as follows:

The price, expressed in terms of cash equivalents, at which a property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy nor to sell, and when both have reasonable knowledge of the relevant facts.2

It is important to note that the determination of FMV under healthcare regulations may not always be consistent with generally accepted appraisal standards. In fact, certain departures from standard appraisal practice may be required. Specifically, the methodology must not exclusively rely upon data points which are based on arrangements where parties were in a position to refer. For example, if a pharmaceutical company compensated a physician for consulting services at a certain hourly rate, this would not be adequate FMV documentation for another company to establish payments to the same physician, as it is considered “tainted” since it is assumed that the first company likely receives referrals from the physician. This concept is well known throughout the healthcare valuation industry. Said another way, certain data should not be exclusively relied upon, and the FMV process is expected to be thorough. The following sections discuss guidelines for establishing FMV compensation for clinical and administrative physician services often found in life sciences arrangements.

Determining FMV for Administrative Services

Administrative services may include various types of consulting, including the administrative review and discussion of clinical trials, written abstracts and manuscripts, as well as speaking engagements. There has been previous regulatory guidance related to FMV for healthcare providers who provide administrative services:

A Fair Market Value hourly rate may be used to compensate health care providers for both administrative and clinical work, provided that the rate paid for clinical work is Fair Market Value for the clinical work performed and the rate paid for administrative work is Fair Market Value for the administrative work performed. We note that the Fair Market Value of administrative services may differ from the Fair Market Value of clinical services.3

Based on this excerpt, one should acknowledge that administrative services may be valued differently from clinical services. It is important to understand the service being provided and the experience and qualifications required for the provision of those services. Ideally, one would rely upon compensation data for healthcare providers who are providing the same services, in the same specialty with the same experience. However, this survey data may not always be available. In addition, one should consider if the data appears to be overstated in order to ensure the final compensation indication does not rely upon data which could be perceived as tainted by referral relationships. Therefore, to establish FMV compensation, one should apply multiple valuation methodologies, such as referencing public survey data for physicians in similar roles, or conducting industry interviews and research, to assist organizations in developing defensible documentation for payments associated with administrative services. 

Another data source for administrative services may include compensation for physicians in clinical practice, assuming clinical expertise is required for the administrative role. For instance, if the administrative services require a physician within a particular specialty, clinical compensation survey data may be appropriate to consider.  However, relying solely on this data based on the fact it is the “opportunity cost” for the healthcare provider (i.e.: this is what he or she would earn during surgery), may not provide defensible documentation alone, from a FMV standpoint.  

Determining FMV for Clinical Services

Arrangements within the life sciences industry often require healthcare providers to perform clinical services. These services may include office visits, surgery or test interpretation. It is important to note that if an AMC or physician is receiving compensation for clinical services from the life sciences industry, it most likely will not make sense for the AMC or physician to bill the patient for the same service. Specifically, it could appear that the physician is being paid twice for the same service if able to collect from a patient and collect for the same service from industry. The following describes two methods which may be considered in establishing FMV compensation for clinical services (assuming the physician cannot bill and collect from the patient).

If the provider is providing a service which has a relevant CPT code, the market reimbursement for that code, or a similar procedure, may be an acceptable compensation methodology. This amount would reflect what another willing buyer of the services would pay in the market which should reflect FMV. Alternatively, if one is unable to link the procedure to a CPT code or market reimbursement of some type, other methods may be relied upon. Most healthcare valuation firms rely on multiple and objective salary surveys which report clinical compensation data by specialty. It will be important to understand the experience of the healthcare provider, the complexity of the procedure, time required and other factors when considering and applying this reported compensation data.

Compliance Checklist when Establishing FMV 

In addition to appropriately determining FMV compensation for services, it is advisable to establish internal policies for setting compensation in order to apply a consistent methodology for all compensation arrangements. The following are essential steps associated with physician and AMC arrangements within the life sciences industry:

  • Document time and understand services to be provided.
  • Clearly understand the experience requirements.
  • Clearly understand the subject healthcare provider’s qualifications.
  • Reference multiple, objective, independently published salary surveys.
  • Consider multiple valuation approaches. 
  • Understand that the FMV of administrative services may differ from the FMV of clinical services.
  • Do not exclusively rely on survey data based on referral relationships.
  • Do not exclusively rely on opportunity costs.

Regulatory authorities may not only question the amount of the payments, but also the reason for the payments. A robust compliance program should provide safeguards against arrangements which don’t make sound business sense. The following questions are closely tied to the FMV requirement and should be asked when reviewing an arrangement between the life sciences industry and a provider (AMC or physician):

  • Is there a legitimate need for the service?
  • Did the appropriate department engage the physician consultants (not the marketing department)?
  • Was the physician chosen based on his or her expertise in clinical practice?
  • Are there excess consultants engaged?
  • Is there documentation that the services were actually provided?
  • Is the physician consultant or AMC receiving additional benefits not tied to the payment (i.e.: the provider is receiving funding for a research trial and retains equipment post-trial)?4

One cost effective way to maintain compliant might be to have a table of hourly rates for various services based on expertise and the required specialty. Another option may be to establish a conservative internal hourly rate for compensation, but when certain arrangements deviate from the internal threshold, the organization should seek a third party FMV opinion in order to obtain defensible documentation as to why higher compensation is justified.

Conclusion

The public reporting of AMC and physician compensation data is likely to trigger investigations related to payments and subsequently documentation for supporting that the compensation was set at FMV. Sticking to regulatory guidance and examining one’s policy regarding how payments are established and why the providers are engaged will be essential for compliance.

***

1

42 U.S.C. § 1320a-7h.

2

National Association of Certified Valuators and Analysts: www.nacva.com/association/a_bv_terms.asp.

3

STARK II, PHASE III, Fed. Reg. Vol. 72, No. 171, August 27, 2007.

4

In addition to the guidance suggested above, it is important that the organization establish compliance policies, train employees on compliance policies, monitor and update compliance policies and take action when necessary. Regulatory authorities have consistently considered that establishing an infrastructure for compliance to be essential.   

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