Fair Market Value: Gaining Attention Within Life Sciences

Vol. 12 No. 8

AuthorAs the count and monetary value of fraud and abuse settlements and judgments in the healthcare sector continues to rise year over year, the federal government has sought to keep pace through investing in infrastructure and legislating requirements of increased transparency on the part of healthcare entities, specifically companies in the life sciences industry. These investments and legislative changes are driven by a high return on investment for the federal government, as the Department of Health and Human Services (HHS) has reported that for every dollar invested in healthcare fraud and abuse investigations, approximately $7.70 has been recovered in settlements and other legal outcomes.1 New guidelines from the Department of Justice (DOJ) suggest that individuals, including employees and physician contractors of life sciences companies, will be targeted in civil and even criminal suits alongside the DOJ’s investigation of a company.2 Since federal law prohibits the payment of compensation to physicians in excess of fair market value (FMV),3 and any excess payment to a physician may be construed as an inducement for referrals and may result in litigation, it is imperative that life sciences companies develop a robust internal approach toward payments to physicians for necessary and legitimate consulting services. 

The Federal Government Raises the Stakes

The government’s successes in fighting healthcare fraud and high return on investment in the area has spurred it to increase its investment accordingly. A representative with the HHS Office of Inspector General (OIG) announced in June of 2015 that the OIG is in the process of hiring additional lawyers in order to combat healthcare fraud,4 specifically fraud on the part of physicians providing services to healthcare entities under questionable payment arrangements.5 Increased scrutiny by the OIG suggests that the agency is no longer willing to wait for whistleblowers to bring qui tam suits,6 but intends to seek out and prosecute physician fraud on its own.7 This initiative by the OIG is surprising given that over 700 whistleblower lawsuits were filed in 2014, representing an increase of approximately 75 percent over 2009 levels,8 and clearly illustrates that the agency is not content with the current (albeit increased) rate of healthcare fraud prosecution. Additionally, the OIG has focused in recent years on the utilization of data analytics in its pursuit of Medicare fraud cases, resulting in “almost $15 billion in investigative receivables and more than 2,700 criminal actions in the past 3 years [since 2012].”9 These developments indicate that an even greater increase in healthcare fraud and abuse cases will arise in the near future.

This prosecution trend is worrisome for life sciences companies in particular, which already face a greater percentage of qui tam lawsuits than other segments within the healthcare sector. For instance, in 2015, pharmaceutical giant Johnson & Johnson reached a $2.2 billion settlement with the DOJ to settle claims that, among other infractions, involved the payment of monetary kickbacks to physicians. Omnicare, a leading provider of pharmaceuticals to long-term care facilities and nursing homes, also settled for $116 million in connection with the Johnson & Johnson kickback payments.10 These settlements highlight the significant risk that life sciences companies run when accused of paying kickbacks to physicians. It is important to emphasize that illegal kickbacks do not need to follow the classic form of separate and identifiable direct payments for referrals, but can be implied (and therefore prosecuted) in compensation that exceeds FMV for otherwise verifiable and legitimate physician services. In the 2015 case of Daiichi Sankyo, Inc., the pharmaceutical company paid $39 million to settle kickback claims that originated from paying physicians for speaker fees.11 As all compensation transactions between life sciences companies and physicians move into the crosshairs of government agencies, it is imperative that life sciences companies develop a robust internal methodology to ensure that physicians are compensated at FMV for verifiable services that further a legitimate business purpose of the company.

With the institution of the Physician Payments Sunshine Provision of the Patient Protection and Affordable Care Act (also known as the Open Payments program),12 applicable life sciences companies are required to report all payments to physicians annually on a public website.13 While certainly geared towards increasing transparency and aiding the decision-making process of informed healthcare consumers, the Sunshine Provision reporting requirement also provides a golden opportunity for the OIG and others to collect and analyze physician payment data from many life sciences companies, providing the first step in identifying individual arrangements in which a payment to a physician may exceed FMV.

Tips for Life Sciences Company Compliance Programs

How can a life sciences company proactively demonstrate compliance with government regulation in order to avoid investigation and eventual litigation? Before establishing an internal methodology for FMV compensation to physicians, compliance personnel should adhere to the following practical guidelines regarding physician service agreements:

1. Determine that a legitimate business need for the arrangement exists (absent potential referrals);

2. Fully understand the services being provided as outlined in a written agreement (which should detail payments for identifiable services and be executed before services are performed);

3. Determine necessary qualifications for the position such as specialty, credentials, and experience level;

4. Identify and screen candidates based on the qualifications above; and

5. Offer the position to the best candidate.

Though logical, these steps are not always practiced. When physicians are selected through an alternative process, such as marketing department initiatives, it is more likely that the arrangement will fall under regulatory scrutiny.14 Remember, regulatory authorities will question not only the dollar amount of payments to physicians, but also the legitimate business reason for those payments.15

The Fair Market Value Standard

Once it has been determined that the services are required, establishing a FMV hourly rate for these services is the next step to compliance. According to the International Glossary of Business Valuation Terms, FMV is defined as follows:

The price, expressed in terms of cash equivalents, at which 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 or sell and when both have reasonable knowledge of the relevant facts.16

The determination of FMV for services provided by physicians is of utmost importance. If the rate payable to a physician is determined to be set at FMV, no excess compensation has been paid to a physician that could be construed as remuneration for referrals; therefore, a company cannot be successfully prosecuted for paying kickbacks to physicians in exchange for referrals.

In the case of physician consulting services to life sciences companies, payments to physicians are most often in the form of an hourly rate, as an hourly approach is suggested by federal regulation for part-time physician services.17 It is important for life sciences companies to remain updated on industry data to ensure that the hourly payments to physicians are set at FMV. For example, according to a survey conducted by Cutting Edge Information from 2006 to 2011 payments to physicians from life sciences companies sharply dropped from an average of $604 per hour to $299 per hour.18 Although the hourly rates on the whole have remained generally stable since 2011, outdated market studies of FMV compensation rates may provide a false sense of security for companies whose physician payment rates currently exceed FMV.

The establishment of the FMV hourly rate should be based on a current and thorough valuation that relies upon several objective compensation surveys; as federal regulation recommends, “[r]eference to multiple, objective, independently published salary surveys remains a prudent practice for evaluating Fair Market Value.”19 Many life sciences companies utilize the assistance of a third party, which can perform the necessary research and create hourly rate tables in order to provide a consistent and documented approach to determining FMV. The examination of multiple, objective surveys detailing physician compensation for identical or similar services is essential when constructing an hourly rate table, which should be organized both by specialty and by physician experience tier. Just as the federal government has invested in tools to fight fraud and abuse, life sciences companies ought to also invest in corresponding tools to defend their actions such as hourly rate tables in order to ensure that all payments to physicians are consistent with FMV. Finally, once FMV hourly compensation rates are determined, a life sciences company must ensure that these payment rates are outlined in physician contracts and implemented, a task that has proven challenging for many of these companies.

The Bottom Line

In spite of the daunting regulatory environment currently facing the life sciences industry, it is important to emphasize that existence of a well-reasoned compliance program, whereby a company can demonstrate its effort and intentions to operate in accordance with government regulation, is absolutely vital. Larger life sciences companies often have entire departments dedicated to compliance, while smaller companies may neglect the need for compliance entirely.20 Moreover, while larger life sciences companies typically maintain updated hourly rate tables prepared by a third party, problems tend to occur in the implementation of the physician relationship, as individuals responsible for physician contracting may or may not be fully informed regarding the company’s physician compensation policies. Therefore, a well-reasoned compliance program should also include the establishment of protocols and best practices for engaging and compensating physicians that is effectively communicated throughout the company through written documentation. Further, an individual company member should be assigned responsibility for monitoring and enforcing the company’s compliance program. Taking proactive and logical steps to internally document and standardize legitimate payments to physicians stands as a safeguard that life sciences companies cannot afford to overlook in light of current regulatory scrutiny.


Jen Johnson, CFA, is a managing director with VMG Health and oversees the Professional Service Agreements Division. Her expertise is related to the in-depth knowledge required to understand the Fair Market Value challenges, market data, and regulatory guidelines associated with valuing professional service arrangements associated with both healthcare systems and life sciences companies. She is routinely published on various fair market value topics nationally through organizations such as the American Health Lawyers Association, American Bar Association, Health Care Compliance Association, and Healthcare Financial Management Association. She may be reached at jenj@vmghealth.com. The author greatly acknowledges the assistance of Lawson Hopkins in the research and development of this article.


"Departments of Justice and Health and Human Services Announce over $27.8 Billion in Returns from Joint Efforts to Combat Health Care Fraud," HHS.gov. HHS Press Office, 19 Mar. 2015. Web. .


Greaves, Catherine. "DOJ Stresses Individual Accountability in New “Yates Memo”, ABA Health eSource, October 2015, Web. .

3Both the Stark Law (42 U.S.C. § 1395 nn) and the Anti-Kickback Statute (42 U.S.C. § 1320a-7b) address the need for physician compensation to be set at FMV in order to prove that excess compensation is not being paid for physician referrals.

"OIG Hiring More Attorneys/Physician-Vendor Relationships under Heightened Scrutiny - Physician CPA for Medical Practices in Houston," Reed Tinsley CPA, 23 June 2015. Web.  .


Schencker, Lisa, "New OIG Fraud Alert Puts Doctors on Notice, Modern Healthcare, June 9, 2015 .


Qui Tam suits are lawsuits brought by private citizens against an entity believed to have broken the law, typically relating to a contract with the government or violating a government regulation which outlines a monetary penalty. See http://dictionary.law.com/default.aspx?selected=1709 for more detail.


"OIG Hiring More Attorneys/Physician-Vendor Relationships under Heightened Scrutiny - Physician CPA for Medical Practices in Houston," Reed Tinsley CPA, 23 June 2015. Web. .


“Justice Department Recovers Nearly $6 Billion from False Claims Act Cases in Fiscal Year 2014,” Justice News. Department of Justice - Office of Public Affairs, 20 Nov. 2014, Web. .


Sullivan, Thomas. "CMS and OIG Discuss ‘The Use of Data to Stop Medicare Fraud’ Before House Ways and Means Subcommittee - Policy and Medicine." Policy and Medicine. 08 Apr. 2015, Web. . Quote from Gary Cantrell, Deputy Inspector General for Investigations for the OIG.


“Justice Department Recovers Nearly $6 Billion from False Claims Act Cases in Fiscal Year 2014,” Department of Justice - Office of Public Affairs, 20 Nov. 2014. Web. .


“Daiichi Sankyo Inc. Agrees to Pay $39 Million to Settle Kickback Allegations Under the False Claims Act,” Justice News, 9 Jan. 2015. Web. .


For more detail, see https://www.cms.gov/openpayments/.


Thomas, Sullivan. "Physician Payment Sunshine Act: CMS Releases Fact Sheets - Policy and Medicine," Policy and Medicine, 12 Apr. 2013. Web. .


Since physicians who are selected by marketing department initiatives may be targeted based on their ability to refer additional business to the company, a more robust approach should be utilized to ensure that the physicians chosen reflect the expertise needed to perform the services and are not mere strategic referral sources for the company.


As payments for physician referrals are prohibited (see 42 U.S.C. § 1395 nn, 42 U.S.C. § 1320a-7b), compensation arrangements that do not have a legitimate business purpose apart from generating referrals for the company are at high risk of scrutiny.


http://www.aicpa.org/InterestAreas/ForensicAndValuation/Membership/DownloadableDocuments/Intl%20 Glossary%20of%20BV%20Terms.pdf.

1742 C.F.R. § 415.60.
18Evangelista, Elio. "Key Opinion Leader Payments Drop by 50%," Marketwire, 14 June 2011, Web. .
19STARK II, PHASE III, FR Vol. 72, No. 171.
20Based on the author’s market experience, smaller life sciences companies largely tend to be either unaware or only recently apprised of the need to document payments to physicians at fair market value.



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