Determining the Bona Fide Nature of Fee-for-Service Arrangements Mark DeWyngaert, PhD, MBA John Moose, MBA, CPA, ABV Elizabeth Gluck, Esq. September 27, 2012
About the Speakers Elizabeth Gluck, King & Spalding egluck@kslaw.com Elizabeth s practice focuses on drug price reporting issues related to the Medicaid, Medicare, Veterans Affairs, Federal Supply Schedule, 340B Drug Pricing, and related programs. She has assisted in multiple comprehensive assessments of pharmaceutical manufacturer price reporting and calculation practices and in the development and implementation of government price calculations and reporting policies, procedures, systems, and methodologies. Mark DeWyngaert, Huron Life Sciences mdewyngaert@huronconsultinggroup.com Mark DeWyngaert has provided operational, clinical, managerial, consulting, and litigation services to various segments of the health care industry. Mark trained as a molecular biologist and has been actively involved in both research and business development roles for the past 25 years. He specializes in assisting pharmaceutical manufacturers, biotechnology, and medical device companies with identifying and mitigating regulatory risks and valuing intellectual property. John Moose, Huron Life Sciences jmoose@huronconsultinggroup.com John specializes in providing valuation and market price related analyses for regulatory, financial reporting, and litigation purposes. He is an expert in assessing the fair market value of services provided under fee-for-service arrangements. John holds a MBA from the University of Michigan, and is a CPA and accredited in business valuation by the AICPA. He has applied complex accounting literature to the valuation of numerous intangible assets, including trademarks, developed technology, in-process research and development, non-compete agreements, and assembled workforce. 2
Disclaimer This presentation contains general information only. The presenters are not, by means of this presentation, rendering accounting, legal, or other professional advice or services. The opinions expressed herein are solely those of the presenter(s) and do not represent the opinions or policies of their employers or clients. 3
Agenda Bona Fide Service Fees Assessing Fair Market Value FMV and the Contracting Process Example Service Fee Analysis Questions and Answers 4
Bona Fide Service Fees Bona fide service fees ( BFSF ) are excluded from the calculations of Average Manufacturer Price ( AMP ) and Best Price. Not all service fees are bona fide. Service fees that are not bona fide are treated as price concessions and included in the calculations of AMP and Best Price. A service fee may only be considered bona fide, and thus excludable from AMP and Best Price, if it meets all of the criteria of the bona fide service fee exemption (the BFSF Test ). Certain wholesaler service fees are also excluded from Non-Federal Manufacturer Price ( Non-FAMP ), but the term BFSF is strictly a CMS construction. 5
Bona Fide Service Fees Patient Protection and Affordable Care Act of 2010 ( PPACA ) Congress for the first time articulated several services that could be considered bona fide. AMP excludable BFSF could include, but are not limited to: Distribution service fees; Inventory management fees; Product stocking allowances; and Fees associated with administrative service agreements and patient care programs (such as medication compliance programs and patient education programs). 1 6
Bona Fide Service Fees In November of 2010, CMS issued a final rule withdrawing and amending regulations that had governed the calculations of AMP and Best Price since October 1, 2007. 2 CMS wrote that the definition of BFSF should not be used in the calculation of AMP. However, it is still to be used for Best Price. 3 Statutory reference 4 to BFSF is not a definition. How to define BFSF in AMP pending publication of the final AMP regulation? Guidance in 2012 AMP proposed rule; and Manufacturer s reasonable assumptions. 7
Bona Fide Service Fees Proposed AMP Regulation (February 2012): References the specific service fees cited in the statute, but suggests these fees must meet the existing regulatory criteria for BFSF to qualify as excludable. Limits the types of entities that may be paid excludable BFSF to wholesalers, retail community pharmacies, or any other entity that conducts business as a wholesaler or a retail community pharmacy. 5 8
Bona Fide Service Fees Proposed AMP Regulation (February 2012): Group Purchasing Organization ( GPO ) administrative fees may also be eligible for exclusion, provided they satisfy all other elements of the BFSF Test. Price Appreciation Credits (which CMS characterized as retroactive price adjustments ) never considered BFSF. 6 9
Bona Fide Service Fees Proposed AMP Regulation (February 2012): Consistent with prior practice, CMS declined to define Fair Market Value ( FMV ). CMS indicated in the preamble that it believes, that manufacturers should appropriately determine fair market value and make reasonable assumptions consistent with adequate documentation that will support their payment for these services at fair market rates sufficient that an outside party can determine the basis for the fair market value determination. 7 This language suggests that formal documentation of FMV analyses is now expected by CMS. 10
Bona Fide Service Fees Goals in Assessing Potentially Bona Fide Services Your company should assess potentially bona fide services to: Respond to CIA or DPA requirements; Adhere to OIG guidance; Mitigate risk of overpaying and creating perception of an improper payment; Facilitate additional oversight during contract evaluation to allow for consistency across contracts; Provide business partners with the justifiable means for communicating payment amounts to vendors and other third parties; and Support adherence to company policy. 11
Bona Fide Service Fees Questions to ask Many companies are working with outside vendors to address several questions raised by the guidance in the proposed AMP regulation including: Which of the services under fee-for-service arrangements should be considered bona fide? Are payments for bona fide services treated properly in my government pricing calculations? Are my contracts clearly delineating the bona fide services received? Are my contracts clearly linking FMV fees to the bona fide services provided for under the contract? Has my company adequately calculated and documented fair market value? 12
Bona Fide Services Bona Fide Service Fee Test Under the proposed AMP Rule, to be considered bona fide a service fee must satisfy each the following four criteria: The fee paid must be for a bona fide, itemized service that is actually performed on behalf of the manufacturer; The manufacturer would otherwise perform or contract for the service in the absence of the service arrangement; The fee represents FMV for the services rendered; and The fee is not passed on in whole or in part to a client or customer of any entity. 13
Bona Fide Service Fees Key Treatment of Bona Fide Service Fees Proper treatment of fees paid to service providers is critical to ensure the accuracy of GP statutory pricing calculations and integrity of prices reported to the government. One of the most important aspects of BFSF and FMV evaluation is the rationale and documentation required in order to demonstrate due diligence in the decision making process. In this dynamic regulatory environment, and given the evolving guidance, it is critical to have a clear record of the rationale for your determinations The scrutiny on BFSF s has increased dramatically, as they are determinations that must be made by the manufacturer, and can have a dramatic impact on reported government prices Manufacturers cannot make determinations based upon what is conservative or aggressive as the impact of calling a payment a Bona Fide Fee for Service and exempt from calculations can be conservative in one program and aggressive in another 14
Bona Fide Service Fees Examples of Potentially Bona Fide Services Examples of potentially bona fide services are provided below. This is not meant to be an exhaustive list. GPOs, MCOs, and PBMs Specialty Pharmacy Wholesalers and Distributors Maintain customer lists; Notify customers of changes in contract prices or terms; Data reporting sales and market share; Program oversight and contract consulting; Audit wholesaler data; Resolve billing, chargeback, and rebate issues; Provide members with contract modeling tool; Conduct contract modeling for member on manufacturer s behalf; Provide promotional activities such as email blasts and webcasts; Exhibits and meeting attendance; Sponsorships; Focus groups/ad boards; Speaker programs; and Market research. Coordination with company s call center hub; Custom scripted calls to patients; High-risk patient assessments; Sending promotional or educational materials; Express shipping; Call center; Complex benefits investigation; Sales and inventory reporting; and Product replacement services. Inventory management (Primarily Branded); Customer service levels (Branded and Generic); Information and data service fees (Branded and Generic); Indirect Contract Administration (Branded and Generic); and Range of services associated with generic introduction (Generic): o Marketing materials; o Rapid product introduction; o Promotional events; and o Distribution of free product. 15
Bona Fide Service Fees Developing a Robust Compliance Program Develop policies and procedures governing the assessment of whether fees paid to service providers are Bona Fide. Ensure company has a pricing committee. Ensure distribution and commercial contracting groups are actively communicating contracting plans early on in the process. Perform a thorough BFSF evaluation and FMV analysis, documenting rationale, and assumptions. Document treatment of service fees in statutory pricing calculations. Ensure analysis and application of fees are reviewed; Involvement from internal/external counsel; and Consider utilizing external consultants (SME) for FMV analysis. 16
Bona Fide Service Fees Next Steps Branded and generic pharmaceutical manufacturers should consider: Reviewing current contracts to: Assess consistency in payments within and between contracts; Determine if all the fees paid to service providers (e.g., in exchange for services or data) that are treated as Bona Fide in statutory price calculations are itemized in the contract and properly linked to payment; and Identify clauses that allow for adjustment of payment or no payment if bona fide services or data is not received or provided as contracted. Preparing a business case to document business need for services; Calculating and documenting fair market value of service or data requests; Assessing whether bona fide service fees are properly treated in government pricing calculations; and Establishing internal controls to verify and document receipt of service(s) and data. 17
Assessing Fair Market Value 18
Assessing Fair Market Value Fair Market Value Defined A fair market value definition generally accepted in the valuation industry: 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 arm s 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. (1) [emphasis added] 1. American Society of Appraisers Business Valuation Standards Glossary ; http://www.bvappraisers.org/glossary/glossary.pdf. Approved June 2005 Copyright 2005, American Society of Appraisers 19
Assessing Fair Market Value Steps to Assessing Fair Market Value Identify and define the potentially bona fide services to be valued; Understand the market(s) for that service; Determine controls used to validate receipt of service; Determine methodologies to be applied; Apply the methodologies; Implement at the service level; and Implement at the contract level, if applicable. 20
Assessing Fair Market Value Identify and define potentially bona fide services Identify potential fee-for-service arrangements through interviews and a comprehensive review or sampling of contracts. Review the fee-for-service arrangements for potentially bona fide services. Every bona fide service or data set should be clearly defined. Description; Attributes that may drive value; and The primary tangible and intangible assets employed to deliver the service or data set (which drives the level of reasonable profit). 21
Assessing Fair Market Value Levels of FMV The manufacturer must determine at what level the FMV assessment will be determined: Activity (e.g., call, educational insert, letter) Service (e.g., activity times volume for the contract) Contract (e.g., fair market value for all services in a contract) 22
Assessing Fair Market Value Understand the market for the service Attributes of the market to be considered may include: Pricing Efficiency; Bargaining power of buyer and seller (e.g., market share); Buyer and seller knowledge of other transaction prices; and Access to unique assets (e.g., customer relationships). A solid understanding of the markets in which services are bought and sold will allow for a more accurate assessment of the profit to be placed on the service or data set. 23
Assessing Fair Market Value Valuation Approaches Generally accepted valuation principles employ three primary approaches to value: 24
Assessing Fair Market Value Valuation Methodologies Strengths and Weaknesses Each method has advantages and disadvantages for any given service or data set. Income Approach Requires significant number of assumptions or effort in data gathering but may be the most flexible valuation methodology. Market Approach No two services are exactly alike or exchanged under the same circumstances; and Adjustments for specific differences in value drivers between the observed prices and the subject prices may be difficult or impossible. Specific knowledge of all value drivers is usually not provided in the contract and the circumstances surrounding negotiation of the contract are usually not available. Cost Approach Results may lack a connection to observed prices; Certain estimates are required but the estimates have the potential to provide a more accurate estimate than that provided by the Market Approach; and Cost drivers are apparent which allows for a better educated buyer of the services. 25
Assessing Fair Market Value What s in a Price? Price for a bona fide service can be thought of as an amount that covers: The direct cost of the service; The overhead associated with delivering that service; The cost of assets used up in the delivery of the service; and A reasonable return on the assets employed in the delivery of that service. These four factors may not always be appropriate in assessing fair market value in all cases. 26
Assessing Fair Market Value Conclusion Your conclusion of fair market value should consider the results of all methods employed, but may rely entirely on one method. The fair market value should be a range, not a point estimate. Once a fair market value range for an activity is determined, the amount should be multiplied by the volume of that activity for each type of service and added together to arrive at a fair market value range for the contract. 27
Assessing Fair Market Value Attributes to Consider Fair market value assessments for fees paid to service providers determined to be Bona Fide should be: Documented Defensible Consistent Flexible 28
FMV and the Contracting Process 29
FMV and the Contracting Process Consider adding an FMV review to the Contracting Committee analysis. - Diversity in representation on the Committee helps to ensure that practical considerations are not overlooked. Implement an SOP to detail when and how to apply FMV. - An SOP demonstrates an organization s commitment to any reviewing agency. o Include a formal exceptions process; o Train on the SOP; and o Audit against the SOP. Develop a template contract with the assistance of legal counsel. 30
FMV and the Contracting Process Perform a thorough FMV analysis of current services, documenting rationale and assumptions. Empower employees to gain acceptance. Clarify importance of FMV implications for statutory price calculations and contracting process; Explain the policy and how rates were derived; and Encourage employees to negotiate rates within the FMV ranges. 31
Example Service Fee Analysis 32
Example Service Fee Analysis New and Enrolled Patient Support Patient support services for product adherence program are designed to address the unique characteristics of patients and may require specialized skills of healthcare professionals familiar with multi-faceted treatment regimens and causes for patients not adhering or dropping off of therapy. An example of a fair market value analysis of a call to a patient follows: 33
Questions Mark DeWyngaert Huron Life Sciences P 646-277-8817 mdewyngaert@huronconsultinggroup.com John Moose Huron Life Sciences P 312-880-0514 jmoose@huronconsultinggroup.com Elizabeth Gluck King & Spalding P 202-626-5585 egluck@kslaw.com 34
Endnotes 1 [42 U.S.C. Section 1396-r8(k)(1)(B)(i)(II)] 2 [75 Fed. Reg. at 69,591 (November 15, 2010)] 3 [75 Fed. Reg. at 69,593] 4 [42 U.S.C. Section 1396-r8(k)(1)(B)(i)(II)] 5 [77 Fed. Reg. at 5321, 5327, 5332 (Feb. 2, 2012); proposed sections 447.502, 447.504(c)(14), and 447.505(c)(16) 6 [77 Fed. Reg. at 5332] 7 [77 Fed. Reg. at 5332] 35
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