Fair Market Value: Gaining Attention Within Life Sciences

life sciences fair market value

Published by ABA Health eSource

As 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,6but 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.10These 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.

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