Developing Fair Market Value for Physician Payments
Pharmaceutical companies have long relied on healthcare practitioners to provide perspective on developmental and marketed products. Physicians and clinical researchers who specialize in a product’s intended therapeutic area can offer their expertise on how to structure clinical trials and analyze results, assess the likelihood of product uptake and educate other physicians on the benefits of those products.
The compensation physicians receive for their services must be at fair-market value, but determining FMV can prove difficult. If a payment exceeds the fair-market value of the services, the pharmaceutical company risks regulatory reprimands, as well as various penalties and fines that can be enforced through the Department of Justice (DOJ) or the Office of the Inspector General (OIG) for the Department of Health and Human Services (HHS).
No company wants to be seen as offering kickbacks to physicians, which can damage the reputation of both parties, but non-compliant FMV practices can easily put companies in such a position. On the other hand, when companies offer too little to physicians, they find it difficult to attract the thought leaders necessary to help them make tough product and brand development decisions.
Because the life sciences industry has been hit hard with corporate integrity agreements, compliance audits and OIG fines, they are keeping a close eye on new expert compensation regulations cropping up worldwide.
Companies are paying attention to how much they spend on individual experts, but when it comes to developing a global strategy for fair-market value compensation, it is rare to find a company that has established consistency across all of its affiliate markets.
Consequently, a recent study from Cutting Edge Information focused on global expert management and the differences in expert compensation levels between the United States and the European Union.
Cutting Edge Information is a widely recognized leader in providing fair-market value (FMV) consulting to help life sciences companies develop their physician fee schedules. CEI performs custom, client-driven studies using proprietary databases and research methodologies. Cutting Edge Information’s data found that only 9% of drug and device companies have global FMV fee schedules in place.
Cutting Edge Report
The report noted that, “part of the difficulty with proactively establishing a global FMV compensation strategy is that there are too many local regulations — not to mention local customs — to consider. For example, if company policy is to pay experts through flat fees in exchange for their services, companies may have trouble in countries where experts expect to be paid hourly.”
The report also noted that global strategies for paying experts is a fairly new concept that was “brought about by the OIG’s Guidance for Pharmaceutical Manufacturers, published in 2003.” The OIG guidance called for drug and device companies to compensate consultants and advisors (in other words, experts) at a fair-market value.
With no additional guidance as to how to calculate FMV, drug companies have turned to benchmarking data, historical payments and other forms of aggregate spend tracking and documentation to determine fair-market value.
Only recently has the FMV concept taken hold in Europe. The Association of the British Pharmaceutical Industry’s (ABPI) recent code of practice changes calls for physician fee schedules to be “reasonable and to reflect the fair-market value of the services rendered.” With similar language appearing in more and more regulations, life sciences companies have started to turn their attention toward developing global FMV strategy.
The report also acknowledged that establishing FMV for experts is important considering the Physician Payment Sunshine Act, which requires pharmaceutical companies to start tracking expert payments this January 2012 and to publicly disclose them in 2013. Accordingly, the report noted that, “In the wake of the requirements in the United States, the largest companies in the EU are instituting global disclosure policies.”
FMV Compensation Lower in Europe than in US
To provide a guidepost for European thought leader compensation, CEI analysts calculated average hourly rates for the US and for Europe. These averages were derived from 596 data points for the US and 245 data points for the European rate.
Based on average hourly rates for every expertise level, company size, therapeutic area and type of activity, CEI analysts determined that the average US hourly rate is $306; the average European hourly rate is €183. Therefore, at the most general level, analysts can determine that a US rate is higher than a comparable European rate by close to 13% (exchange rate of 1.4814 on May 4, 2011).
When taken as a case-by-case basis, this difference does not seem to amount to much, but when extrapolated to total yearly cost, it can easily represent tens or even hundreds of thousands of dollars and/or Euros.
The number of different factors that influence compensation in the US and Europe makes a single, standard calculation model impossible. At many companies, compensation varies based on both the type of medical professional and the activity he or she performs. Considering just these two factors, there are up to 135 different combinations of qualifications and activities. Also expanding these possibilities are company size and therapeutic area. Finally, companies can elect to pay an hourly rate or a flat rate.
Because any single formula used to calculate European compensation based on US values would not yield accurate, actionable figures, but instead indicate a trend, CEI analysts closely examined compensation differences to further identify the areas where these differences can be seen. The report noted that experts-in-field in the US have rates ($462) that are 23% higher than the hourly compensation for similar professionals in Europe ($376). For surgeons, the difference is not as pronounced, with a variation of 12% more in the United States ($353) than in Europe ($316).
Annual Compensation Limits
Although not yet a widespread practice in Europe, companies are beginning to set limits on how much is paid to thought leaders. Similar to the trend in rates for select thought leader types, companies in Europe are setting limits lower than the ones reported in United States.
Though companies in the US average compensation limits of nearly US $64,000 per expert, European executives reported limits averaging close to US $50,000, or 22% lower than their US counterparts. CEI analysts believe that regional influences such as country-specific income levels, extent of activities performed by experts, and access to these experts impact the levels of compensation found in Cutting Edge Information’s research.
Establishing Region or Country-Specific Fee Schedules
Global FMV strategy has developed organically, emphasizing local market nuances and customs. Accordingly, the report recommended that, “without more formal regulation around expert compensation from governments in Europe or other parts of the world, companies should avoid establishing blanket policies or global fee schedules for” experts.
Instead, the report recommended that companies “develop regional fee schedules that encompass two or three countries to better accommodate to regional demand, influences and regulations.”
Additionally, the report maintained that, “Companies must be careful not to allow these regional fee schedules to spill over into too many other markets. Otherwise, they may find themselves overpaying or underpaying [experts] and running afoul of any local regulations that may preclude physician compensation.
Finally, the report recommended that companies “monitor individual governments’ policies for working directly with medical professionals prior to contracting these professionals as” experts.”