Determining fair market value (FMV) for services and payments is crucial in life sciences to maintain regulatory compliance and to avoid fraud and abuse allegations. But establishing FMV with sound methodology is complex given the lack of perfect market equivalents. Recent guidance provides insights into current best practices.
FMV is defined as the commercially reasonable price for services at the time they are provided based on arm’s length transactions, per the Stark Law and Anti-Kickback Statute [1]. For life sciences, this applies to relationships with physicians, hospitals, and other potential referral sources. Common scenarios include consulting contracts, royalty agreements, and research funding.
Weston Fox, (Executive Vice President of Commercial at BC Platforms) says this, “At BC Platforms, we have the ability to provide the value and granularity of all payments we make globally to our data partners. We ensure these are in line with what is considered to be fair and reasonable for the given geography. Our transparent process and collaborative operating model ensure that we are up to date and in compliance with all global regulations.”
Methodologically, life sciences companies should use multiple objective benchmarks to estimate FMV and document their methodology [2]. No single source will provide a perfect comparison. Useful inputs include:
– Pricing from recent contractual relationships for near identical services under similar terms.
– Salary survey data from reputable sources, adjusted for geography, specialization, and seniority.
– Fair health benchmarks for physician fees based on procedure codes.
– Industry reports detailing typical royalty rates for technologies.
– For research funding, the sponsor can assess the budget, milestones, and aims for validity.
Securing multiple data points enables a reasonable FMV range to be established [3]. The final value should fall within that range based on the specifics of the situation. Documentation should detail all inputs, assumptions, adjustments, and selection rationale.
It is important to avoid basing FMV solely on a company’s budget or a single benchmark. Regular reviews and updates to FMV methodology are also recommended to reflect current market conditions [4]. And any method should account for the buyer’s specific circumstances versus generic industry averages.
Establishing FMV for services and engagements remains more art than science. But well-documented methodology based on multiple market indicators can demonstrate diligence. Adhering to the spirit of FMV – not simply the minimum threshold – is also wise. With sound processes, life sciences organizations can effectively navigate this regulatory requirement.
Sources:
[1] Copeland, “Life Sciences Law”, 2021
[2] Mason et al., “The Health Lawyer”, 2020
[3] Ryan et al., “Biotechnology Healthcare”, 2020
[4] French et al., “The National Law Review”, 2020