Bona Fide Service Fee Requirements including Fair Market Value

Presenter:Sajid A. Saeed, CPA/ABVFair Market Value and Fee For Service Lead, GSK

Disclaimer

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The views and opinions expressed in this presentation are those of the presenter and are not reflective of the official

position of GSK or any of its affiliates. GSK or any of its affiliates are not liable for the relevance, accuracy or completeness

of the content included in this presentation. Examples used in this presentation are for illustrative purposes only, may not be

exhaustive and may not apply in every fee for service / fair market value situation.

Bona Fide Service Fee Overview

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CMS - Final Rule Highlights

• Center for Medicare & Medicaid Services issued 42 CFR Part 447 – Medicaid Program, Covered Outpatient

Drugs; Final Rule on February 1, 2016 (AMP Final Rule)

• Effective date of April 1, 2016 (except of inclusion of US territories and state Medicaid programs

requirements)

• Revised definition of bona fide service fee to replace the reference of “wholesalers and retail community

pharmacies” with “an entity”

• Pass through fees – Manufacturers may presume that a fee is not passed through by the recipient in the

absence of evidence or notice to the contrary.

• Declined to provide guidance on Fair Market Value

Bona Fide Service Fee Criteria

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Any contract between a manufacturer and an entity must meet 4 requirements (4 part test) to be considered a

bona fide service fee that may be excluded from AMP and Best Price calculations

Bona fide service fee means a fee paid by a manufacturer to an entity that:

The fee includes, but is 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)

represents fair market value;

for a bona fide, itemized service

actually performed on behalf of the manufacturer;

that the manufacturer would otherwise

perform (or contract for) in the absence of

the service arrangement, and

that is not passed on in whole or in part to a client or customer of an entity, whether

or not the entity takes title to the

drug.

Identification and Management of Fee for Service Agreements

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Fee for Service Framework - Considerations

• Corporate policies should reflect bona fide service fee requirements

• Define customer definition and who should be in-scope (affiliates, other entities, etc)

• Develop a process to review each agreement/engagement prior to contract execution –

consider centralized process with appropriate oversight and documented in SOPs

• Identify and limit the number of individuals who can initiate bona fide service fee arrangements

• Consider additional training – targeted towards the bona fide service fee requirements and

related due diligence

• Cross functional governance (legal, compliance and government pricing)

• Oversight of overall spend with customer organizations on bona fide service fee arrangements

Identification and Management of Fee for Service Agreements

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Fee for Service Framework - Considerations (Cont’d)

• Develop a process to review in-scope arrangements at certain intervals and at the end of the

contract term – ensure services are being delivered, utilized and within the contractual terms

(including fee)

• Consider system controls to ensure contracts/payments are only executed upon completion

and approval of the 4 part test

Identification and Management of Fee for Service Agreements

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Fee for Service Process - Considerations

Document 4 part test of each agreement with appropriate approvals and oversight

• Business reason and justification of services (necessary/legitimate)

o Understand why the service provider was selected

o Understand why non-customer organizations cannot provide the same services

o Understand why internal resources cannot deliver or achieve the service objective

o Understand how the services align to business needs/strategic imperatives

o Understand if the services are outside of the contractual and legal obligations of the

service provider

o Understand who owns the deliverable, its benefits and use

• Services should be clearly itemized and detailed in contracts

Identification and Management of Fee for Service Agreements

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Fee for Service Process – Considerations (Cont’d)

• Document fair market value analysis and compensation details

• Per AMP Final Rule – CMS expects determination of fair market value and

documentation be made contemporaneously with the manufacturer's agreement to pay

the fee

• Additional due diligence and/or contractual clauses to ensure fee is not being passed on as

a rebate or discount

• Set up a process to ensure acquired services are not duplicative (e.g same data being

purchased by 2 separate brand teams)

• Separate responsibilities of individuals buying services from account management

activities of customer organizations

• Understand sub-contracting relationships and how they impact the delivery / compensation

Examples of FFS agreements

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• Reimbursement support services

• Patient assistance programs

• Data agreements

• Educational programs / trainings

• Coupon/vouchers programs

• Consulting services

• Wholesale/distribution related services

• Marketing services (email blasts, event planning, etc)

Fair Market Value

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Per AMP Final Rule:

• CMS declined to define FMV for purposes of bona fide service fee arrangements

• CMS noted that “manufacturers should retain flexibility in determining whether service fees

are paid at fair market value in light of constant changes in the pharmaceutical

marketplace.”

• CMS further stated “we believe the determination of fair market value is by nature

subjective and many factors can contribute to its determination, and as a result, it can be a

range of values. Therefore, we believe that any documentation can be used, provided that

it makes clear the methodologies or factors the manufacturer used in making its fair market

value determination. We expect such determination of fair market value and documentation

be made contemporaneously with the manufacturer’s agreement to pay the fee. As with

other reasonable assumptions, in accordance with the requirements of the national rebate

agreement, each manufacturer must maintain adequate documentation supporting its

assumptions.

Fair Market Value – Commonly Used Approaches/Methodologies

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Market Approach Cost Plus Approach

Description Measures the value of assets or services by

examining transactions, proposals or offers in

the marketplace involving the sale of similar

assets or services.

Determines an indication of the value of the service or asset

by evaluating the cost to replace or recreate the service or

asset.

Pros Easily applied when similar transactions and

relevant information surrounding transactions

are readily available.

Useful where there is only one vendor who can perform the

service or when preparing a valuation of specific assets that

poses reasonably quantifiable costs of replacement.

Cons Requires the existence of reasonably similar

transactions, assets or services within the

marketplace and the availability of public data

for those similar transactions.

May be difficult or costly to develop assumptions to employ

in the development of total costs associated with a service.

Fair Market Value Considerations/Challenges

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• FMV is required to be documented contemporaneously – may delay critical engagements if

not planned properly

• Documentation should clearly demonstrate the methodologies or factors considered in

estimating FMV

• FMV analysis should consider itemized/underlying activities being performed on behalf of

the manufacturer

• Defined escalation process – if proposed fee outside of the FMV range

• Requirements of FMV updates/intervals (contract renewals, set time, etc)

• Lack of valuation expertise within the organization to prepare and document analysis

• Availability of market data