{ { { Bona Fide Service Fees and Fair Market Value. Managed Services Operations. Compliance & Risk Advisory Services. Business Intel Products

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1 { { { Managed Services Operations Compliance & Risk Advisory Services Business Intel Products Bona Fide Service Fees and Fair Market Value June 2015 Results from an Industry Survey CIS-PARTNERS.COM

2 2 BONA FIDE SERVICE FEES AND FAIR MARKET VALUE WHY CONDUCT THIS STUDY? Given the focus on this area as a result of guidance in PPACA, current litigation and potential changes in the Final Rule, we felt it prudent to understand how manufacturers are currently managing service fees paid to customers and purchasing agents. Our mission was to gather benchmarks related to determining BFSF and FMV, and share this information to help your organization understand current trends. Service fees are an important financial driver that impact organizations across the industry including pharmaceutical manufacturers, wholesalers, specialty pharmacies, specialty distributors and GPOs. The evaluation of fee for service agreements against the CMS definition of a Bona Fide Service Fee (BFSF) is critical to determine whether fees are appropriately considered in statutory pricing calculations associated with Government Programs. CMS has issued limited guidance for manufacturers to use when determining which payments constitute BFSFs. According to the Affordable Care Act, the following are specific examples of BFSFs paid by manufacturers to wholesalers or retail community pharmacies: Distribution service fees Inventory management fees Product stocking allowances Fees associated with administrative service agreements and patient care program The forthcoming CMS AMP Final Rule is expected to clarify the definition of a BFSF. As manufacturers are expected to perform and document a BFSF and Fair Market Value (FMV) analysis, manufacturers are hoping that CMS provides additional guidance related to FMV and BFSF determination. To that end, manufacturers should reevaluate their service fee contracts to determine whether these fees are reasonable with their company s established FMV guidelines. Given the focus on this area as a result of guidance in PPACA, current litigation and potential changes in the Final Rule, we felt it prudent to understand how manufacturers are currently managing service fees paid to customers and purchasing agents. Our mission was to gather benchmarks related to determining BFSF and FMV, and share this information to help your organization understand current trends. We have a fascinating range of answers from a diverse group of manufacturers. We hope you find this insightful and informative. Compliance and Risk Advisory Philadelphia, PA Managed Services Operations Raleigh, NC

3 BONA FIDE SERVICE FEES AND FAIR MARKET VALUE 3 ABOUT THE PARTICIPANTS This study includes responses from 53 manufacturers ranging from global companies with $2+ billion in annual revenue and more than 50 products to smaller companies with $50 million in revenue and 10 or fewer products. How many different products do you have on the market? 1-5 products What types of products does your company manufacture? 100 8% 8% % 54% 23% % 62% 51 or more 8% % 15% Brand Specialty Generic Biotech Medical Device Which types of service arrangements does your company contract for? % 69% 69% 69% 77% 62% 69% 69% 25 38% 0 Full-line wholesaler/ distribution services Consolidated wholesaler shipping location (e.g., RDC, NLC, etc....) Third party logistic provider Specialty pharmacy services Group Purchasing Organization (GPO) administrative services Pharmacy Benefit Manager (PBM) administrative services Co-pay, coupon, and/or voucher program services Specialty distribution services New product launch services (retailer and/or wholesaler) 15% Other CIS-Partners.com info@cis-partners.com CIS-PCX.com 2015 Compliance Implementation Services BFSF0615

4 4 BONA FIDE SERVICE FEES AND FAIR MARKET VALUE BONA FIDE SERVICE FEE TRENDS Which departments and personnel are involved in determining whether fees are BFSF? What are your thoughts on what constitutes a BFSF? % Legal Distribution/Trade/ Supply Chain Managed Care Contract Procurement 54% 46% Does it meet CMS Four Part Test? Determining and evaluating whether the services are reasonably necessary or useful services of value to manufacturer, and ensuring that these services are performed on behalf of manufacturer. Is it a service our company would do itself instead of contracting for it? Is it business critical? 25 23% 38% Would we have to utilize internal man hours to perform a required/necessary service? If so, we would then review the service to determine if it is fully bona fide. 0 Government Programs/ Pricing Managed Care Contracts Sales Team Administation Finance Other Do you think the following service fees are BFSF? GPO administration service fees Specialty pharmacy service fees 58% Yes PBM administrative service fees Unsure 33% No 42% 36% Yes 11% 56% Yes No 64% No Compliance and Risk Advisory Philadelphia, PA Managed Services Operations Raleigh, NC

5 BONA FIDE SERVICE FEES AND FAIR MARKET VALUE 5 Do you think any of the following distribution services are not BFSF? % Pick, pack and Ship 17% 17% Distribution Service Level Providing EDI 852/867 33% Returns Processing 17% Contract Pricing Administration 33% Chargeback Processing 17% 17% Accounts Receivable Management Consolidated Wholesaler Shipping Location Please explain why you think the above distribution services are not BFSF. Pick, Pack and Ship: They are a function of the distributor. It s the distributor s core business so we don t pay extra for it. How often do you review and/or update your BFSF assessment? 15% Every 12 months Providing EDI 852/867: Data that is provided to validate the transaction is not data that we would pay for as a bona fide service. Providing EDI 852/867: I would single out the EDI data because it is the evidence of activity, not an activity in and of itself. Consolidated wholesaler shipping location: I d need more explanation on this service as it appears it should be part of the Pick, Pack & Ship with the distributors. However, one could argue that there is value to manufacturers with this consolidation. Other 54% Upon renegotiation or new agreement As needed Depends Have not yet determined 15% 15% Never Every 24 months B OT TO M L I N E A lack of communication and knowledge between business areas could lead to significant pricing risk. The goal is to have a holistic approach from contracting through government program evaluation. To obtain independence and objectivity, get stakeholders involved to review potential service, contract language and FMV. CIS-Partners.com info@cis-partners.com CIS-PCX.com 2015 Compliance Implementation Services BFSF0615

6 6 BONA FIDE SERVICE FEES AND FAIR MARKET VALUE FAIR MARKET VALUE TRENDS Which departments and personnel are responsible for determining the approach and method used to determine FMV? Finance Managed Care Contracts 62% What approaches are you using to determine FMV for the services contained within your contracts? % 92% 25 38% 38% 23% 31% 50 0 Government Programs/ Pricing Business Leads Compliance Legal Other What data sources does your company use to determine that a payment is FMV? Internal sources: sales, contracts, customer, cost comparison to do the service in-house vs. hire external External sources: RFPs, third-party, industry databases, Bureau of Labor Statistics Several manufacturers are relying on data sourced and analyzed by external consultants. Furthermore, 45% of respondents are using a thirdparty consultant to determine FMV for their BFSFs. Employ a collaborative approach to FMV evaluation that delivers a comprehensive, client-tailored, and scalable framework Market Cost 17% Income About half of the respondents, 42%, use multiple FMV approaches when determining BFSFs, and as indicated above, the market and cost approaches are the most widely used. However, nearly all respondents, 83%, felt that the market approach was the most representative of FMV. The remaining 17% felt that the most representative approach depended on the service in question. What s interesting is that none of the respondents felt the cost or income approaches were most representative of FMV, yet these are still used to determine FMV for BFSFs. Compliance and Risk Advisory Philadelphia, PA Managed Services Operations Raleigh, NC

7 BONA FIDE SERVICE FEES AND FAIR MARKET VALUE 7 Please briefly explain the types of services you use multiple approaches for. When contracting for a service, when do you perform a FMV analysis? Distribution, Wholesale, Access IT/system components Unsure Before contract negotiations GPO, Managed Markets Consulting (speakers) 23% 31% How often do you review and/or update your FMV analysis? 8% Every 24 months 25% 17% Every 12 months After a contract has been negotiated and signed 38% During contract negotiations Never 17% When performing a BFSF and FMV assessment, how do you document the assessment? 42% Other Have not yet determined Depends Upon renegotiation or new agreement for a service FMV analyses are reevaluated if a triggering event changes market conditions for certain services Basic business documents (e.g., spreadsheets) Templates/forms/meeting minutes Systems (e.g., online workflow application) One respondent commented that after material is documented, the company has a process of formal review with the contracts and pricing committees and then keeps the documentation per the company s record retention policies. BOTTOM LINE With respect to BFSFs, CMS has not defined FMV so manufacturers have the flexibility to determine an approach consistent with industry-accepted methods. It is important for a manufacturer to be able to demonstrate an appropriate level of due diligence while verifying that the assumptions, rationale and methodology used in BFSF and FMV analysis are well-documented and maintained. CIS-Partners.com info@cis-partners.com CIS-PCX.com 2015 Compliance Implementation Services BFSF0615

8 8 BONA FIDE SERVICE FEES AND FAIR MARKET VALUE SERVICE CONTRACT TRENDS In your service contracts, do you itemize each service and fee (e.g., 1% for inventory management, 1% for data, etc.)? The majority of respondents, 67%, itemize each service and fee within their service contracts. When asked if they perform a FMV analysis and determine a FMV range for each identified service, 64% of respondents indicated that they did. On the other side of the spectrum, 25% of respondents perform a FMV analysis and range collectively for all services at the contract level. Digging deeper, here is how respondents address FMV at the contract level: If you perform an FMV analysis at the contract level, how do you treat instances which a certain service fee is not FMV, but the contract as a whole is FMV? The service fee is paid on the contract as a whole, for a bundle of services. How do you compensate each of your service providers? Percent of WAC 33% 8% Other 42% 17% Specified Dollar Amount per Unit % of Net Sales All of the above Combination of above Depends on the arrangement Distributors & PBM = % of WAC; GPOs = % of net sales; Retailers = $ per unit Specified Dollar Amount While we typically perform a FMV analysis at the item level, we will look at the totality of the arrangement from a FMV perspective. There is an established range. If the contract fits in that range, no further analysis is done. We have spreadsheets that determine FMV based on certain criteria. Although commercial contracting can produce significant benefits, it also generates compliance and administrative challenges that can create pricing risks. Compliance and Risk Advisory Philadelphia, PA Managed Services Operations Raleigh, NC

9 BONA FIDE SERVICE FEES AND FAIR MARKET VALUE 9 How does your company handle a fee that is in excess of an approved FMV range? Other Fees in Excess of Approved Range are considered a price concession for government price reporting purposes 25% 25% 50% How do you ensure that all service arrangements are reviewed? Detailed SOPs General ledger monitoring as well as purchase order controls on agreements Internal audits Built-in system restrictions (i.e., contracts cannot be saved without FMV documentation) Legal reviews all contracts Our policy is not to pay more than FMV Escalation to cross functional governance committee Exceptions are considered non-bfsf and are captured in GP calculations Must get business and law approval Entire Fee is considered a price concession for government price reporting purposes BOTTOM LINE Appropriate treatment of fees paid is critical to the accuracy of GP statutory pricing calculations and the integrity of price reporting. Manufacturers cannot make determinations based on what is aggressive or conservative as the impact of calling a payment a BFSF and exempt from calculations can be conservative in one program yet aggressive in another. CIS-Partners.com info@cis-partners.com CIS-PCX.com 2015 Compliance Implementation Services BFSF0615

10 10 BONA FIDE SERVICE FEES AND FAIR MARKET VALUE CONCLUSION Recommended Reading article: Lessons Learned on Bona Fide Service Fees and Fair Market Value Is There a Right Answer? article: Why We Care About Bona Fide Service Fees What challenges have you encountered in performing FMV and BFSF assessments? Data: availability, lack of comparables, completeness Regulatory guidance Government pricing risk Defensibility, robust analysis, accuracy Differences of opinion by external counsel and vendors Complicated approaches (e.g., some services have no market value and cost approach is complicated) What do you think will change with FMV and BFSF as a result of the CMS AMP Final Rule, if anything? More clarity as to the Four Part Test and what is required Black and white definition of a BFSF Clarity on the such as language in the proposed rule Not looking for anything to change With PPACA and increased scrutiny through government compliance audits, manufacturers understand the importance of conducting thorough BFSF and FMV evaluations, as well as VA service fee evaluations. Compliance and Risk Advisory Philadelphia, PA Managed Services Operations Raleigh, NC

11 BONA FIDE SERVICE FEES AND FAIR MARKET VALUE 11 KEY FINDINGS Trends Increased awareness and accountability BFSF and FMV reviews, documentation and ongoing assessments are becoming a top priority Increased regularity for reviewing assessments (i.e., as new service agreements entered) More frequent compliance auditing and ongoing monitoring of process and documentation Greater focus on using multiple FMV approaches to develop FMV ranges Shift in industry practices related to service agreements Increased focus on what constitutes a legitimate service and pick/pack/ship continues to be questioned Manufacturers are requiring that vendors itemize, clarify and explain services in greater detail Increased focus on FMV of services related to specialty drugs Shift in industry practices related to payments for services Compensating vendors for services based on specific performance criteria Paying for services on a dollar basis rather than as a percentage of WAC or Net Sales B OT TO M L I N E The scrutiny on BFSFs has increased dramatically. As healthcare programs grow and the government increases spending, enforcement authorities have ramped up their scrutiny of the accuracy of reported pricing to protect against overpayment. CIS-Partners.com info@cis-partners.com CIS-PCX.com 2015 Compliance Implementation Services BFSF0615

12 12 BONA FIDE SERVICE FEES AND FAIR MARKET VALUE Challenges Ambiguity around service fees Judgment calls regarding CMS Four Part Test Determining which service agreements are in-scope/out-of-scope for the BFSF assessment What constitutes an administrative service fee vs. a promotional rebate Whether to evaluate services and fees on a per product basis Determining if GPO admin fees are passed on or cover the costs associated with administering the agreement Lack of authoritative guidance regarding FMV Uncertainty around which FMV approach to use (i.e., cost, market, income) How often to perform a FMV analysis When to evaluate services and fees for FMV (i.e., during negotiations or afterward) Lack of industry standards to conduct BFSF and FMV assessments Sourcing data: lack of availability, lack of comparables, completeness Understanding service and data definitions Differences of opinions between the business, consultants and legal counsel B OT TO M L I N E The message from the government is clear manufacturers are expected to get it right. Manufacturers should conduct a high level of due diligence when making a BFSF determination. Trading partners have a role and an interest, but with respect to government price reporting, the compliance accountability and risk is not on them. Compliance and Risk Advisory Philadelphia, PA Managed Services Operations Raleigh, NC

13 BONA FIDE SERVICE FEES AND FAIR MARKET VALUE 13 HOW WE CAN HELP An independent review of FMV and BFSFs is a critical component to government programs compliance. Manufacturers can have False Claims Act risk if they cannot demonstrate appropriate due diligence in representing FMV when determining fees in their calculations. As seen in this study, manufacturers are relying on data sourced and analyzed by external consultants. Nearly half of those surveyed are using a third-party consultant to determine FMV for their BFSFs. Manufacturers select us due to our cross-functional specialization in FMV methodologies, our wealth of relevant information and data, our approach to the analysis and our knowledge of government programs. BFSF/FMV Services FMV Valuation and BFSF Analysis Assessment of FMV and BFSF processes, including RFP process Review of methodology, approach, rationale, assumptions, data and documentation Documentation Due Diligence VA Service Fee Review Assessment of documentation related to the inclusion/exclusion of fees in AMP, BP, ASP and Non-FAMP FMV for BFSFs is a sensitive topic due to the lack of definitive guidance and the competing priorities within the organization among functions such as compliance and sales. For this reason, it is often beneficial to engage an external provider to bring an unbiased view of the situation. Commercial Compliance Audits Pharmacy Benefit Manager (PBM)/Wholesaler Federal Acquisition Requirements (FAR) 340B Covered Entity Contract/Government Programs Impact Government Statutory Pricing Managed Care Supply Chain CIS-Partners.com info@cis-partners.com CIS-PCX.com 2015 Compliance Implementation Services BFSF0615

14 About Us We specialize in integrated compliance and revenue optimization for the healthcare industry. We provide solutions that focus on compliance, risk and technology-driven managed services. To learn more about our BFSF/FMV services, please contact us at CIS-Partners.com CIS-PCX.com Compliance Implementation Services All Rights Reserved Compliance and Risk Advisory Philadelphia, PA Managed Services Operations Raleigh, NC