Clinical Fair Market Value: Why it's essential and what methodology to use
Casey Armstrong, Consultant
Jun 30, 2020

Fair Market Value (FMV) has become an industry standard in accordance with regulations and statutes such as the US Sunshine Act, False Claims Act, and Anti-Kickback Statute, as well as international transparency reporting and anti-corruption legislations. The key elements of a robust FMV practice continue, however, to evolve. As an industry, the Life Sciences has nearly uniformly adopted Healthcare Professional (HCP) FMV. Today, these evolutions and expansions have come to include Clinical FMV – the fair market valuation of clinical research budgets.

This article explores what is included in the umbrella term of “Clinical FMV,” why Clinical FMV is considered essential to a robust FMV Program, and what methodologies to consider in a proper valuation.

The funding of clinical research is a common tool to generate evidence in support of therapies and associated products to develop new indications or patient populations. This includes Pre-Clinical Research, Clinical Trials, Investigator Initiated studies, as other research-related activities such as protocol and publication development.

There are two main reasons why clinical research, a crucial mechanism of the life sciences industry, should be evaluated for FMV - compliance risk mitigation and commercial value.

Funding of certain clinical research arrangements can attract interest governing bodies like the Office of the Inspector General for violations of regulations such as the Anti-Kickback Statute. From a regulatory perspective, the evaluation of a clinical budget from a Fair Market Value perspective proves to governing bodies the organization’s proactive risk mitigation steps to remove any potential of overpayment, inducement, or kickback payments.

From a business point of view, installing a Clinical FMV arm to an existing FMV Program represents both significant cost and time savings. Evaluations of these budgets regularly discover formulaic errors or other oversights that may result in large-scale savings to the organization. Not only can Clinical FMV generate savings, but an established evaluation process can streamline the execution of contracts and launch of clinical research trials.

Organizationally, Clinical FMV can sit in a variety of divisions, including Compliance or Medical, or can be outsourced to a specialized group. Just as the existing approval process for studies must contain documented guidance and procedures, the fair market valuation process must be consistently applied, thoroughly documented, and pull from defensible sources and methodologies.

When assessing Clinical FMV, valuation experts utilize two core methodologies, commonly known as the market and cost-based approaches. As its name suggests, the market-based approach considers recent transactions of similar goods or services in order to arrive at FMV. While this approach is quick to implement, it comes with several caveats.

To make an accurate valuation using the market approach, the valuator needs to leverage a dataset with a robust sample size containing highly comparable transaction types. In the Clinical FMV marketplace, often entailing complex and unusual transactions, ample data is often not available. Secondly, because this approach relies on benchmarking from preexisting datapoints, pricing transparency can be elusive.

This can lead to the incorporation of cost drivers that may represent kickback risks or unnecessary costs to your organization.

In comparison, the cost-based approach relies on identifying each known cost driver within the item being evaluated in order to build an accurate Fair Market Valuation of the given budget line item. Understandably, this approach may require intricate operational knowledge and an upfront investment of time in order to identify all potential cost drivers – a task that some may not have the knowledge or time to properly execute.

Despite these barriers to entry, the cost-based approach maintains considerable merit in the world of valuation experts for the results are typically more accurate and tailored to the exact good or service being evaluated, stepping away from an approximated figure to a true valuation. Further, any given line item does not require a pre-existing dataset – a new valuation can be crafted and stand on its own. Eventually, in an environment where many Clinical FMV evaluations are applied, valuators will see line items repeat in new studies and the upfront investment in tailored valuations prove worthy.

When assessing the appropriateness of a market versus cost-based approach, there are some general guidelines that can be applied. A market approach should only be used when there is low compliance risk and a robust, accurate dataset available. In scenarios with unique or complex items being evaluated that entail higher compliance risk, the cost approach is the more accurate and fitting methodology.

As FMV continues to encompass more activities of life sciences companies, Clinical FMV is a crucial addition to your existing Compliance FMV Program. With the right process and methodology in place, it can reduce regulatory risks as well as expenditures. IQVIA Commercial Compliance assists companies in compliant and effective FMV programs. We welcome the opportunity to discuss your requirements. For more information, please email or visit our webpage.

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