How to defend against accusations that payments to consultants are

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Fair market value and consulting agreements
How to defend against accusations that payments to
consultants are improper remuneration: Part 1
Experts explain how to structure consulting agreements to minimize compliance risk

T he Fair Market Value (FMV) component of
consulting arrangements is one of most
difficult areas confronted by drug and device
Lauer says that makes it necessary to look to a
variety of other sources of guidance to minimize risk.
That way, when companies are on the back end
companies. “You can structure your arrangements defending these arrangements they can point to what
so that you fall squarely within a safe harbor took place on the front end, she explains.
sometimes, but not very often,” warns Katherine
Lauer, a partner with Latham & Watkins in San OIG compliance guidance
Diego. As a result, in almost any situation where According to Lauer, the first place to look is the
companies find themselves defending arrangements OIG compliance guidance for pharmaceutical
in this context, FMV is going to be an issue, she manufacturers issued in 2003, which defines the
says. OIG’s minimum
According to Lauer, while it is important to expectations for
understand the FMV methodology, there are a engaging One of the
number of factors that companies should keep in consultants. challenges in this
mind when engaging a consultant in addition to the Here are the key
FMV calculation itself. Timothy Renjilian, senior expectations area, says Latham
managing director of the Atlanta office of FTI included in that
Consulting, takes a similar view. He says that if guidance:
& Watkins’
pharmaceutical executives begin by focusing on the Katherine Lauer, is
FMV calculation, they will be missing an important Arrangement set
part of the argument and probably starting in the out in writing. that there are no
wrong place. How companies get to that point in the Needless to say, the ‘hard-and-fast’
first place and how they show the intent of the arrangements must
organization play big roles in defining what the FMV be set out in writing, rules to follow
is, he explains. says Lauer. “If they
are not in writing,
when engaging
No ‘hard-and-fast’ rules everybody is going consultants.
One of the challenges in this area, says Lauer, is that to think they are
there are no “hard-and-fast” rules to follow when suspicious.”
engaging consultants. “If you are lucky enough to
have an arrangement with a consultant that can fit Legitimate need for the service. The second item,
within a safe harbor, give yourself a gold star,” says says Lauer, is the legitimate need for the service. She
Lauer, “because that almost never happens.” The says companies must consider how to establish that
problem when you have consultants, she says, is that need, who should participate in that decision, and
in order to fit in the safe harbor you must have how it should be documented. “The second thing a
compensation in the aggregate set in advance. “It is prosecutor is going to ask is, ‘What is the service and
very difficult to do that and at the same time meet why do you need the service?’” she says, “so you
fair market value,” she says. need to demonstrate legitimate need.”
In addition, to meet the safe harbor, companies
must schedule the intervals when services are Services are provided. Third, says Lauer,
performed, which is almost impossible to do, says companies must make sure the services are provided.
Lauer. “As a practical matter, we are almost never “Just having a written contract of something that you
going to be in the safe harbor,” she says. really need does not make a difference if you are

APRIL 24, 2008 Rx COMPLIANCE REPORT 8
paying somebody for something that they didn’t do,” the company’s products in compliance with FDA
she explains. “That is going to be suspect.” regulations. It is also important that the training
results in the provision of valuable services to the
Compensation at FMV. Compensation at FMV is company, and that participants meet other criteria
a key consideration, says Lauer. (Several techniques for consultants, she adds.
for establishing compensation will be examined in the
next issue of Rx Compliance Report). Advamed Code—consultants
Notably, says Lauer, the Advamed code addresses
All of the preceding are documented prior o consultants in somewhat more detail than the
payment. To the extent possible, the preceding PhRMA code.
considerations should be documented prior to However, the themes
payment, says Lauer, because back-end documen- are similar, she says. If pharma
tation will always be viewed suspiciously by an For example, the executives begin
enforcement agent. Advamed code says it
is appropriate to pay by thinking about
The PhRMA Code—consultants for bona fide
The PhRMA code also addresses consultants, notes consulting services if
the FMV
Lauer. Similar to the OIG’s guidance, the PhRMA there is FMV for the calculation itself,
code points to written agreements that specify the time and reasonable
services and compensation as well as legitimate need factors for travel, they will be
for the services. meals, and lodging. missing an
According to the
Criteria for selection related to legitimate need, not Advamed code, important part of
business generation. One of the most important factors indicative of
considerations, says Lauer, is separating sales and bona fide consulting the argument and
marketing from the selection of consultants in order arrangements include: probably starting in
to to avoid the suggestion that those selected are the
biggest customers as opposed to the most qualified. • Agreement must be the wrong place,
While it is not often seen anymore, adds in writing, signed,
Renjilian, some companies used to make explicit and specify services;
warns FTI
return-on-investment calculations and specific Consulting’s
quantification of business generated by individual • Compensation
physicians. That is clearly a mistake in this context, consistent with fair Timothy Renjilian
he says. market value;
The PhRMA code also indicates that the number
of consultants should be no greater than the work • Legitimate purpose and need for services
needed, that records should be maintained regarding identified in advance;
the use of consultant work product, and that the
venue and circumstances for the meeting is • Selection based on consultant’s qualifications and
conducive to providing services, social or expertise;
entertainment events, notes Lauer.
• Venue and circumstances of meeting:
PhRMA code—speaker training
The PhRMA code also addresses speaker training, Appropriate for information exchange;
which is important to consider because there is an
overlap between consultants and speakers, says Hospitality—modest, subordinate to meeting
Lauer. In short, she says, the PhRMA code indicates purpose, and;
that participants can be compensated for their time
along with reasonable expenses for travel, lodging, • Written protocol for research services.
and meals if participants actually receive training on

APRIL 24, 2008 Rx COMPLIANCE REPORT 9
Checklist for consulting agreements Checklist for clinical trials
According to Lauer, whether companies look to According to Lauer, the questions companies face in
industry sources or government sources, it pays to the area of clinical trial agreements differ somewhat
structure arrangements on the front end, according from some other types of consultant agreements.
to established policies and procedures that include “One of the things we see a lot are clinical trials that
checklists. are initiated by the sales and marketing department
Here is an example of a checklist that can be as opposed to regulatory affairs or R&D,” she
used for consulting agreements: reports. Lauer says this refers not to the trial itself
but the agreement for the trial and the suggestions
• Does the company have a legitimate need for the for who should participate.
consulting or other personal services? One of the questions that should be asked, she
says, is who initiated the idea for this trial and who
• Is the company subsidizing part of the customer’s initiated the idea that this particular person should
ordinary cost of doing business? take part in this trial.
“We sometimes
• Is the company deriving benefit from the services, see clinical trials when
According to
or is it “makework”? there is really no Lauer, whether
scientific reason to
• Does the company pay for needless repetition of have the trial,” says companies look to
services? Does the company have more Lauer. It is called a industry sources or
consultants than it needs? clinical trial but it is
really just a sham and government
• Does the company pay fair market value for the a way for the
services actually provided? physicians to get sources, it pays to
money, she says. These structure
• Does the company require documentation of data are sometimes
services provided prior to making payment? not needed for the arrangements on
business, she explains,
• Is there a written agreement in place for all and the spreadsheets
the front end,
relationships? and databases are according to
sometimes no more
Deriving benefit from the consultant agreement than marketing tools. established
is a major consideration, says Lauer. “We see an Sometimes, the policies and
awful lot of situations where agreements look fine on company actually
their face,” she says. “But when you look behind the does the work that procedures that
work that is being done, you realize that this is not the customer is asked
work the company really needs or really derives any to do, says Lauer.
include checklists.
value from.” Rather, she says, it is just a way to dress Likewise, sometimes
up an arrangement to get money to a doctor who is equipment or personnel are provided to the
going to prescribe the drug. consultant or to the physician “in order to gather
That also comes up in connection with the needs data.” But the computer equipment, IT equipment,
assessment, says Rejilian. “It is not just and sometimes even nursing personnel, end up in the
do we need the service, but how much of this service physician’s office helping their practice under the
do we need? How many speakers do we need to guise of providing data for the clinical trial. “That is
train? How many people gathering clinical data do always a question you want to ask,” she warns.
we really need?” Clinical trial publications are another consid-
The key, he says, is to make sure the totality of eration, says Lauer. “Sometimes, we see the
the program makes sense and not just the individual companies actually ghostwriting the clinical trial
arrangements. reports, which is a red flag the physician is paying for
something he is not doing.”

APRIL 24, 2008 Rx COMPLIANCE REPORT 10
Here are some of the pertinent questions that consultants, says Lauer. “You want this to be your
should be asked: R&D, medical affairs, and regulatory rather than
marketing,” she says.
• Who initiated the idea for the trial—was it the In terms of monitoring consultant activity, Lauer
physician or sales and marketing? says, this is a great
place for internal Renjilian says it is
• Is the “clinical trial” or “research” calculated to audit and compliance
generate meaningful, usable information? to get involved. important to make
Needless to say, it
• Will the company actually use the data? should never be sales sure the totality of
and marketing, she the program
• Did the customer or the company do the work? says.
Is the company able to use the equipment or Approval of makes sense and
personnel that the company pays for in his/her compensation should
practice? also be carried out by
not just the
someone independent individual
• Did the company pay fair market value for the from sales and
services? Is it appropriate to use the physician’s marketing such as the arrangements.
hourly rate for patient care services for research CFO or another
activities? senior executive. “You need to think about whom
you want to have approve deviation,” Lauer explains,
• Is the company ghostwriting the clinical trial “because deviation is the first thing a prosecutor is
publication? Is the investigator being paid for it? going to look at.”
“That is an important process,” concurs
Checklist for royalty agreements Renjilian. Many corporate policies and deferred
Many physicians have lucrative royalty agreements, prosecution agreements include specific standards or
especially in the device industry. The real question, thresholds above which compensation needs to go
says Lauer, is whether they contributed meaningful through some sort of internal approval process, he
intellectual property or just changed the color, says. “It is helpful to have a standard that you are
packaging, or name of the device. In many situations, normally operating within,” he says. But it is also
there is the suggestion that what was contributed is important to have a sound process for deviation
mostly a lot of business for the device manufacturer. from that standard so the proper people within the
Here are several questions that should be posed: organization are looking at those exceptions to make
sure they are appropriate, says Renjilian. The
• Has the physician or other customer contributed thought process behind those deviations should
meaningful intellectual property? always be documented, he adds.
Here are several specific questions that should
• Is the royalty payment commercially reasonable be considered:
and based upon the actual contribution to the
value of the invention? • Who defines the need?

• Does the company have documentation from the • Who selects the consultants?
physician to substantiate his contributions and
work product? • Who monitors consultant activity?

• Who approves compensation that deviates from
Key roles to consider
previously established standards? s
According to Lauer, every company must determine
for itself who is defining the need for consulting s Katherine Lauer, Partner, Latham & Watkins, San Diego,
agreements. However, sales and marketing should Katherine.lauer@lw.com
never be on the committee that makes this decision, s Timothy Renjilian, Senior Managing Director, FTI
she recommends. Consulting, Atlanta, GA, tim.renjilian@fticonsulting.com
The same holds true for the selection of

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