What’s Fair about Fair Market Value in Research?

Dawn Burke
September 28th, 2015

When it comes to budgeting for clinical trials, a consistently ambiguous element seems to be determining fair market value (FMV) for services and procedures, including human resources, like nursing.  Often, sites and sponsors have very different ideas of what FMV is, which, if not approached objectively, can leave both parties with undesired results.

Let’s take a look at some of the definitions of FMV

The Internal Revenue Service defines FMV as “the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.” (IRS Publication 561)

“Usually, the fair market value price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition…”

For comparison, the Centers for Medicare and Medicaid Services (CMS) defines it as “The value in arm’s-length transactions, consistent with the general market value. ‘General Market Value’ means the price that an asset would bring as the result of bona fide bargaining between well informed buyers and sellers who are not otherwise in a position to generate business for the other party…Usually, the fair market value price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition…” (42 CFR 411.351)

As is evident by these two definitions, there is no clear-cut explanation of FMV, especially in terms of clinical trials.  One could certainly make the argument that CMS’s definition is more closely tied to clinical research, and thus, should be the definition that is taken into consideration when calculating FMV. However, there is still a lot left to interpretation, and it raises many questions. For example, what exactly does “in a particular market at the time of acquisition” mean in the above excerpt?

Generalization of FMV leads to skewed budgets

The problem with many sponsors’ approach to FMV is they often take the average cost/charge of a procedure across all markets.  Often, this may be based on previously negotiated amounts, either from earlier trials at a site or from an aggregate of other sites.

In reality, the cost would likely be different if you were running a trial in Kansas City as opposed to conducting the same trial in Los Angeles.  It is possible the site in Kansas City could make a larger profit, while the site in LA may just barely break even.  If this is the case, the sponsor might actually be overpaying the site in Kansas City, and potentially violating the Federal Anti-Kickback Statute.

A more likely scenario, however, would be that the sponsor determines the lowest negotiated amount for an item and applies it across all sites. In this situation, the Kansas City site may be the one breaking even, while the LA site would be losing money.

It’s easy to see from this example that, because not all sites are the same, the same budgeted amounts cannot apply to all sites.  Fair Market Value must be addressed per site and per market, as well as per disease and in response to protocol specifications (i.e. in-patient procedures vs. outpatient, which would be more costly).

When sponsors are working with hundreds of sites, they are unlikely to dig into the costs of individual markets, but rather revert back to an “average” rate.  In this case, it is the site’s responsibility to know their site and their costs, know how to negotiate for what’s fair, and ultimately, be able to stand their ground and not be afraid to push back if the proposed budget doesn’t cover their operating costs.

It is the site’s responsibility to know their site, know how to negotiate for what’s fair, and ultimately, be able to stand their ground.

So how can sites best determine their Fair Market Value?

Fair Market Value is rarely one specific number and unfortunately, there isn’t one perfect solution for finding it.  Rather, it’s a range of values with a variety of ways to approach calculating it. Consider established research rates that have a solid grounding in FMV and make note of this value in your charge master, when possible. Also, take a look at Medicare rates and make sure your budgeted dollars don’t dip below them.

With the agreed FMV, it’s important to note how that amount would be viewed during an audit.  If the potential profit is high, be prepared to justify the rate or it could be viewed as an inducement.  The sponsor will most certainly be concerned about this as well, since it will increase the overall cost of conducting an already expensive clinical trial. Additionally, they’ll likely have further reporting under the rules of the Sunshine Act.

When negotiating for FMV with a sponsor, be sure to ask the sponsor where they’re getting the proposed amount.  Once it’s understood how the sponsors came to their decision on FMV, it will be easier for sites to know what’s reasonable to push back. Sites also need to do their homework on what FMV is in their area so that they can intelligently negotiate and come to an agreement with the sponsor.

Calculating Fair Market Value is not always an easy task.  It should be approached objectively and cautiously.  Be prepared to back up any requests for budget terms higher than the FMV proposed by the sponsor.  Sites know better than anyone what their costs will be for conducting certain procedures. They not only need to be vocal about pushing back against budget terms that don’t align, but also need to have the proof to back it up.

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