Compensating Physician Advisors with Equity: Considerations for Life Sciences Companies

Life sciences companies often engage physicians as consultants and advisors to serve on scientific or clinical advisory boards, or to otherwise obtain their expertise relating to product-specific research and development, patient education resources and/or peer-to-peer education related to new products. Typically, such physicians are compensated on an hourly basis or paid a monthly stipend that presumably reflects fair market value for their services – the expected structure for arrangements that seek to comply with the Federal Anti-Kickback Statute (AKS).

However, it is also common for life sciences companies to compensate physician advisors in exchange for their services with equity or stock options. These arrangements should be carefully considered and constructed to ensure they comply with the AKS and other applicable healthcare fraud and abuse laws.

Understandably, cost-conscious, clinical-stage companies requiring the expertise of such physician advisors and key opinion leaders are inclined to pay with equity or stock options, often led with the thought that such arrangements would provide the physicians with “skin in the game” and personal investment in the growth and success of the company. However, it is important to stress that as a life sciences company steps closer to commercialization and reimbursement for their products, financial arrangements with physicians and other healthcare providers who are or will be in a position to refer or otherwise recommend or influence the use of the company’s product will be subject to fraud and abuse scrutiny, whether that is scrutiny from regulators or third-party investors.

For several decades, the Office of the Inspector General (OIG) of the US Department of Health and Human Services has issued a number of guidance documents, special fraud alerts and advisory opinions on physician investment and ownership in entities to which physicians can refer. In the OIG’s October 6, 2006 letter that specifically addressed physician investments in medical device manufacturers and distributors, the OIG noted “the strong potential for improper inducements between and among the physician investors, the entities, device vendors and device purchasers” and stated that such arrangements “should be closely scrutinized under the fraud and abuse laws.” The same caution applies to all life sciences companies to which physician owners can refer.

Additionally, the Physician Payments Sunshine Act (the Sunshine Act) requires certain medical product manufacturers and GPOs to disclose to the Centers for Medicare and Medicaid Services

(CMS) any payments or other transfers of value made to physicians, including the disclosure of any physician ownership or investment interests held in such companies, with the goal of increasing transparency into the financial relationships life sciences companies have with healthcare providers.

The AKS prohibits the knowing and willful offer of anything of value (including cash compensation, stock options, equity grants, etc.) in exchange for referring, ordering, recommending or arranging for the purchase or order of items or services paid for, directly or indirectly, by Medicare, Medicaid or any other federal healthcare program. Violations of the AKS are punishable by criminal fines, administrative civil monetary penalties, exclusion from participation in federal and state healthcare programs, and in egregious cases, imprisonment.

Due to the breadth of the AKS, the OIG developed safe harbors to protect certain arrangements that would otherwise implicate the AKS from prosecution. Practically speaking, arrangements pursuant to which physician advisors are compensated with equity in life sciences companies are unlikely to satisfy the requirements of an applicable AKS safe harbor.

Failure to meet all the requirements of a particular AKS safe harbor does not make the conduct or arrangement per se illegal. Instead, it increases the compliance risk, and the legality of the arrangement must be evaluated on a case-by-case basis using a “facts and circumstances” analysis. Additionally, many states have promulgated similar anti-kickback laws that may be broader in scope than the Federal AKS and cover the purchase or order of healthcare services or items paid by state programs, commercial insurance and self-pay arrangements.

In consideration of the potential healthcare fraud-and-abuse implications, we recommend the following when structuring compensation programs pursuant to which physician advisors are awarded equity in a life sciences company:

• Develop and establish, in advance, objective qualifications for physician advisors who may be compensated with equity, avoiding factors that take into consideration the expected volume or value of referrals or business generation (whether currently or in the future) that a specific physician or specialty of a physician can make on behalf of the company.
• Ensure each physician advisor’s service contract is written, set out in advance, for a term of at least one year, and covers all the material terms of the services and compensation. Language that specifically disavows volume or value of referrals or business generation as being a consideration of the arrangement is also helpful to lend support to an AKS facts and circumstances analysis.
• Aggregate compensation, including awarded equity, to physician advisors should be at fair market value (FMV) and commercially reasonable for the services to be provided by the physician advisor. The company should develop and maintain reasonable internal documentation to support the FMV of the full arrangement that is refreshed periodically as the advisory arrangement gets renewed.
• Develop and implement a healthcare compliance program that reflects the risks of the company’s business and/or that incorporates industry guidelines (e.g., PhRMA Code / AdvaMed Code of Ethics). The compliance program should cover training and education, monitoring and auditing activities, directed at ensuring compliance with applicable fraud and abuse laws, including the AKS, federal and state financial reporting laws (i.e., Sunshine Act), and federal programs’ exclusion laws, etc. When coverage and reimbursement for the company’s product is a near future goal, it is never too early to adopt an effective healthcare compliance program.

Please reach out to me if you have any questions or would like to discuss further.