Firstly, let’s look at the types of services typically purchased by the pharma industry from HCPs and HCOs. Examples include clinical trials, speaker arrangements, meeting chairing, insights collecting activities such as advisory boards and market research, providing services in the context of patient support programs, preceptorships, among others.
In the majority of cases we’ve listed, prepayments are not typically used as a contractual mechanism. The only exception we can identify is clinical trials, where prepayments are used to cover the initial set-up costs, such as staff training, patient recruitment, and administrative expenses before the trial’s initiation. This aids the effective implementation of research trials and alleviates the financial burden from the HCOs and HCPs.
Looking at the other types of services, we can conclude that prepayments are quite rare. Pharmaceutical companies often prefer making the necessary arrangement themselves, like buying airline tickets, booking hotels, arranging visas, etc., rather than making advance payments to HCPs or HCOs.
What is the reason for this? Would it be easier for pharma companies just to make advance payments to HCPs and let them take care of travel and other arrangements?
The primary reason pharma companies shouldn’t use advance payments in relations with HCPs, unless absolutely necessary, relates to significant ethical and transparency concerns associated with prepayments. Without adequate oversight, these advance payments could inadvertently compromise patient care by encouraging preference for certain medications, introducing the risk of therapeutic decisions being swayed by financial rather than purely clinical reasoning.
Public trust is also a significant factor. Given the direct impact of healthcare professionals and pharmaceutical companies on patient health, maintaining an “arm’s length” approach in their financial transactions is crucial for public trust.
Different pharma companies have been criticised, investigated, and even prosecuted for failing to maintain an “arm’s length” approach in their relations with HCPs. In many of the cases that reached the public domain, this resulted in penalties for bribing or for inappropriate promotional practices. Here are just a few examples:
- In 2009, Pfizer paid $2.3 billion to settle criminal and civil charges due to illegal and misleading marketing practices that included entertaining doctors with golf, massages, and resort junkets.
- In 2016, Teva Pharmaceuticals agreed to pay more than $519 million to settle charges that it violated U.S. anti-corruption laws by making improper payments to government officials in Russia, Ukraine, and Mexico.
- Similarly, in 2013, Johnson & Johnson agreed to pay $2.2 billion to resolve criminal and civil probes into kickbacks to pharmacists and the marketing of pharmaceuticals for off-label uses.
- In 2020, Novartis agreed to pay $678 million to the U.S. government to settle allegations that it paid massive kickbacks to doctors to induce them to prescribe its drugs.
Though they may not be specifically related to ‘advance payments,’ these examples involve illegitimate financial transactions and inducements. This explains why pharma companies are extra careful when it comes to any transfers of value to HCPs.
Apart from pure legal risk, another key concern is reputational risk. There hasn’t been a single case known to us where a pharma company has refused to pay an HCP for provided services. They simply cannot afford to have a bad reputation among HCPs. The instances when an HCP couldn’t deliver their services are not that uncommon. This could be due to unpredictable circumstances such as health issues or logistical challenges. If the services of the HCP are linked to a specific event (like speaker services at a conference) and the HCP fails to deliver, it is likely that the company won’t require those services anymore.
Now, if we imagine that there was an advance payment for such services, the pharma company will find itself in a difficult position and will have to ask HCPs to pay the money back. This is never a pleasant conversation and may have a reputational impact. It also brings complexity for pharma companies, as depending on the country, they may have transfer of value reporting obligations, income tax-related reporting, and withholding. If you were a pharma company, there is a good chance you would prefer to stay away from advance payments to HCPs and HCOs.
It is worth mentioning that the pharma industry is using the same approach with other sensitive stakeholders, such as individual patients, patient organizations, and government officials, including former ones. In all these cases, the standard practice is payment after the services are delivered.
To conclude, we would like to recognize that while advance payment is an important economic instrument, for a number of reasons, we cannot expect it to be widely used in the relations between pharma companies and HCPs/HCOs.
On 10th November, we are running a webinar “HCP Contracts Made Clear: Understanding the What, Why, How”. In this webinar we will explore how to draft Health Care Professional (HCP) and Health Care Organisation “HCO” Service Agreements (Speaker, and Ad-Board, and Consultancy Arrangements) what are the pitfalls and how to avoid them. We will also provide you with the “Why” it is important to ensure the parameters of the services are clearly laid out.
If you are involved in putting in place engagements with HCPs, or you are an in-house lawyer who would like to sample this training, with a view to rolling it out to the business, we encourage you to attend.
The Webinar will be hosted by our Founder, Wendy Lloyd-Goodwin and Sharmishtha Das. Wendy has over 20 years of experience in running in-house legal teams within the pharma industry and is well versed in educating business stakeholders on putting in place robust and pragmatic HCP contracts. Sharmishtha, is a senior pharma industry legal counsel, who also has a wealth of experience in drafting, and training the business on HCP contracts.
Why not join us for some valuable hints and tips.