Direct Relief’s programs involve a wide range of functions, several of which require specialized expertise and licensing. Among these functions are identifying key local providers of health services in such areas; working to identify the unmet needs of people in the areas; mobilizing essential medicines, supplies, and equipment that are requested and appropriate for the circumstances; and managing the many details inherent in storing, transporting, and distributing such goods to the partner organizations in the most efficient manner possible.
To fulfill its mission and program objectives, Direct Relief has long sought partnerships with businesses and organizations with particular expertise that is needed and can be leveraged for humanitarian purposes. This approach has led to more than 100 healthcare manufacturers and other corporations, in sectors ranging from technology to transportation, donating needed goods and services that would otherwise have to be purchased.
Direct Relief also solicits and receives financial contributions, which are used to cover internal costs and for goods and services to advance the organization’s mission and that cannot be obtained through donation.
The strategic pursuit of in-kind resources – both goods and services – enables Direct Relief to provide far more humanitarian assistance than would be possible in a model that relied entirely upon raising cash and then converting the cash into goods and services. It makes little economic sense to incur the expense involved in raising funds to then purchase something that a business may be willing and able to provide directly and more efficiently as its charitable contribution.
The specifics of Direct Relief’s valuation methodology are noted here in recognition of the confusion that can arise with regard to the value of contributed goods and services. One source of confusion stems from the significant pricing (and therefore valuation) differences that exist in different parts of the world for similar products. With regard to pharmaceutical products, significant differences exist between a branded drug and a generic equivalent formulation even within the within the same market, including the U.S. Because Direct Relief operates on a global scale, such differences must be considered and reflected in the accounting and reporting of contributions.
Of course, similar pricing and valuation differences also exist for other commodities and services beyond pharmaceuticals. In the U.S., for example, the commodity of water may be the easiest example, since the price that is paid for the same compound, H2O, ranges from free in a public tap to several dollars for a “branded” equivalent bottled quantity in a hotel room. But similar pricing differences exist for services as well. The outsourcing and off-shoring phenomena reflect that even highly skilled services – surgery, computer programming, research conducted by Ph.D.s – are done at vastly different prices in different countries.
Direct Relief ensures that these distinctions are clearly documented and that the organization’s financial reporting precisely and accurately reflects the fair market value of the specific items received through donation. If a low-cost generic medication is received through donation, its value is properly recorded. If a more expensive branded product is received through donation, its value is properly recorded.
As noted above, Direct Relief has long sought the contribution of needed goods and services to use for humanitarian purposes because of the efficiencies and other benefits that result. The organization, and more importantly the people it serves, benefit from the lowest-cost, most efficient use of resources. So too do financial contributors, since their financial contributions are not being used to purchase goods or services that can be obtained directly through donations. Therefore, when it comes to accounting for, documenting, and reporting any contributions it is very important that we get it right.
Click here to see Direct Relief’s Letter to the Better Business Bureau about this topic.
When Direct Relief receives an in-kind donation, accounting standards require a “fair market value” to be assigned to the donation. Donations of medicines, medical equipment, and medical supplies have long been an integral part of Direct Relief’s humanitarian assistance programs.
Direct Relief is the only nonprofit organization in the United States licensed to distribute pharmaceutical products in all 50 U.S. states and is among the largest-volume providers of medical donations worldwide. In assigning a fair market value to the in-kind medical donations received, Direct Relief uses a careful, conservative approach that complies with the relevant accounting standards, and the spirit and purpose of disclosure, transparency, and accountability to the public.
Specifically, Direct Relief uses the following methodology in determining the fair market value of in-kind medical donations:
Branded and generic, the valuation basis is the “Wholesale Acquisition Cost” (WAC) as published in the Thomson Reuters RedBook©, an industry-recognized drug and pricing reference guide for pharmaceuticals in the United States.
WAC is the standard used by many U.S. states as the Federal Upper Limit pricing for drugs purchased under the Medicaid program. (For more information on the Federal Upper Limit click here to visit the Center for Medicaid and Medicaid Services web page that includes quarterly updates of the formulas used by each state, such as the example here for the quarter ending September 2011.)
Alternative methods of valuing a drug donation would result in a higher valuation. For example, the commonly cited Average Wholesale Price (AWP), which also is published in the RedBook©, is twenty percent higher than WAC for a particular product. Direct Relief determined that WAC is the more appropriate measure.
Because pricing differences exist for generic and branded products, it is important to note Direct Relief applies WAC value to each specific product’s National Drug Code, which relates to the specific manufacturer and formulation of a drug. This distinction is significant because it reflects, for example, the lower price (and fair market value) of a generic product received through donation from a higher-priced branded product.
For example, products manufactured for use in non-U.S. markets, the organization uses independent pricing guides to determine the fair market value of the particular manufacturer’s specific formulation. As is the case with FDA-approved formulations, the value relates to the specific product from the specific manufacturer. The sources of such pricing information vary, but relevant information may include the price paid by wholesalers or other third-party buyer, a price negotiated by an organization (such as the Clinton Foundation) for a particular drug, or other such reasonable basis.
The organization determines wholesale value by reviewing the pricing information on the specific item listed for sale in trade publications, through online pricing, and through its own procurement history when purchasing. Such valuations typically are substantially lower than published retail prices.