Multiple Methods of Valuing Drugs Create an Unclear Picture of Aid Totals

Ask a dozen international aid groups that deliver medicines to poor people overseas how they determine the value of those drugs for purposes of their financial statements and you’re likely to get 12 different answers—if you get an answer at all.

Medicines and other goods make up a significant share of many aid groups’ revenues, including the revenues of some of America’s largest and best-known charities. But the charities take such different approaches to valuing those medicines that watchdogs and nonprofit officials say it’s difficult to get an accurate picture of how much aid they truly provide.

In addition, unclear accounting rules and minimal oversight have fueled practices that critics say paint a deliberately misleading portrait.

“Unless a charity is willing to disclose what their goods are and how they value them, donors should ignore those numbers because there is so much abuse going on,” says Daniel Borochoff, president of the American Institute of Philanthropy, a watchdog group that recently released a report about the overvaluation of medicines and other goods. His group doesn’t take into account revenue from goods and products when it analyzes charities’ financial statements, because it believes those numbers can be so easily manipulated.

A Variety of Practices

Coalitions of charities like InterAction and the Partnership for Quality Medical Donations are trying to bring more consistency to the way charities value the goods they provide overseas, particularly in light of a new rule from the Financial Accounting Standards Board last year that provided more specific guidelines on how businesses, nonprofits, and other groups ought to assess the value of their gifts and products. But those efforts have been fraught by disagreement among charities.

Adding to the complications is the fact that the standard by which most nonprofit aid groups have long been valuing their medicines—U.S. average wholesale prices—have come under criticism. Those numbers are reported by U.S. drug companies, and they are unverified. A joke among doctors and pharmacists is that AWP (average wholesale price) stands for “ain’t what’s paid.”

But many charities, including AmeriCares, Islamic Relief USA, and World Concern, continue to use those values. Some of the groups say they are assessing their practices but that humanitarian organizations haven’t come together to determine a good alternative.

Other nonprofit aid groups, like Direct Relief International and Food for the Poor, most often use “wholesale acquisition costs.” Those values are 20 percent below average wholesale prices.

Some organizations, like World Vision, take a more complicated approach. To assess the value of a few drugs, the group buys data on how much the medicines sell for abroad. In other cases, World Vision knocks 65 percent off average wholesale prices or uses the “federal upper limit,” the ceiling at which the U.S. government will reimburse drug companies through Medicare and Medicaid.

Another group, Brother’s Brother Foundation, primarily uses the “federal upper limit.” In cases in which those values aren’t available because the drugs aren’t part of the Medicare and Medicaid programs, Brother’s Brother docks the values by 70 percent.

Reducing its values so significantly hurt Brother’s Brother’s rating on Charity Navigator, a watchdog that evaluates charities partially based on whether their revenues are growing. The group was awarded the site’s top designation of four stars in 2008 but then became a three-star group in 2009 for that reason.

Other charities that have recently dropped their values, such as Food for the Hungry and World Vision, might also find themselves in that situation.

InterAction, the umbrella group for aid organizations, and the Partnership for Quality Medical Donations are talking with Charity Navigator so that groups that have dropped the values won’t be punished for simply being more conservative in their approach.

Barbara Wallace, vice president for membership and standards with InterAction, says that while there won’t ever be a single answer to valuing medicines, it’s a good thing that the new accounting rule has prompted charities to grapple with how to value their medicines and other goods.

“This has been a bone of contention for many years,” says Ms. Wallace. Average wholesale prices, she says, are “no longer viable, and the community is going to have to wrestle with this.”