To fulfill its mission and program objectives, Direct Relief has long sought partnerships with, participation of, and contributions of in-kind goods and services from businesses and organizations with particular expertise that is needed for humanitarian activities.
As only international nonprofit organization in the United States that has received NABP Drug Distributor Accreditation from the National Association of Boards of Pharmacy to distribute prescription medicines in all 50 U.S. states and among the largest-volume providers of medical donations to its partners worldwide, Direct Relief’s core activities involve the functional role of a medical distributor.
Consistent with this role, the majority of in-kind contributions typically include substantial inventories of prescription medications, vaccines, and medical supplies from manufacturers that Direct Relief, in turn, provides at no charge to qualified healthcare organizations for patients who need and cannot afford them and during emergencies.
Other in-kind contributions include extensive transportation and logistics services, a broad array of software applications and technology platforms, and expertise in numerous specific functional areas inherent in managing a global medical supply chain that must meet stringent regulatory standards, which exist even in emergency situations to which Direct Relief frequently is asked to respond and does.
In-kind contributions typically represent more than 90 percent of the organization’s total annual revenue and also entail other significant benefits.
The strategic pursuit of in-kind resources 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 longstanding approach of inviting direct support for needed goods and services has allowed broader public participation in humanitarian efforts by commercial businesses across many industries.
Reporting on Cash vs In-Kind Revenue
Direct Relief’s financial statements must account for both cash and in-kind contributions that are entrusted to the organization to fulfill its humanitarian mission.
Direct Relief’s activities are planned and executed on an operating (or cash) budget approved by the Board of Directors before the onset of the fiscal year. The cash budget is not directly affected by the value of in-kind medical product contributions.
Cash support—as distinct from the value of contributed products—is used to pay for the logistics, warehousing, transportation, program oversight, program and administrative staff salaries, purchasing of essential medical products, acquisition of donated medical products, and all other program expenses.
Valuation of In-Kind Resources
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 integral to Direct Relief’s humanitarian assistance programs.
Click here to see Direct Relief’s letter to the Better Business Bureau about valuation.
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.
U.S. FDA-Approved Pharmaceuticals
Direct Relief uses the following methodology in determining the fair market value of in-kind medical donations: U.S. Food and Drug Administration-approved pharmaceuticals, branded and generic, are recorded at estimated wholesale value, which approximates fair value, on the date received, based on the Wholesale Acquisition Cost (WAC) as in the Micromedex RED BOOK™ published by Merative.
The RED BOOK© is an industry-recognized drug and pricing reference guide for pharmaceuticals in the United States. The organization uses monthly pricing information available from the RED BOOK™ online service developed by Truven Health Analytics to ensure the most accurate and current valuation of pharmaceuticals donated to the organization.
WAC is the standard many U.S. states use as the Federal Upper Limit pricing for drugs purchased under the Medicaid program. 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 RED BOOK©, is approximately twenty-five percent higher than WAC for a particular product, according to the RED BOOK©. 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 compared to higher-priced branded products.
For Non-FDA-Approved Pharmaceuticals
For non-FDA-approved pharmaceuticals, 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 buyers, a favorable price negotiated by an organization for a particular drug, or other such reasonable bases.
For Medical Supplies and Equipment
The organization determines the wholesale value for medical supplies and equipment by reviewing the pricing information on the specific item listed for sale in trade publications, through online pricing, and through its procurement history when purchasing. Such valuations are typically lower than published retail prices.
Confusion in Valuation
Different prices for similar products or services in different geographic areas can cause confusion. The specifics of Direct Relief’s valuation methodology are noted here in recognition of the confusion that can arise with 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 pharmaceuticals, significant differences exist between a branded drug and a generic equivalent formulation even 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, 12 ounces of water is free from a public tap but can be several dollars if it comes in a branded bottle.
Similar pricing differences exist for services as well. The outsourcing and offshoring phenomena reflect that even highly skilled services—surgery, computer programming, and research conducted by PhDs— are done at vastly different prices in different countries.
Direct Relief’s internal processes, information systems, and public disclosures ensure 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 as that of the generic medication. Similarly, if a more expensive branded product is received through donation, its value is registered as that of a branded product.
Getting It Right
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. Financial contributors also benefit 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 Direct Relief get it right.
A strong incentive exists to use higher valuation sources, such as retail prices or branded product values, for generic donations. However, Direct Relief believes that a conservative approach provides the most accurate, easy-to-understand basis and is best to instill public confidence in its financial reporting.