Cash & In-Kind Contributions

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 175+ healthcare manufacturers and other corporations, in sectors ranging from technology to transportation, providing in-kind contributions in the form of needed goods (primarily medical products) and services that would otherwise have to be purchased. Direct Relief also solicits and receives cash 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 in-kind donations.

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.

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. In Fiscal Year 2016, over 96 percent of our total public support of $779 million was received in the form of in-kind medical products and certain other donated services (such as transportation services from FedEx, online advertising from Google, and donated volunteer services from the GSK PULSE Volunteer Partner Program in which senior professionals volunteer to be seconded to work at Direct Relief at no cost to Direct Relief).

Direct Relief’s activities are planned and executed on an operating (or cash) budget that is approved by the Board of Directors prior to 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

Direct Relief is the only nonprofit organization in the United States that has received accreditation from the National Association of Boards of Pharmacy as a Verified-Accredited Wholesale Distributor (VAWD) licensed to distribute prescription medicines in all 50 U.S. states and is among the largest-volume providers of medical donations to its partners worldwide. 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.

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. 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.

Click here to see Direct Relief’s letter to the Better Business Bureau about valuation.

For 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 RED BOOK™ published by Truven Health Analytics/IBM Watson Health. 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 provided by Truven Health Analytics to ensure the most accurate and current valuation of pharmaceuticals donated to the organization.

WAC is the standard used by many U.S. states 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 product.

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 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 are lower typically than published retail prices.

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, research conducted by Ph.D.s— are done at vastly different prices in different countries.

For Medical Supplies and Equipment

For medical supplies and equipment, 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 are lower typically 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, research conducted by Ph.D.s— 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 benefit also, 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 use 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.