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 pharmaceutical products 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, an IBM company, 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.