Gamesmanship in GIK valuations? Part 2

Previous post discussed an accounting issue raised by Forbes about valuing deworming medicine.  Forbes magazine thinks some nonprofits are using a valuation that is too high for recording donated meds in their financial statements.

The Forbes article, by William P. Barrett, is Donated Pills Make Some Charities Look Too Good on Paper.

My first post describes some of the valuations that are in use. 

This post discusses where the valuation amounts came from. 

Where did these valuations come from?

Forbes says Red Book is the source of those values.

Red Book, published by Physicians’ Desk Reference, a division of Thomson Reuters, is a database for drugs approved for use in the U.S. For each it includes something called “average wholesale price,” or AWP. These prices are supplied by manufacturers, and there is no requirement that they be accurate or even real. Indeed, Red Book explicitly states in a Web-posted disclaimer, “Thomson Reuters relies on the manufacturers to report the values.” Not clear enough? “Thomson Reuters does not perform any independent analysis to determine or calculate the actual AWP.” Still in doubt? “The manufacturer’s suggested AWP … does not necessarily reflect the actual AWP.” Small wonder nonprofit insiders openly joke AWP really stands for “Ain’t What’s Paid.”

Even though Reuters disclaims the valuations, here’s the numbers for deworming pills from the Forbes article:

Listed per-pill AWP in Red Book have included these quotes: $10.64, $12.72 and $16.75.

Notice the similarity of those values mentioned in the Forbes article, discussed in the previous post here, to the Red Book. Amounts at or near $10.64 and $16.25 were mentioned several times in Mr. Barrett’s article.

A whole discussion could be had on the issue of average wholesale price. I did a very brief internet search on AWP. Looks like there are a number of interesting reads on whether AWP is even a real benchmark.  I don’t have time at the moment to look at that issue.  There is a bigger issue at play, which I’ll discuss in a follow-up post.

Followup from my previous post:

I was a bit skeptical of the idea these meds are available overseas for 4 cents or 2 cents per dose.

With a mere two minutes of searching I did not find a price list for a European wholesaler.  With 30 minutes research someone could probably find something, but I’m not going to spend that time.

 Instead, I did a 5 minutes on an internet search for wholesale prices. Found these listings on the first page of search results:

• $0.30 for 6 doses in syrup form, or 5 cents a dose – 100 mg – minimum 40,000 bottles – from a seller that appears to be in China

• 55 cents each for 90 pills, essentially discount retail in terms of volume – from a seller that appears to be in Mexico.  Wholesale value for large quantities would be some fraction of that $0.55/dose.

My conclusion is to agree with Mr. Barrett’s comment that charities can buy the 500 mg meds on the open market for under 4 cents a dose.  A superficial internet search validates those numbers are in the ballpark.  Ten or fourteen dollars is not.

Therefore, the valuations cited in the article of $2.00, $1.00, and $1.54 are still rather high. Values used by others in the range of pennies (2.6, 3.2 and <4) all make sense to me.

Other media attention

Forbes isn’t the only media outlet looking at this issue.

American Institute of Philanthropy has a wide-ranging discussion in their post, The Alice in Wonderland World of Charity Valuation.  Author is not credited.  The article discusses changes made by a number of charities due to SFAS 157.  I’ll come back to that topic later.  Will do a bit of research on some of the financial statements discussed in that article.  The post gave me ideas for some useful number-crunching.

By the way, check out the superb graph of the impact of changing valuation of GIKs.

Found an article at The Chronicle of Philanthropy, by Caroline Preston.  Found other articles linked on the right sidebar.  I’ve only browsed the articles.  Hope to have some comments in follow-up posts.  Here are a few posts, if you want to start reading:

• Aid Charities Accounting Practices Draw Criticism – 9-18-11 – behind a pay wall
• Antipoverty Charity’s Revenue Drops in Half Due To Accounting Change – 4-25-11
• Multiple Methods of Valuing Drugs Create an Unclear Picture of Aid Totals – 9-18-11 – behind a pay wall
• Controversy Over Drug Values at Aid Groups: A Look at a Key Player – 11-14-11

In my next post, I’ll quantify the impact on the financial statements from using those high values and the impact from the revisions.  In my last post, I will discuss a bigger issue than reliance on the Red Book.  Specifically  the need to adjust for the location the meds will be used.  Principal market will be the buzzword we discuss.

Update 12-21-11 – I’ve changed the sequence of planned posts.  Next post introduces the GAAP accounting rules.