Guest post – Determining FMV is difficult. Let’s keep in mind the good that is accomplished by donated meds.

The following is a guest post submitted anonymously. The writer raises some good points and good questions. I’ll post it verbatim except for breaking two large paragraphs into smaller ones for easier reading. I hope the title of the post, written by me, fairly summarizes the ideas. 

One of the cool things about blogging is the ability to provide links to cited sources – if the author would like to forward links for the two quoted sources, I will add them.

Thanks to the author for taking the time to write. Here are his or her thoughts:

(Update 5-31: In case it wasn’t obvious, this post reflects the author’s opinion and not that of his/her employer. It does not reflect my opinion.)

Thank you for providing a space for this conversation. I have studied this specific aspect of researching fair market value (FMV) of donated items in depth. As with any discussion we must ensure that we start with the same definition of fair market value.

Accounting guidelines state that FMV is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To bring it into simpler terms, if I am selling apples and you are looking to buy apples, what price can we agree upon?

There are three points that I would make to start the conversation on the valuation of donated goods.

The recurring accusation flying around by charity watchdogs is that nonprofits receiving donated goods are inflating the value of those goods. Let us all agree that incorrect accounting should not be tolerated. Let us also agree that over-valuing items and under-valuing items are equally improper. Accounting guidelines suggest that a donated item should be valued in its primary market and according to its highest and best use. Valuing an apple at $100 and valuing an apple at $.01 are equally incorrect because neither are FMV. Every effort must be made to assign the correct FMV for an item based on the prevailing authorities and guidelines, not on a small contingent’s discontent.

The pharmaceutical market is drastically different from most markets. In his book The Strategic Pricing of Pharmaceuticals Mick Kolassa writes, “Few things are as maligned, misunderstood, and mischaracterized as the pricing of pharmaceuticals.” He goes on to show that the very nature of purchasing prescription medicine by an individual is driven by entirely different market components.

To continue the analogy, if I am hungry, I will buy an apple. If I am sick I am forced (by virtue of the prescription) by a third party (doctor) to purchase a specific product (medicine) that I would rather not need. When I go to purchase this product, the cost is dependent on what type and level of insurance I have – if I have any at all – and what deals the pharmacies have made with the manufacturing company. The cost could also depend on the state in which I live. The cost could also vary dramatically depending on whether or not I buy from a pharmacy or receive the medicine while under the care of a hospital.

In Time magazine’s March 4, 2013 cover story, “Bitter Pill: How outrageous and egregious profits are destroying our health care,” Steven Brill exposed what the nonprofit community has been saying for years: there is no consistent or knowable cost of either health care or medicines in the United States. Brill writes, “[…] there seems to be no process, no rationale, behind the core document that is the basis for hundreds of billions of dollars in health care bills.” The story continues, “No hospital’s chargemaster prices are consistent with those of any other hospital, nor do they seem to be based on anything objective – like cost – that any hospital executive I spoke with was able to explain.”

If the health care industry itself cannot establish reasonable, consistent, and observable cost data, then what is the nonprofit community to do? How is the nonprofit community supposed to determine the FMV value donated medicines?

What gets lost by the recalcitrant objectors is that donated goods provide an enviable leverage that takes every penny raised and maximizes its value for good! They complain that receiving donated goods make the charities look more efficient. First of all – YOU’RE RIGHT! It makes them look efficient because it actually makes them efficient! Secondly, since when did efficiency fall into such ill repute?

Since when did the US accounting value of a donated item become more important than the good that is does for those so desperately in need? I am still having a hard time understanding why this issue has grown to the size it has. We all want correct and proper accounting. Let’s not allow our opinionated differences to hurt those who are sick, desperate and in need.

37 thoughts on “Guest post – Determining FMV is difficult. Let’s keep in mind the good that is accomplished by donated meds.

  1. I wholeheartedly agree with the post above. I have been doing pharmaceutical valuation consulting for almost 10 years. If a charity is complying within FASB, GAAP, and in accordance with the guidelines as set forth by the self governing organizations, and if they comply with their requirements to file 990 forms, then why are they being vilified for maximizing the leverage of these programs?

    to be clear, I am not condoning misstatement of valuation,either over or under. I am furthermore, not supporting any group that incorrectly classify purchases as GIK programming. I just think we need to revert back to the original objective here which is to encourage charities to promote their good works throughout the world.

    1. David, thanks for your comment.

      If there were some way to quantify how much one drug improved a person’s life, that would be a great way to go. Likewise, it would be really cool if we could put a dollar amount on one clean water well for a village.

      Unfortunately, the only way we have to measure the impact of distributing millions of doses of meds is by counting dollars.

      The criticism is based on whether it is appropriate to quantify at $10.54, or even $1.50, a donated pill that can be bought on the international market for somewhere between $5.95 and $15.60 for a bottle of 500 pills. That a range from $0.012 to $0.031 per pill, just pennies a dose.

      2009 data: mg&desc=Mebendazole&pack=new&frm=TAB-CAP&rte=PO&class_code2=06.1.1.&supplement=&s_year=2009&year=2009&word=

      One data point for 2011 is $20.00 for bottle of 1000 pills, or $0.02 per dose.

      What valuation do you think GAAP points toward?

  2. The author of the post makes very good points about the confusion in pricing at the retail level inside the U.S. Pricing here is a terrible mess – I’ll guess every insurance company has a different price for each of the chain pharmacies.

    However, the issue isn’t how much you or I or our insurance companies pay for one bottle of pills.

    The NPOs involved are dealing with pallets of medicine. We are talking about tens of thousands of pills per shipment. For the key med in the discussion, we are talking several million tablets over the course of a year. The range of prices charged to consumers & their insurance companies by the chain pharmacies are completely irrelevant to the discussion.

    I’m not aware of any charity claiming retail price for their donated meds. Even the claims to Red Book are based on that being an indicator of wholesale value.

    The appropriate focus is then on what you and I could negotiate for half a million doses, not 1 bottle of 30 pills. If I could go online to buy 10,000 doses of a med used in our home (which would be a 27 year supply), I would get a radically different price that I paid last week at my pharmacy.

    Also remember a huge portion of the issue is one particular dose of one particular pill: 500mg mebendazole. To use the analogy above, we aren’t talking about negotiating the price of one bag of apples. Instead we need to find the per unit price of a 40’ shipping container filled with a fruit which is not legal to sell in the U.S.

  3. Good comments, and of course you are correct the issue is identifying the value of one dose of one pill within a larger collection of potentially thousands of pills.

    the legality of sale in the US is a bit of a red herring as the issue is never about whether these NPOs can sell or even distribute the goods within the US. Obviously only goods with an NDC number, and therefore approved (albeit not endorsed) by the FDA can be distributed in the United States. The responsibility of the NPO is to determine a Fair Value (read: “exit price”) for the goods received in the course of GIK as determined through the highest and best use within a hypothetical transaction in the most relevant marketplace at the observation date.

    Based on your perfect summary above, this is likely the wholesale marketplace. clearly not the retail or pharmaceutical level.

  4. Jim, here is where we take a left turn into Wonderland. Firstly because GAAP doesn’t point toward a specific value for a specific pill of a specific product. GAAP does direct the 501(c)(3) to establish a methodology and to apply it to determine an exit price. Again, to acknowledge your point, the volume here is consistent with a wholesale marketplace. Currently in the pharmaceutical industry there are published price guides (level 2 inputs) that have pricing available for various points within the supply chain for wholesalers. These guides are available for a subscription.

    My point is that according to the guidelines, if the NPO selects AWP (Average Wholesale Price) or WAC (Wholesale Acquisition Cost) or some discounted version of either or some alternate formula, and they codify it in their organizations GIK program Guidelines. they apply it consistently, accurately, and allow for a distinct audit chain by the IRS or industry watchdogs then i believe they are acting correctly. If that concludes with a $10.54 valuation for a donated pill or some other value, why is the charity to blame.

    The World Health Organization has come up with a metric for how much one drug has improved a person’s life, it is called a Disability-Adjusted Life Year (DALY). It attempts to quantify the burden of disease and conversely the value of eliminating that disease through treatment.

    the other item i want to get back around to is your observation that “the only way we have to measure the impact of distributing millions of doses of meds is by counting dollars”. this is of course one way but not the only. we can measure people treated, lives saved, diseases eliminated, societies improved. we can measure progress towards the Millennium Development Goals.

    My point is, these are the metrics by which many of these charities measure themselves. and it is the forest that is getting lost for the trees when we isolate a single outlier drug product.

  5. As a follow up to my comments above, I believe in a large part that this problem began when the public at large started examining a single piece of information out of context. The financial metrics of any charity are the arena of the IRS. this information is generally public and it should be as charities are the administrators of the public’s will to do good. They are funded by the public, they enjoy special tax privileges, and they should be accountable for those monies.

    however, when it comes to ranking charities i think we can do better. The purpose of charity watch organizations and ranking lists are to assist the public in determining which organizations are better than others at fulfilling their charitable duties.

    then let’s measure that.

    Every charity has a charitable mandate which narrowly defines how they go about their purpose. Charities should be scored and subsequently considered based upon how well they have achieved their objectives. For example, a charity that has as its mission to dig wells in Africa should be judged by how many wells they dug. if they raised lots of money and didn’t dig lots of wells we have a right to know why not. If they only raised a few funds but used every penny to dig wells then they did a good job.

    I realize this is straying away from the accounting nature of this blog but i felt that it would not be correct to offer a critical opinion of how this problem began without volunteering at least one viable alternative to solving the issue.

  6. Jim, you wrote:
    “Unfortunately, the only way we have to measure the impact of distributing millions of doses of meds is by counting dollars.”

    Do you think the people who are helped care how much these pills sell for in different markets?

    The only impact the controversy on the value of de-worming pills has had is to decrease the availability of these meds and to increase the suffering in Africa. 20% of the limited food in Africa is consumed by parasites. So while the self righteous emperors of minutiae argue over esoteric accounting principles people suffer. The problem with shaping an industry by causing scandal that hurts the poor is that no one wins. The only exception to this is the reporters wanting to make a name for themselves. They prosper while poor go without.

    1. DrRighton:

      Thanks for taking the time to comment.

      Can you enlighten me why an NPO booking a general ledger entry to record the contribution of a dose of mebendazole at $2.00 instead of $10.54 makes less of the medicine available from donors? How does the $10.54 valuation alleviate suffering?

      I can tell you are quite upset about this. Thanks for the comment. I’m quite serious – thanks for sharing your thoughts.


      1. Jim,
        It is the scandal that accompany the valuation question that has caused most charities to stop receiving worm meds as gifts and distributing them. Confusion and uncertainty causes paralysis. There is no universally accepted standard to give a FMV to any drug. The stories that come from the field of human suffering caused by CNN playing “Gotcha” journalism are appalling.

        Jim you wrote:
        “There are two varieties of the most common criticism. First is that organizations were booking the FMV of mebendazole at $10.54 when it could have been purchased on the international market for $0.02. If that assertion is correct, the donation should have been recorded at $0.02.”

        Would this not violate the principle that gifts must be valued at the time and place of donation? The value of US drugs is higher than the value of “International” drugs. If the drugs are donated in the US what does an international pricelists have to do with the requirement to value them when and where they are donated? Everyone is ready to tell you that you did it wrong but no one agrees on how to do it right. In the absence of clear standards and guidelines everyone has to guess how to do it. If CNN disagrees with you, you become a crook even when you are trying to do what is right.

        Jim you wrote:
        I think that in distant third place would be the antibiotics as a group. CNN has one data point of shipping documents to illustrate the issue if you are really, really interested.

        I am really, really interested in the CNN data point.

        Thank you so much for fostering this discussion in such an open and reasonable way.
        Dr. Right On

        1. Dr. Right On:

          My post on the CNN discussion is here:

          That post gives a link to the CNN report, which is here:

          Their report gives one set of actual documents. That is only one data point, but it is a public data point.

          I’m happy to provide a place for discussion. Thanks for joining in. I’ll keep it running as long as we can all stay on point and remain professional.


  7. David and doctorrighton:

    It would be wonderful if there were some sort of outcome measure that could be used to quantify all of an organization’s impact.

    Sounds like Disability-Adjusted Life Year would be a good tool for meds. If we could quantify the huge impact of a clean water well on the improved life of a whole village, even better.

    I’ve personally seen the contrast between one of the typical wells and a clean well. There’s got to be a huge difference in health for the whole village. How do we quantify that?

    What if we could quantify the tremendous improvement in health, well-being, life expectancy, joy, and future increase in the national GDP for each year that one community is fed, vaccinated, educated, clothed, nurtured to wholeness and prepared for a healthy future by World Vision? I picked that organization because they are getting adverse attention on this issue but are doing amazing things that we can’t quantify.

    If we could quantify all that, I’m guessing that the impact statement, or whatever we would call it, would be at least an order of magnitude larger than the revenue on their current statement of activity.

    But we can’t quantify that. At least I have no idea how to count it. Anyone have any great ideas? Don’t forget that any suggestions need to work across sectors so we have comparable measures.

    So in the meantime, here in the U.S. we look at a statement of activity that is quantified in U.S. dollars that are measured in accordance with generally accepted accounting principles. We adjust that for income tax reporting on the 990 based on tax law.

    That is the way the IRS, state charity regulators, state Attorneys General, banks, credit unions, foundations, federal grant agencies, major donors, small donors, sales tax agencies, property tax assessors, newspaper reporters, and CPAs look at charities.

    If we can get donors to focus on outcome measures, great! How do we make that change?

    For everyone else, we will keep looking at dollars.


  8. there are two more issues that i would like to point out specifically as they relate to accounting. the first is that no one is saying that these organizations are out there ‘buying’ the goods and overpaying for them. objecting that the charity is paying $10.54 for something that they could have purchased for $0.02. the objective for the charity is to determine a nominal amount, defined as fair value, to quantify their GIK to satisfy the IRS. If GAAP points them to the price guides and the price guides reflect a certain number then the charity is entitled to use that number.

    the second issue is that this whole investigation focuses on mebendazole which as i said before is an outlier product. a statistical anomaly. for every product that has a high AWP (high being significantly above what you might find in the international market) there is a outlier product on the opposite end of the spectrum with an AWP below the current international marketplace. the majority of products fall within a “normal” range within the standard distribution curve.

    AWP as a metric is a reasonable methodology. it is currently still used by many states as a benchmark for their medicaid reimbursement plans. There are other supply chain benchmarks that can also be used.

    to use a different analogy, this issue of mebendazole is tantamount to suggesting that the NBA raise the regulation height of the net to 12 feet because Manute Bol is 7 foot 7. Or conversely lower the regulation height to 8 feet because of Muggsy Bogues.

    we should be promoting the organizations to implement internal controls. a firm, audit capable, accounting methodology with clear references back to the appropriate GAAP standards. consistently applied and documented. the values, whatever they be, can then be substantiated and defended by the organization.

  9. David:

    Thanks for your comments. I appreciate the dialogue. This particular post, along with the comments from various people, is getting a large amount of traffic compared to other posts on this blog.

    On your first point, nobody is saying that NPOs are actually spending $10.54 for a pill that could otherwise be purchased for $0.02. The $10.54, or $16, or $2, or $1.50 numbers you will see in discussion are the amounts used to record the FMV of the donated meds.

    There are two varieties of the most common criticism. First is that organizations were booking the FMV of mebendazole at $10.54 when it could have been purchased on the international market for $0.02. If that assertion is correct, the donation should have been recorded at $0.02.

    The second criticism is that organizations evaluated the transaction as a donation, paid a service fee or handling fee or some other sort of fee of something in the range of $0.02 per pill, and then recorded a GIK of $10.54 per pill. There are multiple issues here that have been discussed by me and other people with a far bigger audience than me.

    One issue that I have not had time to develop is that if the assertion of a donation was correct and if there was a shipping or handling fee paid, then the FMV of the contribution would actually be $10.52, calculated as $10.54 less $0.02 which is the amount spent to acquire the donation.

    On your second point, which is the impact of mebendazole on the discussion, a few thoughts:

    Mebendazole is an outlier in many ways. There is an apparent large spread between AWP and the price on international markets. Multiply that by millions of doses and the impact on financial statements is huge.

    Let’s go back to one set of financial statements to illustrate the issue.

    In the following post I discussed the impact on Operation Blessing’s 990 when they decided to exclude deworming medicine from their 990 which had been included in the previously issued audited financial statements:

    Their 990 said:
    “Subsequent to the issuance of its March 31, 2011 audited financial statements, OBI revised its methodology for recording the estimated fair value of donated anti-parasite medication. After reviewing recent trends in the way the non-profit community reports the value of these medications, OBI has determined there is no longer a clear and uniform industry standard for estimating their fair market value. Until industry standards for the recognition and valuation of these medications become clearer, OBI has decided to discontinue recognition of any value for such donations for financial reporting purposes. Such changes in methodology are implemented prospectively in the reporting period they are identified. As a result, $113,043,709 of donated anti-parasite medication previously reported as revenue and program expense on OBI’s issued March 31, 2011 audited financial statements have been excluded from this Form 990. This change has no impact on OBI’s March 31, 2011 net assets, change in net assets or cash flows, and will not affect OBI’s on-going anti-parasite program which helps millions of children globally each year.”

    That comment raises far more questions than it answers, but I’ll leave that for another day.

    When you see ‘anti-parasite medication’ that means predominantly mebendazole. There may have been a little albendazole.

    Let me put that $113.0M adjustment into perspective.

    Total revenue on the audited financial statements was $377.96M. That means the revenue recognized from donations of anti-parasite meds was 29.9% of total revenue and support.

    Can we round that 29.9% to one-third?

    That means that one-third of the organization’s revenue in fiscal 2011 was from donations of mebendazole (with some small amount of albendazole thrown in). That is extremely material.

    While the pricing of mebendazole may be an outlier, the OBI financial statements are not. I suggest they are representative of the issue under discussion.

    So that is why mebendazole is the focus of discussion. The next largest issue, which pales in terms of dollar impact, would be albendazole. I think that in distant third place would be the antibiotics as a group. CNN has one data point of shipping documents to illustrate the issue if you are really, really interested.

    To review the basics and see the impact of deworming meds on other charities, please read two of the earliest articles from Forbes and Chronicle of Philanthropy:


  10. Dr. Right On:

    The core question is what is the exit price in the principal market for a med that can’t be distributed in the U.S.? $10.54 in the U.S. or $0.02 outside?


  11. Jim – you may have the best dialogue going I have seen on this topic – ever. I attribute that to your ability to offer and maintain an unbiased and agenda-less discussion. I have read through every comment with great interest. I agree that staying on point and remaining professional is in everyone’s best interest.

    It seems that you are pushing for some sort of a new paradigm of measurement. I see the merit in discussing possibilities but I don’t see how it helps nonprofits now. I guess I can’t really see what your end game is with that line of reasoning.

    Your last comment is interesting to me. It is important to note that the medicines CAN be distributed and as a matter or fact ARE being distributed in the US when they are sold as a product for consumer use. As such the US value of the medicine is the correct value. The US market is the correct principle market. The only reason DONATED medicines cannot be distributed in the US market is that the manufacturers place a restriction (cannot be distributed in the US) on the donations to A) eliminate liability and B) they don’t want their donations used in their primary market where they are trying to sell the same product. Based on this information and based on the governing accounting guidelines, the exit price of a medicine in the US market is the correct data point for establishing FMV.

    David – your NBA analogy is dead on. I find most of what you present resonating with my understanding as well. I would be very interested in making a personal connection.

  12. Jim, I’ve heard you as well as Forbes say that “anyone” can buy mebendazole at $0.02 a pill. But I’ve never seen any of these journalists actually prove that. So I challenge you, prove it. You, go out and actually buy mebendazole at $0.02 a pill then post of picture of you holding the pills that you purchased along with the invoice. Prove once and for all that this is the price “anyone” can buy it at that price.

  13. DJ:

    I’m advocating GAAP, not anything new.

    My end game is the same as all CPAs: full disclosure financial statements that comply with U.S. GAAP.

    My goal for the last 17 months has been to help the R&D NPO community get to that place before the regulators rewrite the rules. Check out the first one or two posts I wrote on this topic back in December 2011.

    Also check out the two open letters I wrote, one to the R&D community and the other to their auditors. I fear the time is running out.

    Thanks for your comment.


    1. Hi Leif!

      Haven’t heard from you in a year. Welcome back!

      Can I go buy 500 mg mebendazole for 2 cents each? That’s a straw man option. A good one, but still a straw man. I don’t have any contacts to buy bulk meds. So guesss I can’t prove my point from personal experience.

      But I can read.

      Let’s look at some old articles to find public comments on NPOs that do buy their mebendazole.

      First, Mr. William Barrett reports in Forbes on 11-30-11 that Children International paid under 4 cents for 500 mg mebendazole.

      From the article:
      “Significantly, not every big charity plays the goose-the-financial-statement game. The New York City-based United States Fund for Unicef books the same deworming meds at only 2.6 cents. Direct Relief International of Santa Barbara, Calif. uses 3.2 cents. Kansas City’s Children International eschews donations and buys deworming meds on the open market for no more than 4 cents a pill and often much less. “More cost-effective and straightforward,” the charity says.”

      Second, Ms. Caroline Preston reports in Chronicle of Philanthropy on 9-18-11 that Feed the Children bought 65 million pills for 1.6 cents each.

      From the article:
      “In Feed the Children’s case, the group says it had a contract with an Indian drug maker, Micro Labs, in 2009 for $1,023,750 to manufacture, handle, and package 65 million pills but that the tablets themselves were donated. That would amount to about 1.6 cents a pill, though the charity says the contract was not based on such a calculation. The group has also acquired medicines from a European supplier in the past.”

      So, it can be done.

      Amongst many other things I cannot prove from personal experience is that either World Vision or Compassion International actually have any field programs. Yet I know they do.

      Thanks for your challenge.


  14. Jim,

    Thank you for facilitating this discussion. I have a lot of respect for your advocacy of internal controls. In response to the various comments above, there is a point that I think we are collectively missing.

    Let’s take two versions of the same scenario, one where a 501(c)(3) organization goes out and purchases pharmaceuticals for use in its own programs in the field. The accounting for this I believe is relatively straightforward, and the value reflected in the filing should be whatever it is that they pay for the goods.

    Now let’s take the same scenario but the organization has the goods donated to them as GIK. This now triggers a responsibility to determine the value of the gift for the purpose of completing Form 990 (along with any other internal uses this information will assist with).

    Bear with me now as I know I am being pedantic to some readers out there. In any transaction there are two sides, the seller whose objective is to maximize the price at which the exchange takes place and the buyer whose interests are the exact opposite, to find the lowest price at which to acquire the item. In GAAP language the selling price is called the “exit price” and the buying price is called the “entry price”.

    When determining a value for GIK, the charity is obliged to determine Fair Value. According to FASB, Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There have been many articles addressing this point, but they all boil down to the same conclusion, this is an “exit price”.

    In other words, the fact that the charity can buy the product at any price is irrelevant. The issue is what they could reasonably hope to sell the goods for.

    Furthermore, another principle in valuation and appraisal comes into effect and that is “highest and best use”. According to the International Society of Appraisers, this is that reasonable and legal use of a property that will result in its greatest value. The principle of highest and best use recognizes the need to consider the item’s ultimate use as well as the most appropriate marketplace which, taken together, results in the highest value for the property under consideration.

    Therefore, if one transaction occurred at $0.02 and another at $5.00, not only is it common sense that as a hypothetical vendor in the wholesale marketplace the charity would want to receive the $5.00 transaction but more to the point, they are obliged to recognize that $5.00 represent the highest value for the property under consideration.

    DJ – thanks for the support. you can reach me at

    1. Here are the links to the open letters I posted last November.

      An open letter to the evangelical nonprofit community receiving GIK meds

      An open letter to the CPAs who audit R&D charities receiving GIK meds

      I posted those six months ago. Since then we have gotten that much closer to some regulator stepping in and giving us new rules. I fear the time is running out.

  15. Jim,
    All the examples you give are of NGOs buying the pills. But Barrett, Preston, etc do not say that “any NGO” can buy the pills and only those NGOs with bulk purchase agreements. They say that “anyone” can buy the pills on the “open market.” So either anyone can buy the pills at that price, or only special deals given to NGOs. If only NGOs can buy the pills under special agreements, then Mr. Barret would be untruthful in saying that anyone can buy it on the open market. So what is it? Can “anyone” buy the pills?
    This is an important point because the issue being argued is inherent contributions. According to GAAP (you can find the definition for inherent contribution in the glossary), if an organization pays a fee significantly below market value, there is an inherent contribution to be recorded. So the question, as always, is what is market value. FMV is at least dependent upon what price is paid in the open market. So if “anyone” can pay that price, then that’s a pretty strong argument towards FMV. However, if only certain charitable groups under certain circumstances can buy pills at that price, then it’s less strong of an argument towards FMV.

  16. ejisakson:

    Thanks for your post.

    For others reading, what ejisakson describes is colloquially known as a “bargain purchase.”

    I want to expand on the concept.

    I’ve discussed that in two posts back in October 2012:

    Let’s use a hypothetical: An NPO buys something from a vendor who is a friend of the ministry for $5 a unit. You can look in lots of places to see the MSRP of this particular item is $24.

    Let’s say the unit is something that is typically sold at a discount to the MSRP. After doing some more checking you find the item almost never sells for the MSRP. After checking with the vendor, a few competitors, and doing some research on the ‘net, you conclude one unit usually sells for about $20. Let’s ignore freight and sales tax.

    What is the FMV of the unit?

    $24? $20? $5?

    In this case, it sure looks to me like MSRP isn’t a real price, so the exit price is around $20. Thus the NPO has received a $15 contribution and should record that as revenue.

    So back to pharmaceutical example, which is a variation of the overall issue. I will cover a lot of ground in one question, much of which has not been mentioned in this post, and also use some inside-baseball wording –

    What is the exit price in the principal market for a med?

    *actual transaction fee or handling fee paid
    *price available on the international market to select NPO customers (this is the interpretation from ejisakson above which has several implications, none of which will be developed here)
    *price available on the international market to those who want to obtain tens of thousands of doses (my interpretation of IDPIG)
    *some other indicator of exit price in the countries where the field programs will use the meds
    *WAC from the Red Book
    *AWP from the Red Book

    It all gets back to exit price. Which is the best indicator?

    Figure that out, subtract any fees paid, and you have the contribution revenue.


  17. The primary point raised by ejisakson above deals with the relevance of the International Drug Pricing Indicator Guide. That is a core issue.

    Keep in mind that is one of the main questions regarding valuation of meds. Ejisakson has directly raised the question.

    I won’t develop that issue in this thread. If you are new to this discussion, please be aware there is a variety of opinions on this issue.


  18. Jim

    in your most recent responses above you touch on a far more interesting dynamic of this issue, and that is domestic versus international pricing modules.

    if we consider the 501(c)(3) to reside in the United States than in your examples above you identify three possibilities that would reference international pricing and two that would be domestic source.

    interestingly your two domestic sources are actually two different price references in the same source.

    As for the IDPIG, this is only one of a number of possible price data sources and comes with its own limitations. the following is excerpted directly from the IDPIG:

    “This list may not be used by manufacturers and suppliers for commercial or promotional purposes.”

    “Bearing in mind that the data and information provided for a product depend largely on the supplier or procure-
    ment agency, these data and information are being provided as is, and MSH and WHO make no representations or
    warranties, either express or implied, as to their accuracy, completeness, or fitness for a particular purpose. MSH and
    WHO accept no responsibility or liability for the reliance on, or use of, such data and information.”

    “This Guide is intended as a comparative reference only; it is not suitable for actually ordering products. To place orders, the vendor must be contacted directly. No guarantees are implied as
    to availability of prices listed, quality of products, or specific sales conditions. The vendors included are not intended to be a comprehensive list of potential suppliers. Prices from buyers
    are listed for comparison purposes only.”

    Now if an organization does choose to use this as their source, that is their prerogative. as long as they then apply the references accurately and consistently keeping in mind that they are acting as a hypothetical seller and not buyer (in the language of the IDPIG) i think they are being compliant.


    1. David:

      Thanks for your comments.

      You are correct on those disclaimers in the IDPIG. I understand there are far stronger disclaimers in the Red Book.

      At one level, those disclaimers are like what you see on ads from real estate brokers or securities offerings – it isn’t an offer to sell. At a deeper level, it is saying the data is merely what vendors reported.

      But it is still data provided by vendors.

      Since there’s no ticker-tape of large transactions of meds comparable to what we see on Wall Street with data aggregated in the next day’s WSJ, organizations and auditors need to look elsewhere. In the language of FAS 157 / ASC 820, that means looking for level 2 or level 3 inputs.

      At the bottom of each listing in IDPIG are a few self-reported actual transactions from national-level health agencies. Again, those are self-reported and there are only a few data points. However, those data points validate the general direction of the self-reported vendor data.

      Early on in this mess, I did some searching for actual transactions of 500mg mebendazole. I spent far more time than any auditor likely would and far less than an R&D NPO should. I found very few articles, but those few did point towards validating the vendor’s self-reported amounts.

      I found one publicly viewable price list that points towards values in the IDPIG: That’s an actual price list.

      So is $.02 or $10.54 a better indicator of FMV for 500 mg mebendazole? The data points I can see with my limited vision sitting at my desk in my little corner of the world points towards the very bottom of the range.


  19. This is a great discussion. I’ve been the one answering most of the questions. To expand the discussions, I have a few questions I’d like to ask.

    Everyone is welcome to jump in, but I’ll direct a few questions to specific people whose comments prompt my question.

    Author of this guest post – How do U.S. retail prices enter into the valuation of donated medicines?

    Dr. Right On – What do you think the “exit price in the principal market” would be for a medicine that is not FDA-approved?

    Leif – Who is buying deworming medicine in hundred thousand dose batches (or perhaps millions of doses) other than international NGOs and national-level health agencies? Who else is in the market?

    David – Do you think AWP or WAC from the Red Book is a reasonable approximation of the wholesale prices in the U.S.?

    David – Do you think FDA approval should have an impact on determining the highest and best use under U.S. GAAP?

    David – What other pricing indicators do you perceive are in use by NPOs? What disclaimers are present in the front of each of those resources? What do you think is the reason that organizations perceive those are appropriate pricing indicators? If someone wanted to criticize the use of each of those indicators, what are the disclaimers such a person would want us to read?

    Leif – Are prices self-reported by vendors in the IDPIG only available to a limited group of customers? Do organizations have to pay a membership fee or get special permission to get that pricing?

    Leif – What do you think the answer is to your question – are the prices in the IDPIG available to “everyone”?

    I appreciate all the comments. What are your ideas on the above questions?


    1. How do U.S. retail prices enter into the valuation of donated medicines?
      Donated meds should be valued at fair market value, defined as the price the org would be able to sell them for. An org should do their research and find the price that approximates the value they would be able to sell their meds for (hypothetically). US retail prices could be that fair market value, though very unlikely, and standards such as those by Accord encourage orgs to use a wholesale value.

      What do you think the “exit price in the principal market” would be for a medicine that is not FDA-approved?
      The exit price would be the price available in markets in which the meds are approved for sale (not necessarily the lowest price to be found on the internet). Research done by organizations actually working with non-FDA approved dewormers has apparently landed on a price in the range of $0.35 – $2.00 based upon the articles you’ve posted. (Though I should note, the value provided to the children using these meds vastly exceeds even $2 or even $10, we’re arguing only about an accounting value here.)

      Who is buying deworming medicine in hundred thousand dose batches (or perhaps millions of doses) other than international NGOs and national-level health agencies? Who else is in the market?
      Hospitals, clinics, military, retail outlets, governments, etc.

      Do you think AWP or WAC from the Red Book is a reasonable approximation of the wholesale prices in the U.S.?
      Depends on the circumstance. Though AWP and WAC may be overpriced for many of the meds used by NPOs, they may be right on for others. Without researching all the drugs on the market and comparing them to actually transacted prices (which are nearly impossible to find), it is hard to say. However, it does seem that many orgs are moving away from those price points, particularly AWP, if only for the bad reputation now associated with AWP. Other pricing sources may pop up in the near future as the health industry goes through some changes from 2014-2016.

      Do you think FDA approval should have an impact on determining the highest and best use under U.S. GAAP?
      Looking solely at US GAAP, then yes, it is accurate. However, I think this is where GAAP does not fully understand the industry. FAS 157 was not written for the purpose of instructing NPOs how to value donated pharma. So we have an imperfect standard that is being applied. Ideally, valuation of meds would be somehow based on efficacy. If two anti-malarial drugs provide the same benefit and health protection to children, then they should be valued the same, regardless of whether or not the manufacturer of the drug paid the fee to get FDA-approval.

      What other pricing indicators do you perceive are in use by NPOs? What disclaimers are present in the front of each of those resources? What do you think is the reason that organizations perceive those are appropriate pricing indicators? If someone wanted to criticize the use of each of those indicators, what are the disclaimers such a person would want us to read?
      An argument could be made (and has been made) criticizing all sources of pricing information. This leads us to the core problem of pharmaceutical valuation and that is that it is a very closed, secretive market controlled largely by insurance companies and governments. Finding out the actual price transacted for any pharma is near impossible. So orgs are left with price lists and market research firms.

      Are prices self-reported by vendors in the IDPIG only available to a limited group of customers?
      I would say yes, and probably say obviously yes.

      Do organizations have to pay a membership fee or get special permission to get that pricing?
      It would seem that the pricing is based more on the mission of the organization and the willingness of those selling to support the mission of the organizations with severely discounted, donative pricing, not on a membership fee.

      What do you think the answer is to your question – are the prices in the IDPIG available to “everyone”?
      I have seen no evidence presented that shows those prices are available to “everyone.” I think that Mr. Barrett in particular says they are available to everyone to make his argument sound stronger (his writings have been more opinion pieces than journalistic). It seems those prices are available only to NGOs and possible some ministries of health in developing nations.

  20. Another invitation for guest posts

    Many people in the NPO community are saying we need some better measure of operations than overhead ratios, i.e. the functional allocation of expenses. I fully agree.

    Any suggestions on what we can use to measure an organization like a cancer research organization and a homeless shelter and an R&D NPO (think World Vision or Compassion International)? To focus your idea, please apply it to each of those three sectors of the NPO community.

    If you have an idea, would you like to write a guest post criticizing the use of overhead ratios?

    Would you like to suggest an alternative?

    Maybe you could introduce the nugget of an idea that will eventually let us get rid of the faux-holy-grail of overhead ratio.


  21. Jim,

    How do U.S. retail prices enter into the valuation of donated medicines?

    The retail price does not factor in to the fmv given to donated medicines. The info in the original post referencing the Time Magazine article is not to build a case for retail value for donated medicines, but to simply show that knowing the value of medicine on any level is impossible. What is the ________ (fill in the blank: retail, wholesale, wholesale acquisition, reimbursement ceiling, etc…) of medicine? There is no single answer. However, it is understood by the nonprofit industry that retail value for donated bulk medicines is not correct.

    What do you think the “exit price in the principal market” would be for a medicine that is not FDA-approved?

    That depends entirely on what the medicine is and where the primary market for that item is. Using accounting definitions the exit price for non-FDA approved medicines would be what that medicine would sell for in

    Do you think AWP or WAC from the Red Book is a reasonable approximation of the wholesale prices in the U.S.?

    It is the only reasonable AND observable approximation of wholesale prices in the US. Even if they are considered unreasonably high estimations of value, if averaged with the unreasonably low estimations given by the Federal Upper Limit and the National Average Retail Price list you could arrive at an even more reasonable estimation of their wholesale value.

    1. DJ:

      On the retail price question, the author spent a lot of time discussing the variability of the retail market. I agree it’s a mess. However, that does not affect the current discussion. Thanks for making that point.

      The appropriate fill-in-the-blank answer to your question is to consider the volume, nature and quality etc of the item in discussion. If we are looking at pallets of meds, then seems t me the answer is wholesale for that volume of medicine.

      Anyone have another idea?

      Wow. You really think AWP is a reasonable indicator of value? Thanks for saying so.

      What do others think about AWP? David?

      Since you introduced FUL, do you think that is a reasonable indicator of the price the feds will pay? We can discuss whether that is representative of wholesale, but the first question is whether you think listed prices are reflective.

      What do you think the National Average Retail Price represents?

      Do you think either of those have a general correlation to what buyers are actually paying?

      Ideas from others?


      1. Jim, I am trying to find solutions with what is available, you seem to want to call everything into question. Yes, wholesale is the way to go. I agree with you! How exactly do you propose we find that information?

  22. I was in the process of responding to all three questions posed, but i will post the answer tot he first as that discussion has already gotten underway.


    I appreciate the questions and the ongoing efforts at supporting a dialogue. I will endeavor to respond to your questions in the order you asked them.

    You have asked whether I think AWP or WAC from the Red Book is reasonable. The first issue is an understanding of Red Book in general. Red Book is a price guide available by subscription and published by Micromedex, a healthcare brand of Thomson Reuters, now called Truven Health Analytics. This is only one source of pharmaceutical pricing information. First Databank publishes information, as does Wolters Kluwer Health, and of course the International Drug Price Indicator Guide published by Management Sciences for Health (MSH). I don’t endorse one particular guide over the others.

    AWP or WAC refers to Average Wholesale Price and Wholesale Acquisition Cost respectively. These represent two price points within the wholesale stage of the supply chain of pharmaceuticals from Active Pharmaceutical Ingredient (API) to end consumer. Once again, as above, there are many more metrics available: Direct Price (DP), Suggested Wholesale Price (SWP), Average Acquisition Cost (AAC), Federal Upper Limit (FUL), Average Average Wholesale Price (AAWP), Generic Equivalent Average Price (GEAP), Average WAC (AWAC), and Generic Equivalent WAC (GEWAC) just to name some.

    As to whether I believe these particular metrics represent a reasonable approximation is moot, the charity is obliged to determine Fair Value by developing and consistently applying a methodology. As to whether I think an organization that has concluded that the use of AWP is reasonable to fulfill their obligation in determining Fair Value, I refer to The Centers for Medicare and Medicaid Services which considered AWP, “a key drug pricing benchmark.” AWP continues to be utilized by parties within the pharmacy benefit industry as a basis for contracts between plan sponsors and Pharmacy Benefit Managers (PBMs) and between PBMs and retail pharmacies.

  23. Your follow up question asked me to consider whether FDA approval should have an impact on US GAAP. There are a number of clarifications required here. US GAAP are used to prepare, present and report financial statements for a wide variety of entities, including non-profit organizations, with the Financial Accounting Standards Board (FASB) establishing rules for public and private companies, and non-profit organizations.

    The Food and Drug Administration (FDA or USFDA) is an agency of the United States Department of Health and Human Services. The FDA is responsible for protecting and promoting public health through the regulation and supervision of food safety, tobacco products, dietary supplements, prescription and over-the-counter pharmaceutical drugs (medications), vaccines, biopharmaceuticals, blood transfusions, medical devices, electromagnetic radiation emitting devices (ERED), and veterinary products.

    At this point it bears repeating that in most cases (and certainly in the case of the deworming medication) since the organization is in all likelihood distributing the GIK in pursuit of their charitable mandate in the international arena and neither importing nor selling the goods into the United States, we are talking about a hypothetical transaction to sell the goods as if they were a market participant.

    Just to be certain, I checked with some professional colleagues who are expert in dealing with FDA matters and they confirmed that the FDA does not regulate drug prices. Therefore I propose we leave the FDA to their sphere of responsibly and maintain our focus on the guidelines set out in FASB.

    1. David:

      Thanks for your comment which provides great background.

      Two different issues combine to create a point of this discussion.

      1st: The very short version of the accounting issue is that restrictions on use of the asset based on the asset itself need to be considered in indentifing the fair value. In contrast, a restriction placed by the donor does not enter into valuation (example: if a donor says use 1 acre of land in downtown for a playground then the value considers the possiblity of putting a 20 story hi-rise on the land).

      2nd: The FDA has not approved certain medicines for use in the U.S. The center of this discussion in on one such med. You guessed it. 500mg mebendazole.

      Thus, it seems to me that U.S. GAAP says it is not appropriate to look to any pricing information inside the U.S. to determine the FMV of meds not approved by the FDA. Seems to me that international prices are required for mebendazole.


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