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.