Magic Pill, Magical Accounting

Upwards of 100 million deworming pills are distributed annually by US-based non-profits to help Third World residents fight intestinal parasites that consume food in their stomachs, causing hunger and starvation.

These chewable generic pills — mainly mebendazole and albendazole — are highly effective, especially for kids; just two pills a year and the worms stay gone. It’s a terrific, feel-good health-improvement story for any non-profit to tell.

But for years these medicines and some questionable accounting have been just as effective in enabling perhaps a dozen non-profits on the annual Forbes list of the 200 largest US charities to inflate their stated contributions and financial efficiencies. The pills can be bought on world markets in Europe, China and India for 2 cents each. But they have been valued on some non-profits’ financial statements as non-cash gift-in-kind (GIK) donations worth as much as $16.25 per pill—81,000 percent above that world market price.

Over the years this practice has added billions of dollars to charities’ reported donations. It has spread, in large part, via a shadowy network of pill-pushing brokers, intermedi- aries and agents. Some operate as their own charities or as stalking horses for obscure drugmakers. In some cases these middlemen supply not only the medicine, but also suitable-for-the-auditor paperwork showing inflated drug values.

Forbes can’t find any evidence that a large bulk deworming medicine donor anywhere shelled out in cash more than a few pennies per pill. Yet loose accounting rules for donated GIK goods, a questionable drug-pricing list and the drug price disparity between US and foreign markets have provided charities some cover for their use of even the most egregious GIK valuations. Indeed, the biggest scandal here might just be what’s legal.

If the kids are getting needed medicine, why worry about the accounting? The charities are trying to look growing and efficient as they fight for cash contributions from the would-be donor. “That’s clearly the reason they do it,” says Christopher Murray, a University of Washington health professor who runs the Institute for Health Metrics & Evaluation, which is funded by the Bill & Melinda Gates Foundation.

Consider Crista Ministries, on our list since 2005. Situated for 50 years on a leafy campus north of Seattle that once housed a tuberculosis sanatorium, Crista operates schools, retirement communities, radio stations and a foreign aid programme. In its fiscal year ending this past June it reported a hefty $85 million in gifts received, the metric we use in determining if a charity will make our list. On its Web site, Crista brags about high financial efficiency. But you won’t find Crista on this year’s roster. Reason: Some $63 million was from deworming pills donated to its World Concern ministry and valued as high as $10.64 a pill.

If the pills are marked to their market value, Crista looks a lot less efficient and its donations received shrinks to just $23 million. Cut-off for our list: $46 million. Crista said it is re-evaluating how it values GIK, but defended its numbers. “We are using industry-accepted values,” a spokesman writes.

Islamic Relief USA, which solicits among US Muslims and made our list last year for the first time on the basis of 2008 results, just reported $182 million in gifts for calendar year 2010—all but $40 million of that in donated goods. But the Alexandria, Virginia-based charity now suspects a huge chunk of that GIK was mebendazole put on its financials at $16.25 a pill. Such uncertainty also warrants exclusion from our list this year. After questions were raised, Islamic Relief USA suspended its GIK programme, hired an outside law firm to take a closer look and says it intends to file amended financial statements.

“The process of grossly exaggerating medicines mocks the poor, the ill, the giving public, the government and higher authorities,” says Luke Hingson, head of Pittsburgh’s Brother’s Brother Foundation. His leanly run charity, which long has been on our list, deals almost exclusively in foreign-delivered GIK, but years ago stopped accepting deworming medicine.

GIK defenders say the accounting rules are flexible, confusing and in flux, and that non-profits have acted in good faith. They worry, too, that low values might discourage cash donors. Certainly the GIK standards have been the subject of sometimes heated discussions within the non-profit industry. The trend now is to use lower, but still puffed-up, values.

For example, earlier this year, Oklahoma City-based Feed the Children announced that its latest yearly GIK contributions dropped by $668 million—a stunning 60 percent fall—mostly due to its lowering of deworming valuation from $9.07 to 35 cents. But that’s still 1,600 percent above the world market price. No stranger to scandal, the charity, a pioneering long-time distributor of deworming pills using high values, is no longer among the country’s 10 largest.

For many years World Vision, a large faith-based charity in Federal Way, Washington, was one of the most aggressive in valuing deworming pills. In 2009 it used $10.64—the same 53,000 percent markup used by Crista Ministries. After studying the issue and paying for outside data, it dropped the valuation for 2010 to $2 a pill—a mere 9,900 percent markup. Across the country, in Brunswick, Georgia, MAP International, another big faith-based charity, says it valued the pills it distributed in its latest accounting period at $1 each, down from $10.58. But that’s still 4,900 percent above what they cost. In Phoenix, Food for the Hungry dropped its per-pill valuation from $10.64 to $1.54— 53,000 percent to 7,600 percent.

In a promotional Web-posted video after the 2010 earthquake in Haiti, Bill Horan, head of Pat Robertson’s Operation Blessing International Relief & Development, stands in a truck parked in Port-au-Prince that he says holds 1 million mebendazole pills. “These things cost less than a nickel apiece,” he declares. But on its statements OBI claimed a much, much higher average value for deworming meds—$6.85 over seven years, we figure, a 34,000 percent markup over actual costs. That extra $300 million swelled OBI’s reported contributions by one-sixth to $2.2 billion and enhanced its calculated financial efficiency. An OBI spokesman insists that the 5 cents Horan was referring to was the cost of administering medicine “and not the cost of the pills themselves.” Still, in a policy change, OBI says for the time being it will assign no value to the pills on its financial statements.

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, California, 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.

So how did 2-cent medicines become $10.64 pills or even $16.25 pills? The tale involves a pricing guide that lists deworming medicine at prices no one seems to pay.

Red Book, published by Physicians’ Desk Reference, a division of Thomson Reuters, is a database for drugs approved for use in the US. 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.”

Nevertheless, for years the non-profit industry and its accountants eagerly used Red Book’s AWP as a basis for accounting statements. But to do so when it came to deworming medicine, they had to go one step further. For foreign use the standard mebendazole pill, the more popular of the two major deworming drugs, has 500 milligrams of medicine. But the maximum dosage approved for use within the US is only 100mg. The lack of US need for deworming medicine—parasites are not a big problem here—plus the fact that US drug prices are among the world’s highest, resulted in top-dollar AWPs for the 100mg version. Listed per-pill AWP in Red Book have included these quotes: $10.64, $12.72 and $16.75.

There is no Red Book listing for 500mg mebendazole pills (although we’ve seen a Red Book printout that one pill purveyor doctored by changing “100mg” to “500mg”). Yet AWP values for 100mg mebendazole are used by many non-profits. At least on their financial statements.

That highest AWP quote for 100mg mebendazole seems to be where Islamic Relief USA got its now-called-into-question $16.25 valuation for 500mg mebendazole. But there’s a lot more to this story. The charity says it was using the work product of Diana Sufian, a Santa Monica, California, non-profit consultant who ran its GIK programme for about six years. In 2010, she was paid $520,000—nearly three times the pay of the charity’s president, Abed Ayoub. Islamic Relief says it now has dispensed with her services. Contacted by Forbes, Sufian declined to comment on her status or operations, but said she was not responsible for drug valuations.

In a statement, Islamic Relief, which seems to be depicting itself as a shocked victim, said it had been told that the deworming pills came from Medical Education Training & Development Inc. in Spring Lake, Michigan. METAD, as it is known, is also a registered tax-exempt charity but appears to be functioning as an agent or broker rather than as an actual donor. METAD’s latest tax return lists total revenues as just $2.2 million. METAD principal officer Barbara “Bobbi” Johnson declined to speak with Forbes.

Islamic Relief says that Sufian told its officials the pills via METAD came from MedPharm LLC, a for-profit drug company also based in Alexandria, Virginia. MedPharm’s Web site calls it “one of the pre-eminent suppliers of pharmaceuticals in the United States” and brags that since 2004 it has supplied more than 120 million deworming pills. Calls to its owner, Andrew Koval, were not returned. Several Web sites identify Johnson as being affiliated with MedPharm, raising the possibility that some of the pill transactions were not truly arm’s-length.

Islamic Relief faces another issue. Forbes has seen some of the METAD invoices for deworming and other medicines. They list a “handling fee” roughly equal to the actual cost of the medicines. An Islamic Relief spokesperson confirmed the charity paid such charges. This raises the possibility the charity’s receipt of the medicine was not a charitable donation at all, not even for 2 cents, but just a market-value purchase. If so, such a lack of donor intent means the charity’s stated fundraising efficiency was not as high as it appeared. There are other non-profits around the country with interesting operations like METAD’s. An August 2010 e-mail to a prominent non-profit from Medicines for Humanity, a tiny Rockland, Massachusetts, non-profit, said that for a $4,800 “acquisition fee”—seemingly, actual costs—it could supply a package largely consisting of deworming pills that could be put on financial statements at $913,000. That’s a nearly 19,000 percent enhancement. “Providing value,” the e-mail declares. The prominent non-profit passed on the deal. MFH says it fully discloses in its financial statements what it does.

In Canada, tax authorities have shut down several non-profits for ginning up tax deductions for medical-goods donors to far more than actual cost. In the US, though, it remains a mystery whether any donor has used Ain’t What’s Paid values as a basis for tax deductions.