<LPBBIHBPMJNIMFNDEDNOMEPGCGAA.scott.hillstrom@analyticorp.co.nz>
Sender: owner-e-drug@usa.healthnet.org
Precedence: bulk
E-drug: Bogus U.S. Industry Drug Pricing
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The news that the Justice Department in the U.S. is investigating drug
pricing has implications for drug donations. USA Today (newspaper)
announced an investigation of drug industry pricing practices that cost
taxpayers $1 Billion per year. "The investigation 'has revealed a pattern
of misrepresentation by some drug manufacturers' resulting in Medicare and
Medicaid 'substantially' overpaying for certain drugs . . ." according to
the April 7-9 issue. "Drug companies, investigators allege, set wholesale
prices high because they know providers will in fact buy the drugs cheaper
but still bill for the higher amount. This attracts providers to their
products." This news comes on the heels of the news about bogus expiration
dates. I wonder when the class action lawyers will get into the act.
There are at least two ways this affects donations.
First, Section 170 of the U.S. Internal Revenue Code permits donors a tax
deduction equal to the cost of the product donated plus 1/2 of the
difference between that cost and the "fair market value". In other words,
they can deduct costs that they did not actually incur. This unusual tax
benefit is intended by Congress to encourage donations and that's good.
BUT, the question is whether "fair market value" is influenced by bogus
list
prices of the sort the Justice Department is investigating. If it is,
there
may be a lot greater cost to taxpayers than what Justice has so far
deducted.
Second, at least one major PVO is using donations valued at wholesale list
prices in reporting their revenue. MAP International books the value of
donations at wholesale list as revenue because it makes revenue appear very
high. Then, when MAP's costs are shown as a percentage of revenue, they
look very low. MAP's website quotes Forbe's magazine saying they are one
of
the most efficient charities in America because their operating costs are a
small percentage of 'revenue'. World Vision does something similar. They
pay 'handling fees' to MAP to obtain drugs that have been donated to MAP
and
show up as MAP revenue. World Vision then reports the same 'revenue' the
same way. So *one* donation is *twice* reported as revenue at the
wholesale
list price which the Justice Department says, in some cases, is bogus. An
unfortunate side effect reported by one World Vision official: This
approach to revenue reporting is so attractive (because it reduces
operating
costs as a percentage of revenue and thus attracts more cash donations)
that
World Vision has be known to spend money on MAP handling fees that could
have been used to buy more appropriate, fresher, better labeled drugs from
generic suppliers in the Europe. He said that spending a $1,000,000 at MAP
produces maybe $10-20,000,000 of revenue to World Vision while spending the
same on generic drugs produces only a $1,000,000 expense. The net cosmetic
benefit is as much as $19,000,000. This helps World Vision raise cash
donations.
My first exposure to MAP was by way of their asking me to donate to help in
No. Korea. They said that for every dollar I donated they would get $20
worth of medicine to Korea. They did not tell me that they based those
figures on wholesale list prices of largely inappropriate drugs and
supplies. What they wanted was a "handling fee" to "make it possible" for
drugs already donated to be delivered. Meanwhile, World Vision told me
that
they would gladly pick up the drugs they needed for Korea and ship them out
but for the handling fee. It gets more disappointing from there.
We really should be facing up to these and other issues before the Justice
Dept or IRS decide to do it for us.
Scott Hillstrom
President, Cry for the World Foundation
e-mail: scott.hillstrom@analyticorp.co.nz
[Using retail prices in donor country may also have implications in
recipient country both when donations are entered into the distribution
chain and the country in the future will try to budget drug expenses. In
addition, a high value might cause a high import tax or handling charge to
be added. For the donor the donation looks much more impressive than it
actually is. One paragraph in the guidelines says the declared value of a
drug donation should be based upon the wholesale price of its generic
equivalent in the recipient country or, if such information is not
available, on the wholesale worldmarket price for its generic equivalent. I
have previously mentioned that some US donations to the Balkans were valued
even higher than US retail prices. I hope the companies and NGOs having
endorsed the guidelines also follow this recommendation from now on! KM,
moderator]
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