Magic Pill, Magical Accounting
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pwards 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.
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