Pharma-funded Charities and Private Benefit

By August 4, 2017Nonprofit

 

Too close for comfort?

Many patient assistance charities provide funding for patients to purchase treatments from the same pharmaceutical companies that provide the majority of funding for these charities. They are accused of increasing the profits of prescription drug companies and continuing to prop up inflated prices by enabling people to purchase expensive treatments. More recently, court records indicate that a new level of scrutiny has arisen for one of the patient assistance charities, which is under an IRS audit in large part due to the organization’s funding sources and the benefits they appear to reap from that funding.

Good Days, also known as Chronic Disease Fund, provides financial assistance to patients who need help paying for prescriptions, health care premiums, or healthcare-related travel. The IRS has alleged that since 2003, at least $1 billion dollars was provided by the charity to patients to purchase prescription drugs from the same companies that donated (and received a charitable deduction for) those funds. In 2011, the IRS alleges that 95% of the $129.3 million the charity distributed ended up back in the pockets of its donors. Good Days manages certain disease-specific restricted funds to which donors may give and the IRS analysis of those funds in 2011 indicated that in most cases, about 90% of the funds went right back to the primary pharmaceutical company donor to the fund. While we can’t see exact sources of donations and amounts in public information (the Schedule B to the Form 990 which contains that information is not publicly disclosable), Good Days’ Schedule A on its most recently filed 990 seems to indicate that the organization receives significant amounts of money from a small number of donors (based on its public support percentage).

Court documents related to the audit indicate that the IRS is concerned that Good Days’ operations result in an impermissible level of private benefit to its pharmaceutical company donors. Charities like Good Days are required to operate exclusively for charitable purposes, which means they must demonstrate that no more than an insubstantial amount of their activities benefit private parties. Insubstantial in this context means no more than an incidental amount, and the IRS will look at whether a benefit is incidental from both a qualitative and quantitative standpoint. A private benefit is qualitatively incidental if it is occurs indirectly or unintentionally, or if it’s a necessary result of an activity that benefits the public. To be quantitatively incidental, the benefit must be insubstantial compared to the public benefit conferred by the specific activity in question, not in comparison to the organization’s overall activities. If an organization is audited by the IRS and found to be engaging in more than an insubstantial amount of private benefit, then it may be subject to revocation, including retroactive revocation back to the date that the level of private benefit became substantial.

The breadth of this prohibition is probably demonstrated best by the example of the American Campaign Academy, which was a charitable organization that trained individuals to work on political campaigns. Even though there was no explicit requirement that individuals belong to the Republican Party, selection of participants functioned in such a manner as to effectively ensure that participants in the Academy were all Republicans. Despite the fact that it was determined that the Academy’s primary activity was educational in nature, both the IRS and later the Tax Court determined that the benefit it provided to the Republican Party (which is not a charitable recipient) was not incidental and the Academy existed for the benefit of private interests (the Republican Party). This case is a prime example of a situation in which private benefit was found, despite the fact that the private benefit was provided not to a finite group of people or businesses, but instead to a large, unidentifiable number of people and entities.

It is unclear if there is private benefit in this situation from the information available publicly, but I don’t think the IRS is wrong to be looking closely at these types of arrangements. This should be an interesting situation to monitor because court documents also indicate that this could have significant implications for patient assistance charities more widely. Good Days is said to be operated in accordance with guidance from Health and Human Services’ Office of the Inspector General, which provides guidance in this heavily regulated area (because of anti-kickback and similar statutes which apply in the health care arena). If Good Days’ operations are problematic for purposes of tax exemption, even if they comply with healthcare specific regulations, it could mean that no patient assistance charities that operate in this manner would qualify as tax exempt.

A sample of the news coverage for more information:

The New York Times

USA Today

Reuters

Bloomberg