When Americans can’t afford high-priced prescriptions, they can turn to charitable organizations created to cover such costs. But these groups are now coming under scrutiny after at least one of them was exposed for working closely with a pharmaceutical manufacturer under investigation for its marketing practices.

Many of these charities, like the Chronic Disease Fund (CDF), provide co-payment assistance to individuals in need of medications that can cost hundreds of thousands of dollars each year.

But these nonprofits get much of their funding from the pharmaceutical industry, which makes money by giving to charities.

For example, if someone faces a $5,000 out-of-pocket expense for a $100,000-a-year drug, a charity steps in (with pharma money) to cover it. This results in the company making $95,000 from either the person’s insurer or Medicare. The drug maker also wins because the contributions to charity are tax deductible.

But now this business arrangement is coming under attack after stories revealed that CDF was possibly giving Questcor Pharmaceuticals special treatment.

CDF received $200 million in contributions last year, making it one of the 50 biggest charities in the United States. Charities like CDF are supposed to seek financial contributions from the public, not only from pharmaceutical firms. Yet 81% of the donations to CDF in 2011 came from two drug companies, according to CDF’s financial documents.

Furthermore, the charity was caught purchasing millions of dollars in services from for-profit companies owned by Michael Banigan, the charity’s founder and president.

The controversy has cost Banigan his position at the Chronic Disease Fund, which also replaced its entire board.

The charity has hired a Washington law firm, Venable, to help recover from the mess.

“When an organization comes under great scrutiny like C.D.F. has come under, you have to make sure they are squeaky clean,” Jeffrey S. Tenenbaum, head of the nonprofit organizations practice at Venable, told The New York Times. He added that the controversy “definitely has gotten the drug companies’ attention.”

Critics of the drug industry hope reforms are on the way that will help bring down the inflated cost of prescription medications.

“These subsidies are unfortunately used to promote the overutilization of expensive brand-name drugs,” Wells Wilkinson, a lawyer at Community Catalyst, a consumer advocacy organization, told the Times.

-Noel Brinkerhoff

To Learn More:

Drug Maker’s Donations to Co-Pay Charity Face Scrutiny (by Andrew Pollack, New York Times)

The Shady Overlap of Disease Charities and Drug Companies (by David Wallechinsky and Noel Brinkerhoff, AllGov)