Efforts To Reform Indirect Costs Accounting Spawn Fear That Research Funds May Shrink

While Dingell panel moves to curb misuse of grant money, some observers worry that overall federal support will be reduced WASHINGTON--As Stanford University stands accused of misusing millions of dollars in federal funds meant to reimburse the school for the cost of supporting faculty research, the issue is not simply one of $7,000 bedsheets and $1,200 antique fruitwood commodes. The more important question for scientists is whether some of that money has been diverted from research. Many working scientists, who have long resented what they see as a "tax" collected by the university on their research grants, believe that the answer is yes. They are joined by Rep. John Dingell (D-Mich.) and other members of the oversight subcommittee of the Committee on Energy and Commerce, which conducted a seven-hour hearing last month on the accounting practices of Stanford and the relevant government agencies. At the same time, federal officials who follow this rather arcane issue say that the money is absolutely necessary for the continued health of the research enterprise. Spending less on indirect costs, they argue, would simply shift the burden of paying such real expenses as utilities and libraries to other sources, including, possibly, direct grants to scientists. "When a university mischarges or overcharges the government for indirect costs," said chairman Dingell as he opened a seven-hour grilling of government auditors and Stanford administrators, "that has the effect of diverting federal money directly from other high-priority research projects that could have been funded with that wasted money. Scientists, therefore, are so much the poorer." But many government officials and lobbyists say that they don't think scientists will see any more money flowing into their labs as a result of congressional concern. "Will it mean more money for research? I doubt that very seriously," says John Diggs, NIH associate director for extramural affairs at the National Institutes of Health, which spends close to $2 billion of its $5 billion allocated to extramural research on indirect costs. "It just doesn't work that way." Sandra Toye, controller for the National Science Foundation, where indirect costs take about 25 percent of its overall research budget, explains why. "These are real costs," she says. "And if you try to cut down on them, it's like squeezing mercury. The universities are going to have to recapture those costs one way or another." Officials and representatives of institutions that rely heavily on these indirect costs also question whether researchers will benefit from any curb on these funds. "Unfortunately, that is a false hope," says Carol Scheman of the Association of American Universities (AAU), which represents 58 research-oriented universities. In fact, science lobbyists like Scheman fear that Dingell's investigation will ultimately harm academic research by shrinking federal support for science. "What the government wants to do is to fund more research for less money," she says. "And one way it can save money is to cut indirect costs." The question of how to pay for what are popularly seen as the overhead costs of doing federally funded basic research goes back to the government's decision after World War II to let universities take the lead in conducting such research. At first the money went only toward paying for the direct costs of research--the people and the equipment, for the most part. But government officials soon realized that grantee institutions also spent money on everything from the utilities to heat and light their labs to the libraries and other facilities that researchers use, as well as on the staff and administrative systems needed for the jumble of federal rules governing research. As a result, various agencies began to negotiate with each institution the rate at which the government would reimburse it for such indirect costs. For the most part, these negotiations are handled by the agency providing the largest share of the institution's funding, usually a branch of the Defense Department or the audit arm of the Department of Health and Human Services. In addition to general rules on what are allowable expenses, universities are free to negotiate with the government what is known as a Memorandum of Understanding (MOU) to cover expenses and accounting practices unique to their campuses. These agreements generally increase the amount of money coming back to the university. Stanford, for example, has negotiated 125 such MOUs, 10 times the number at any other institution. It is an example of what Stanford president Donald Kennedy refers to as the university's "aggressive approach" to the recovery of legitimate expenses for the cost of supporting research. Over the past decade, according to government auditors, Stanford has received $1.8 billion in federal research funds, of which $605 million was for indirect costs. Rank-and-file scientists have long questioned the value of indirect costs, seeing them as a drain on, rather than a supplement to, federal support for research. Last December, for example, the president-elect of the Federation of American Societies for Experimental Biology addressed the issue in testimony before NIH officials drawing up a financial management plan. Robin Cousins, a professor of human nutrition at the University of Florida, asked NIH "to explore ways to roll back the burgeoning indirect costs that are eating away at our nation's capacity to conduct the level of biomedical research needed to solve crucial health problems." And last year, Stanford faculty demanded that the university lower its rate of reimbursement, among the highest in the United States. That protest stemmed from their fear that financially strapped federal agencies might at some point begin to reject their grant applications because Stanford's reimbursement rate was too high. But even opponents of indirect costs acknowledge that this issue is a thorny one. "I recognize that these institutions need indirect costs to operate," says Donald Brown, chairman of the department of embryology at the Carnegie Institution of Washington, D.C., and president-elect of the American Society for Cell Biology. "As a result, any cuts that are made will have to be done gradually." Brown says that the biggest problem with indirect costs is how research institutions have used them to grow--in terms of both staff and buildings--rather than to support existing research programs. "It's the idea that if we're doing well with a faculty of 15, we'd be even better off with 30. That's an inappropriate use of indirect costs," he argues. "It's okay for a university to grow, but they shouldn't do it through the mechanism of indirect cost recovery." Indeed, Kennedy told Dingell at the hearing that such growth was responsible for the current high rate at Stanford. "Our indirect cost rate increase is largely associated with facilities--new buildings and other space-related costs," he testified. "For instance, Stanford's rate has risen 13.4 points over the decade, with 12.8 points of that increase due to space-related costs." The question of how to reimburse universities for supporting research has simmered for decades, with occasional flare-ups. The most recent of those eruptions, prior to the current controversy at Stanford, occurred in the early 1980s, when the Reagan administration unsuccessfully proposed a cap on indirect costs as part of its drive to reduce federal spending on a range of domestic programs. The new NIH director, Bernadine Healy, appeared to throw her lot in with the bench scientists when she told a Senate panel at her confirmation hearing last month (see story on page 3) that she thinks changes in the present system are needed. "If even one scientist wasn't funded because of a misuse of funds, it's an outrage," she said about the findings in the Stanford case. "And from what we're hearing, it may be many more than that." Healy went on to say that senior NIH officials told her at meetings that "they were afraid" to touch the issue of indirect costs. "As the new NIH director," she promised, "I would be prepared to touch that issue. I think that it's time NIH became involved." Research agencies like NIH and NSF do set indirect cost rates for a few small programs, including the Presidential Young Investigator awards and the Small Business Innovation Research program. And agency heads have some input on government-wide practices through their contacts with other officials in the administration. More formally, discussions have been under way for several months between university administrators and officials at the White House's Office of Management and Budget, which oversees the regulations covering indirect costs. According to sources, these talks have addressed the issue of revising the formula on depreciation of buildings and large equipment. It's not clear, however, whether these discussions will change the fundamental basis upon which indirect costs are awarded, that is, that institutions should be reimbursed for the billions of dollars spent to make it possible for scientists to conduct research on their campuses. While many who follow the issue say that a reassessment would be valuable, they worry about the outcome of such a reexamination of the current system. "We can't have each federal agency setting its own rates," NSF's Toye says. "That would collapse the system. But that doesn't mean you couldn't get together all the relevant agencies--NSF, NIH, NASA, DOE, and so on--and have them decide to alter the system. They could discuss differential rates for various types of institutions, changes in what types of expenses are allowable, and a host of other issues." For the AAU's Scheman, who defends the actions of Stanford officials in seeking reimbursement for what appear to be expenses unrelated to the conduct of research, the real problem lies not in Congress' making changes, but in doing so unwittingly. "I think that Congress is engaged in a fundamental revision of the way that the government supports basic research," she says. "But nobody is aware that it's happening. Once you start talking about such issues as marginal costs, that is, reimbursing only for the additional cost of supporting new research, or the kinds of items included in general administrative costs [one of seven categories for which universities are reimbursed], you're really questioning the entire system." A staffer on the House appropriations subcommittee that sets the NIH budget doesn't think Congress is moving toward fundamental change. "The committee hasn't even come to a conclusion about whether indirect costs are too high or too low," says the staffer. "And the members are very much aware of the fact that there are few issues more complex than indirect costs, in which even minor changes can produce potentially major, unintended consequences." Policy experts say that it's too early to know whether the arguments about what Stanford and other universities have or haven't charged the government will affect how much money goes into the pot for research. The score can't be tallied, they say, until the 1992 appropriations bills are passed in the fall and research agencies learn how much they have to spend.

Efforts To Reform Indirect Costs Accounting Spawn Fear That Research Funds May Shrink

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