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Questions and Responses for the Record Committee on Veterans Affairs Subcommittee on Oversight and Investigations September 19, 2002 Hearing on VA Research and Nonprofit VA Research and Education Corporations
1. When VA Medical Centers consolidate, such as in the Chicago area, and as a result a medical center has two separate corporations attached, should the corporations be merged? In some cases, there are valid reasons for merging the corporations and the corporations have done so, including those at Seattle and Tacoma, North Chicago and Hines. In other cases, there are equally compelling reasons for continuing to operate two separate corporations such as those at Sepulveda and West Los Angeles. Considerations may include:
Ultimately, the decision whether to consolidate rests with the boards of the two corporations. Because the senior leadership of the consolidated VAMC must serve on the boards of both corporations, that decision is likely to represent the best interests of VA and both facilities. 2. In justifying the need for the non-profits, NAVREF lists several examples of how the non-profits support the VA research mission: underwriting the cost of IRBs, funding maintenance and improvement of facilities and paying for research related travel. Can we reasonably expect that the non-profits would continue to donate these services to VA if they could sell them to the facility under a contract? Yes. Our affirmative response is based on how the corporations manage funds internally. The corporations generally pay for the services they donate to VA from one of three types of accounts: 1. Project accounts. An NPC-administered grant associated with a specific research project pays for the direct costs of that project. From the VA perspective, these are donated goods and services (such as research supplies and equipment, MRIs, blood tests, and work done by research technicians, nurses). From the corporation perspective, these are project costs. 2. Residual accounts. After a project has ended, funds remaining may be available for the general support of research or education, subject to the corporation’s policies and procedures. These funds are often used for the direct costs of projects, but also may be used for core costs such as travel that may benefit all of a PI’s research projects, common resource equipment, renovating a laboratory or a research technician working on two or more projects. Again, from the VA perspective, all of these are donated goods and services. 3. Board discretionary funds. Many corporations establish an administrative overhead rate that includes sufficient funds to operate the corporation as well as to support new initiatives at the board’s discretion that best serve the facility’s research program, including providing ongoing research infrastructure support for IRBs, animal facilities, etc. In its May 16 and September 19 testimonies, NAVREF cited many examples of board discretionary expenditures. As above, VA receives all of these benefits as donated goods and services. We anticipate that allowing corporations to provide services to VAMCs on a contractual or reimbursement basis from appropriated funds will have no impact on expenditures from the above types of accounts and the corporation’s interest in donating goods and services to VA. Rather, such authority will allow the corporation to better partner with VA to meet investigators’ needs in situations where neither VA nor the corporation can afford the entire cost. For example, a corporation might be able to afford to lease a large piece of core equipment, but could not afford the ongoing maintenance or staffing costs. Allowing the NPC to bill VA research projects for the staff expense on a per use basis would provide the VA with the equipment at a minimal cost to the appropriation. VA would incur a cost only for its usage and the corporation would pay for the remainder with NIH or private sector grant funds. The net result would be VA PI access to the equipment regardless of whether the use was for NIH, private sector, corporation or VA-funded projects, but VA would pay only for the use incurred by VA-funded projects. For corporations that administer HHS grants, this would be done in a manner consistent with OMB Circular A-122 regulations that require uniform policies and procedures for both federally- and privately-financed activities of the organization. The corporations’ interest in contract/reimbursement authority is driven by a desire to do more for facility research programs, not less. 3. NAVREF maintains that the non-profits are more efficient and responsive to the research needs of investigators because they are not subject to Federal procurement and employment regulations. If the non-profits are authorized to contract with VA and under the terms of that contract are subjected to additional Federal regulation, would that reduce the efficiency and cost effectiveness of non-profit operations? Should we expect that complying with the additional regulatory requirement would increase your overhead costs? Would this additional expense be passed on to VA? It should be emphasized that VA has the option of rejecting a contract/reimbursement proposal from a corporation or declining to purchase the service if VA determines the cost proposed by the corporation is excessive or if the service can be obtained from another vendor at a lower cost. No, compliance would not noticeably reduce the efficiency of non-profit operations for the following reasons: § Much of the regulatory burden of compliance with regulations affecting federal expenditures falls on the agency expending the funds, not the recipient organization. VA would incur these expenses regardless of the payee. § Many nonprofits are already administering federal, non-VA grants and contracts and as a consequence, are already in compliance with applicable statutes and regulations such as the Rehabilitation Act of 1974 (Affirmative Action), Americans with Disabilities Act, Executive Order 11246 As Amended (Equal Opportunity Employment), Drug-Free Workplace Act of 1988, etc. § Corporations that administer only private sector funds, or whose federal receipts fall below certain statutory or regulatory thresholds, would be unaffected. § We anticipate that the contractual/reimbursement amounts from VA would be a very small percentage of overall corporation receipts and would not cause a decline in overall corporation efficiency. For the same reasons noted above, we do not anticipate an appreciable increase in administrative overhead costs. An additional cost, if any, as consequence of compliance with applicable federal regulations is a necessary cost of providing services to a federal agency. Such costs may be built into the contracted fee or reimbursement amount depending on the extent to which the corporation could afford to absorb such costs or could under write them from private sector funds. However, corporations (and any other entities such as universities subject to OMB Circular A-21) that administer HHS funds would be subject to the OMB Circular A-122 consistency requirements noted above. 4. VA has historically maintained that non-profit employees assigned to conduct VA approved research are not independent contractors but are performing a Government function subject to direction and control of VA. Isn't it inconsistent to argue that the non-profits should be able to sell its employees' services to VA under a contract but that these same employees should be protected from liability under the Federal Tort Claims Act? No. In NAVREF’s view, it is consistent for corporation employees to be protected against personal liability regardless of the means by which VA acquires their services. Whether VA receives a corporation employee’s services through a donation, in accordance with an Intergovernmental Personnel Act assignment, or pursuant to a contract or reimbursement, the employee performs a government function subject to direction and control of VA and under a federal appointment. Aside from a few administrative personnel, corporation employees work only on VA-approved research or education. They work under the supervision of VA employees. And they have VA without compensation (WOC) appointments. Congress has acted previously to provide explicit FTCA coverage for employees and contractors of other congressionally authorized organizations and NAVREF is simply asking Congress to do the same for NPC employees. Precedents include:
5. NAVREF is a private non-profit association comprised of VA non-profit corporations. Its operations are sustained by membership dues. How can the VA non-profits allow NAVREF to use these funds (money that would otherwise be conserved for VA research) in support of a position that is contrary to VA? Funds used to pay NAVREF dues do not come out of research accounts. Organizations that provide funds to nonprofits provide project funds plus administrative overhead, generally from 10-25 percent of the project budget. The cost of NAVREF dues is a component of the corporation’s administrative overhead calculation that determines the rate it charges research sponsors. If the corporation didn’t have the expense, the rate it charged private sector sponsors could be lower. Therefore, NAVREF dues do not come out of funds that otherwise would be conserved for VA research. NAVREF’s member-approved mission is to support the VA-affiliated nonprofits and their interests. The corporations’ primary interest is always VA research. Therefore, regardless of whether NAVREF agrees with VA on a particular issue, NAVREF’s ultimate objective is always the betterment of VA research. As an organization, NAVREF has made a consistent effort to work with all stakeholders toward the common objective of enhancing the health of veterans. When presented with conflicting guidance on matters that affect the corporations’ ability to support facility research programs, NAVREF seeks expert advice and assistance in developing a solution from both VACO and field personnel. Rather than supporting positions contrary to VA, we hope VA and the corporations share common objectives. 6. What is the argument for a law that would purport to authorize nonprofits to conduct research? If the non-profits are authorized to conduct research wouldn't this further confuse the issue of ownership with regard to intellectual property? How would this complicate existing Cooperative Technology Administration Agreements? While NAVREF has not formally requested a specific law authorizing nonprofits to conduct research, such a law would clarify that the corporations are authorized to conduct research. In NAVREF’s view, 38 USC 7361 (a) already authorizes the corporations to conduct research. It says: The Secretary may authorize the establishment at any Department medical Center of a nonprofit corporation to provide a flexible funding mechanism for the conduct of approved research and education at the medical center. Because the authorizing statute requires the corporations to obtain tax-exempt status, they must conduct research. IRS guidance states: To qualify as a medical research organization, the principal function of the organization must be the direct, continuous, and active conduct of medical research in conjunction with a hospital . . . (page 18, Form 1023, Additional Information). Further, the Department of Health and Human Services has determined that an organization conducts research as one that is “engaged” in research: An institution becomes "engaged" in human subjects research when its employees or agents (Agents include all individuals performing institutionally designated activities or exercising institutionally delegated authority or responsibility) (i) intervene or interact with living individuals for research purposes; or (ii) obtain individually identifiable private information for research purposes. January 26, 1999 letter to Division of Human Subject Protections, OPRR, from Director, Division of Human Subject Protections, OPRR, regarding Engagement of Institutions in Research and 45 CFR 46.102(d),(f). Corporation employees, as well as the VA PIs who conduct corporation-funded research, meet these criteria. However, NAVREF’s position that the corporations already are authorized to conduct research in no way diminishes the fact that all of the research administered by the corporations is VA research, subject to VA policies, procedures and oversight. That said, it is our understanding that General Counsel essentially puts a period after “flexible funding mechanism” in 38 USC 7361 (a) and maintains that the word “solely” in 38 USC 7362(a) refers to “to facilitate.” In discussions with congressional staff involved in drafting the original legislation, NAVREF was told that “solely” was intended to limit corporation activities to research and education. Use of the word as a modifier of “flexible funding mechanism” was not contemplated. At the time, it was suggested that clarification could be achieved by moving “solely” to just before “research.” NAVREF’s main concern in this regard is that if General Counsel informed the IRS or HHS that the corporations are not authorized to conduct research, their tax-exempt status and ability to accept federal research grants could be compromised. In NAVREF’s opinion, a simple clarification by Congress, not a law, would solve the problem. In NAVREF’s view, such a clarification would not complicate existing Cooperative Technology Administration Agreements. The corporations’ rights to intellectual property are determined by federal laws applicable to other nonprofits, subject to constraints and pre-assignment of rights governed by the fact that they conduct VA research in VA facilities using VA resources and that the work is performed by VA-salaried employees or VA WOC appointees. The General Counsel opinion on whether the corporations conduct research is immaterial to CTAAs although General Counsel has recently agreed that corporations may own intellectual property. However, VA’s failure to incorporate in CTAAs an explicit statement that intellectual property resulting from corporation studies sponsored by pharmaceutical companies will be excluded from the terms and conditions spelled out in the CTAA has complicated¾and in some cases seriously impeded¾the corporations’ ability to negotiate clinical research agreements with pharmaceutical companies. Understandably, pharmaceutical companies are reluctant to share their rights to intellectual property with universities that have played no role in the research or to give non-participatory universities the exclusive right to administer and manage each institution’s respective interests in intellectual property. Pharmaceutical companies understand the VA role and are agreeable to appropriate sharing with VA, but not with uninvolved universities. In reality, the chances of new discoveries resulting from such studies are very small and many universities routinely agree not to assert rights to pharmaceutically sponsored research. However, despite many NAVREF requests, to date the VA Office of Technology has not incorporated in CTAAs appropriate language regarding corporation studies sponsored by pharmaceutical companies. 7. Please explain the contractual relationship between VA and the non-profits. How would this work? What enforcement mechanisms would be available to the non-profit if there were a dispute with VA over the contract terms? Wouldn't it pose a conflict if the facility Director, required by statute to sit on the non-profit board of directors, votes to sue VA (the Director’s employer) for breach of contract? How would the Director balance the interests of the VA against those of the corporation? This seems to suggest that the corporations' interests and objectives have diverged from those of VA. Please elaborate. Before responding to your questions, we wish to note that in view of continuing General Counsel and House Committee on Veterans Affairs opposition to use of VA’s existing contract authorities for transactions between VA medical centers and corporations involving VA-appropriated funds, NAVREF has revised its stance. Per discussion with staff of the Subcommittee on Health and the Senate Committee on Veterans Affairs, NAVREF supports “reimbursement authority,” a solution General Counsel finds acceptable. The proposed revision to the corporation authorizing statute is the underlined segment below: 38 U.S.C. §7364. General Powers (a) A corporation established under this subchapter may-
(1) accept gifts and grants from, and
enter into contracts with, individuals and public and private entities
solely to carry out the purposes of this subchapter; New (2) in accordance with procedures established by the Secretary, be reimbursed by the Department for services provided solely to carry out the purposes of this subchapter; and [(2) becomes (3)] employ such employees as it considers necessary for such purposes and fix the compensation of such employees. Such "procedures established by the Secretary" would allow General Counsel to prescribe appropriate controls specifically for VAMC-corporation transactions. However, to respond to your question, to the best of our knowledge, presently there are no contracts between VA and corporations. Until General Counsel imposed a blanket prohibition on VAMC/corporation contracts in December 2001, it is our understanding that a number of contracts had been executed and functioned without problems in accordance with two General Counsel opinions allowing corporations to use certain VA contracting authorities. If Congress were to re-instate contract authority, we anticipate that new contracts would work in the same manner as those executed previously. Further, numerous field contracting officers and VA attorneys assured NAVREF that if contracting authority were reinstated, the federal contracting processes provide sufficient controls to manage potential conflicts of interest and disputes should there ever be any. The available enforcement mechanisms would be the same as for any other government contract and disputes, if any, would be managed in accordance with the Contract Disputes Act of 1978 as amended. Additionally, VA has an alternative disputes resolution authority that could be invoked as needed. We would recommend that all VAMC contracts with corporations contain an explicit statement of corporation cooperation with federalwide or VA dispute resolution procedures as appropriate. In the event of a potential conflict in regard to a contract or reimbursement MOU, the medical center director and any other affected persons would recuse themselves from participating in the matter on behalf of the corporation. This is a common means used by nonprofits to manage potential conflicts. Recognizing that the director’s first and foremost obligation is to VA, the director would be recused before the matter came to a vote. Posted on the NAVREF web site is a sample conflict of interest policy designed specifically to help corporations identify and manage potential conflicts. The IRS and each state also provide guidance on managing nonprofit conflicts of interest. By virtue of the statutory requirement that the facility director must serve on the board of directors, the director, as well as every other member of the board, must constantly balance the interests of the VA and the corporation. Corporation boards members are acutely sensitive to their multiple responsibilities, which often include university appointments, and are accustomed to managing them appropriately. However, because VA and the corporation have the common objective of a productive and well-managed VA research program, VA and corporation interests are largely one and the same. While there may be some disagreement over the finer points, rarely are there disputes over items affecting VA interests and board meeting minutes generally reflect unanimous decisions by corporation boards.
NAVREF disagrees with the suggestion that
“the corporations' interests and objectives have diverged from those of
VA.” Rather, in our opinion the growing complexity of managing a
world-class research program has compelled VA and the corporations to
work together more closely than ever before. Increasingly, VA personnel
tell NAVREF that their facility research program could not survive
without the support provided by the corporation. At the same time,
without a functional VA research program, neither would the corporation
survive. As a result, both VA and the corporations have a vested
interest in supporting each other, not diverging. |
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