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U.S. CONGRESS. HOUSE. COMMITTEE ON 
GOVERNMENT OPERATIONS. 

ADMINISTRATION OF GRANTS BY THE NATIONAL 
INSTITUTES OF HEALTH 




Union Calendar No. 811 

f th Congress, 2d Session ----- House Report No. 1958 


ADMINISTRATION OF GRANTS BY THE 
NATIONAL INSTITUTES OF HEALTH 
(Reexamination of Management Deficiencies) 


TWENTY-FIRST REPORT 


AS Ae/ysn* . Averse . BY THE 

COMMITTEE ON GOVERNMENT 


OPERATIONS . 



June 30, 1962. — Committed to the Committee of the Whole House on 
the State of the Union and ordered to be printed 


U.S. GOVERNMENT PRINTING OFFICE 
72006 WASHINGTON : 1962 


COMMITTEE ON GOVERNMENT OPERATIONS 


WILLIAM L. DAWSON, Illinois, Chairman 


CHET HOLIFIELD, California 

JACK BROOKS, Texas 

L. H. FOUNTAIN, North Carolina 

PORTER HARDY, Jr., Virginia 

JOHN A. BLATNIK, Minnesota 

ROBERT E. JONES, Alabama 

EDWARD A. GARMATZ, Maryland 

JOHN E. MOSS, California 

JOE M. KILGORE, Texas 

DANTE B. FASCELL, Florida 

HENRY S. REUSS, Wisconsin 

ELIZABETH KEE, West Virginia 

KATHRYN E. GRANAHAN, Pennsylvania 

JOHN S. MONAGAN, Connecticut 

NEAL SMITH, Iowa 

RICHARD E. LANKFORD, Maryland 

ROSS BASS, Tennessee 

LUCIEN N. NEDZI, Michigan 


CLARE E. HOFFMAN, Michigan 
R. WALTER RIEHLMAN, New York 
GEORGE MEADER, Michigan 
CLARENCE J. BROWN, Ohio 
FLORENCE P. DWYER, New Jersey 
ROBERT P. GRIFFIN, Michigan 
GEORGE M. WALLHAUSER, New Jersey 
ODIN LANGEN, Minnesota 
JOHN B. ANDERSON, Illinois 
RICHARD S. SCHWEIKER, Pennsylvania 
F. BRADFORD MORSE, Massachusetts 


Christine Ray Davis, Staff Director 
James A. Lanigan, General Counsel 
Miles Q. Romney, Associate General Counsel 
Helen M. Boyer, Minority Professional Staff 

J. P. Carlson, Minority Counsel 


Intergovernmental Eelations Subcommittee 

L. H. FOUNTAIN, North Carolina, Chairman 
JOHN A. BLATNIK, Minnesota FLORENCE P. DWYER, New Jersey 

NEAL SMITH, Iowa ODIN LANGEN, Minnesota 

ROSS BASS, Tennessee 

members ex officio 

WILLIAM L. DAWSON, Illinois CLARE E. HOFFMAN, Michigan 

Delphis C. Goldberg, Professional Staff Member 
James R. Naughton, Counsel 
William D. Gray, Research Analyst 


II 


LETTER OF TRANSMITTAL 


House of Representatives, 

W ashington, D.C. , June 30, 1962. 

Hon. John McCormack, 

Speaker of the House of Representatives , 

W ashing ton, D.C. 

Dear Mr. Speaker: By direction of the Committee on Govern- 
ment Operations, I submit herewith the committee’s twenty-first 
report to the 87th Congress. The committee’s report is based on a 
study made by its Intergovernmental Relations Subcommittee. 

William L. Dawson, Chairman. 


m 



CONTENTS 


Page 

I. Introduction 1 

II. Earlier findings and recommendations 3 

Summary of earlier findings 3 

Earlier recommendations 3 

III. National Institutes of Health response 8 

IV. Audit of NIH grants to Public Service Research, Inc 11 

Summary of findings 11 

V. March 1962 hearings 13 

Grant management 13 

Grants to commercial organizations 17 

Indirect costs 18 

VI. Concluding observations and recommendations 20 

Grant management 20 

Scientific freedom 21 

Grant policies 21 

Grants to commercial organizations 23 

Indirect costs 23 

Need for a more positive grant philosophy 24 

Some further observations 25 

APPENDIXES 

Appendix 1. Correspondence and Progress Reports 27 

Appendix 2. Staff report on audit of expenditures of NIH research grant 
funds by Public Service Research, Inc. (subsidiary of Dun- 
lap & Associates, Inc.), Stamford, Conn 49 


v 









Union Calendar No. 811 

37th Congress ) HOUSE OF REPRESENTATIVES ( Report 
2d Session j | No. 1958 


ADMINISTRATION OF GRANTS BY THE NATIONAL 
INSTITUTES OF HEALTH 

(Reexamination of Management Deficiencies) 


June 30. 1962. — Committed to the Committee of the Whole House on the State 
of the Union and ordered to be printed 


Mr. Dawson, from the Committee on Government Operations, 

submitted the following 


TWENTY-FIRST REPORT 

BASED OX A STUDY BY THE INTERGOVERNMENTAL RELATIONS 

SUBCOMMITTEE 

On June 28, 1962, the Committee on Government Operations had 
before it for consideration a report- entitled “Administration of 
Grants by the National Institutes of Health (Reexamination of Man- 
agement Deficiencies) L T pon motion made and seconded, the report 
was approved and adopted as the report of the full committee. The 
chairman was directed to transmit a copy to the Speaker of the House. 

I. INTRODUCTION 

On April 28, 1961, the Committee on Government Operations issued 
a comprehensive report on the health research and training grant pro- 
grams administered by the National Institutes of Health (NIH), a 
bureau and the principal research arm of the Public Health Service 
in the Department of Health, Education, and Welfare. 

The report, 1 which was based on more than 2 years of study by the 
staff of the committee’s Intergovernmental Relations Subcommittee, 
identified areas of weakness in the management of these programs 
and made recommendations for corrective action. 

The NIH grant programs have special significance not only because 
they are important for improving the health of our people but also 


1 “Health Research and Training : the Administration of Grants and Awards by the 
National Institutes of Health/’ Second report by the Committee on Government Opera- 
tions (H. Rept. No. 321, 87th Cong., 1st sess.). 


1 


2 


ADMINISTRATION OF GRANTS BY NIH 


because the Federal Government has increased its financial support 
for these programs at an unusually rapid rate. Appropriations for 
NIH, excluding construction funds, have increased from $46.4 mil- 
lion in 1950 to $736.5 million in 1962, or nearly 16-fold. Of these 
amounts, the appropriations for research and training grants to non- 
governmental scientists have increased during the same period from 
$21.9 to $581.2 million, or by more than 26 times. The amount appro- 
priated for research grants alone was $433.7 million for the fiscal 
year 1962. 

Public hearings were held by the Intergovernmental Relations Sub- 
committee on August 1 and 2, 1961, in which the Surgeon General of 
the Public Health Service and the Director and other officials of 
NIH discussed the committee’s recommendations and NIH’s plans 
for implementing them. 

The subcommittee held public hearings again on March 28, 29, and 
SO, 1962, to review the progress made by NIH in strengthening the 
management of its grant programs. 

To provide an orderly development of the report, the committee’s 
concluding observations and recommendations are presented in section 
VI, following the sections dealing with the committee’s earlier find- 
ings and recommendations on the NIH grant programs (H. Kept. No. 
321), the NIH response to those recommendations, the results of a 
special audit of NIH grant expenditures by a company which has 
received substantial NIH support, and the proceedings of the sub- 
committee’s hearings held in March 1962. 


II. EAELIEE FINDINGS AND EECOMMENDATIONS 


A summary of the committee’s findings and its recommendations in 
House Eeport No. 321 (87th Cong.) are presented below. 

SUMMARY OF EARLIER FINDINGS 

The committee found that NIH is not adequately organized to 
administer the grant programs with maximum effectiveness. In 
particular, NIH has failed to provide for a meaningful review of the 
financial requirements of research projects as part of the technical 
review process. Further, NIH does not maintain sufficient direct and 
continuous contact with grantees for the purpose of determining 
appropriate levels of continuation support in relation to project ac- 
complishments and needs. 

At present NIH makes commitments for the future support of 
projects in specified amounts for periods as long as 8 or more years. 
Ordinarily there is no further review of project requirements during 
this period, and the amount of the grant is paid automatically each 
year upon request. The grantee, on the other hand, may request 
supplemental amounts to meet unforeseen project expenses. This 
arrangement, obviously, is not conducive to the most prudent use of 
grant funds. 

The present management policies and procedures are especially un- 
satisfactory in connection with research grants to commercial firms 
and for the support of meetings of scientific organizations. 

The committee noted areas where existing grant arrangements are 
not designed to obtain full advantage from the available or potential 
research resources of educational institutions. These areas have been 
identified and recommendations offered for bringing such institutions 
more actively into the national health research effort. 

The committee believes that economies and greater efficiency can 
be achieved through the development of more uniform policies and 
procedures in connection with the many special purpose training pro- 
grams supported by NIH. 

The committee gave close attention to the problem of appro- 
priate Federal payment for the indirect or overhead costs associated 
with grant-supported research. The committee recommended an 
equitable indirect cost arrangement for the use of all Government 
agencies that support research in educational institutions. 

EARLIER RECOMMENDATIONS 

Recommendation No. 1 . — Additional measures be taken to improve 
the effectiveness of the present project review system : 

First: The scientific review conducted by the study sections should 
be complemented by a thorough review of each project’s financial 
requirements performed by qualified analysts in the Division of Ee- 
search Grants. 


H. Rept. 1958, 87-2- 


3 


4 


ADMINISTRATION OF GRANTS BY NIH 


At the present time the study sections do concern themselves with 
the reasonableness of budget requests in relation to the work proposed, 
and this is an essential part of judging a project’s feasibility. This, 
however, is not the type of systematic budget examination that is 
required to satisfy NIH’s administrative responsibility. 

Second : NIH should consider the feasibility of forming field review 
teams composed of staff representatives to visit grantee institutions on 
a regular basis, perhaps once a year. 

Direct contact with grantees is now limited to the site visit, which 
is made for only a small proportion of grants, at the time of the origi- 
nal project application. Some form of continuing contact is needed 
to observe the progress of certain projects and to obtain the necessary 
information for meaningful review of budgetary needs. 

Third : NIH should determine the dollar amount of support, for 
projects receiving grant commitments for extended periods of time, 
at frequent intervals and on the basis of an adequate review of pro- 
gram accomplishment, potential, and financial needs. 

The committee does not believe that specific dollar amounts based 
on original budget estimates can realistically represent the investiga- 
tor’s needs 3 to 8 years in the future. The committee is concerned by 
the fact that under present procedures substantial amounts of supple- 
mental funds are provided grantees ($10.8 million in 1960, or more 
than 5 percent of total grant funds), while grant money paid on the 
basis of original project estimates is rarely returned to the Govern- 
ment as unneeded. 

Fourth : Special advisory committees should be organized to review 
grants which are intended to provide general support for whole pro- 
grams or divisions of institutions. 

Large grants of this kind are not for “projects” in the conventional 
sense and, consequently, require a special type of review by a com- 
petent body. 

Recommendation No. 2 . — Grants for projects initiated by commer- 
cial firms be placed on a cost-sharing basis. The committee believes 
this action, together with implementation of its recommendations for 
strengthening the review of projects and the management of grants, 
will place grants to commercial firms on a sounder foundation. 

When grants are used to support research in organizations operating 
for profit, the Government has relatively little assurance under present 
procedures that public funds will be used economically and with 
concern primarily for research performance rather than private gain. 
The committee has found disturbing evidence of the abuse of grants 
by commercial firms. 

Recommendation No. 3 . — NIH develop a separate policy governing 
the purpose and use of, and the eligibility conditions for, grants to 
help support national and international meetings of recognized scien- 
tific organizations. 

Extravagance and financial irregularities have been found in the 
handling of grant funds by conference planning groups. The com- 
mittee believes that policies and procedures designed for the support 
of scientific investigations should not be applied to conference grants. 
Instead, the recipients of conference support should be held strictly 
accountable for funds in accordance with their approved grant 
proposals. 


ADMINISTRATION OF GRANTS BY NIH 


5 


Recommendation No. 4 . — NIH seek to further improve its methods 
for coordinating research activities with other Government and pri- 
vate agencies so as to minimize unnecessary or unintended duplication 
of research in the health field. 

The committee recognizes that NIH has developed workable ar- 
rangements for avoiding undesirable duplication of project support. 
However, certain gaps exist which should be remedied. 

Recommendation No. 5. — The President establish a uniform policy 
with respect to acceptable salary practices in the use of Federal 
research funds applicable to all Federal agencies making grants to 
educational and other research institutions. 

The committee supports the principle of compensating the parti- 
cipants in Government-supported research in accordance with the 
regular salary schedules of their institutions, and is concerned by 
reports that some institutions are using Federal funds to pay higher 
than regular salaries. Since this is a matter of concern to many 
Federal agencies, the committee feels it should be dealt with on a 
Government-wide basis. 

Recommendation No. 6. — NIH initiate for a limited time a special 
development al-type grant as a direct means of stimulating research 
capability in those universities and professional schools which have 
training responsibilities in scientific fields related to health, but are 
not actively engaged in health research. 

It appears that the limited participation of some universities and 
professional schools in the NIH research program is due more to the 
paucity of project applications than to a high disapproval rate of 
proposals. The stimulation of research activities in these institutions 
is desirable not only to increase their research contribution, but also 
to improve their training capabilities in the health-related sciences. 

Recommendation No. 7. — The Congress consider action to permit 
the awarding of research project grants under the Public Health 
Service Act to VA hospitals on the same terms and conditions as 
apply to non-Federal institutions. 

Under present arrangements, only the scientific personnel of those 
VA hospitals which have a medical school affiliation are permitted to 
compete for NIH grants. Such applications are routed through the 
schools which thereby become eligible for the 15-percent indirect cost 
allowance on projects conducted in the VA hospitals. Permitting 
project applications to be made directly to NIH would, for the first 
time, enable the professional staff in more than 25 percent of the VA 
hospitals with research programs to compete for NIH grants. The 
committee does not view this recommended action as a substitute 
for research programed from VA appropriations. 

Recommendation No. 8. — The Director of NIH review the training 
policies and procedures of the Institutes and the Division of General 
Medical Sciences for the purpose of obtaining a greater degree of 
uniformity and simplification. 

Some variation in policies and practices may be necessary in view of 
the individualized nature of NIH training programs. However, many 
of the differences observed by the committee appear to be due to the 
lack of central direction and coordination. To the extent that these 
differences are not essential for the success of the programs concerned, 
they are likely to cause waste and inefficiency within NIH and to 
impose an unnecessary administrative burden on training institutions. 


6 


ADMINISTRATION OF GRANTS BY NIH 


Recommendation No. 9. — The Secretary of Health, Education, and 
Welfare carefully examines the existing programs and administrative 
arrangements for special-purpose training in the health field both 
in terms of overall Federal objectives in support of education and the 
impact of these programs on our educational institutions. 

The highly specialized character of NIH and other Public Health 
Service training programs raises two closely related questions: (1) 
Would it be more advantageous for the Government to combine the 
great variety of special-purpose training grants into a limited number 
of grants for strengthening the curriculum generally of those institu- 
tions which train health personnel; and (2) is training support as 
presently administered in the health field injurious to the institutions 
concerned ? 

Recommendation No. 10. — The appropriate executive agencies and 
committees of the Congress give particular attention to the problem 
of attracting outstanding students to the field of medicine. 

Evidence has been presented by the Surgeon General’s Consultant 
Group and others that the quality of medical students has been 
decreasing in recent years. The committee is concerned that present 
Federal policies may be a factor in diverting good students from the 
field of medicine. The quality of students receiving medical training 
has an important bearing on the success of NIH programs for health 
research and medical manpower training. 

Recommendation No. 11. — Each participating institution be given 
the option of using either of two methods for computing the overhead 
allowance on supported research. One method would be the con- 
tinued use of a flat rate adjusted periodically to equal approximately 
50 percent of the average rate of indirect expenses based on total 
direct costs for all grantee institutions as a group, as measured by 
appropriate cost accounting principles and procedures. In lieu of 
the standard rate, and in order to provide equitable treatment for 
those institutions possessing relatively high overhead costs, an institu- 
tion would be allowed 50 percent of its actual indirect cost rate deter- 
mined in the same manner as above. 

The committee finds considerable merit, in theory, to the concept 
of Federal participation in indirect costs to the extent that they are 
brought into existence or actually increased by grant-supported proj- 
ects. These additional or “incremental” costs, unfortunately, are not 
ordinarily susceptible of objective measurement. As a practical 
alternative, the committee favors the aforementioned arrangements. 
The figure of 50 percent was selected as a rough estimate and could 
be adjusted as reliable data are obtained on incremental costs. 

Recommendation No. 12. — No overhead be allowed on grants or 
grant items which do not entail actual indirect expenses, and an 
amount less than the regular rate be allowed when extramural research 
requires few institutional services. 

The overhead allowance should not apply, for example, to grant 
amounts for the rental of furnished quarters or of computer time 
where the rent figure already contains an indirect cost factor to cover 
such things as light, heat, maintenance, and janitorial service. An 
amount less than the regular rate would be appropriate in those 
instances where extramural research requires few institutional services 
or where the institution serves merely as a “paper middleman.” 


ADMINISTRATION OF GRANTS BY NTH 


7 


Recommendation No. IS . — NIH reexamine its policy of making 
indirect cost payments on renovation and major equipment expendi- 
tures from grants for the establishment of clinical research facilities. 

This new program involving substantial amounts for the remodeling 
of buildings and the purchase of furnishings and equipment does not 
appear to create significant overhead expenses related to these expendi- 
tures. 


III. NATIONAL INSTITUTES OF HEALTH RESPONSE 


In general, the agency concurred with the committee’s findings and 
recommendations in House Report No. 321. Both by correspondence 
and in the hearings held in August 1961, officials of NIH and the 
Public Health Service expressed substantial agreement with all but 
one of the recommendations and indicated their intention to take cor- 
rective action. 

In commenting on the report prior to its formal adoption by the 
committee, the Director of NIH wrote the chairman of the Intergov- 
ernmental Relations Subcommittee on April 25, 1961 : 

I should like to express my sincere appreciation for the 
opportunity to offer comment on this excellent report. While 
most of the recommendations would be entirely acceptable 
to the National Institutes of Health, there are several on 
which I should like to make statements. 

Except for disagreement with recommendation No. 7 (concerning 
the awarding of research project grants to scientists employed in 
YA hospitals on the same basis as to scientists in non-Federal insti- 
tutions) , the Director’s comments related to the method of implemen- 
tation rather than to the merit of the recommendations. With re- 
spect to recommendation No. 7, NIH objected to extending eligibility 
for research grants to all qualified VA scientists on the grounds that 
NIH preferred limiting grants to YA employees who simultaneously 
hold medical school faculty positions. However, as was pointed out 
in the committee’s report and in hearings, it has been the practice of 
NIH to accept grant applications from all qualified personnel of the 
VA hospitals which have a medical school affiliation, rather than ex- 
clusively from those YA employees who hold medical school staff 
appointments. The committee’s recommendation was intended to 
promote the fuller utilization of our scientific resources by extending 
eligibility for NIH grants to highly qualified scientists employed in 
the YA hospitals which are not located in proximity to a medical 
school and who receive the approval of their hospitals to participate 
in the NIH programs. The President made a similar recommenda- 
tion in the budgets for the fiscal years 1962 and 1963. 

In transmitting a press release to the chairman of the subcommittee 
the Surgeon General wrote on May 12, 1961 : 

You will note from the enclosed statement that I feel your 
study and report have rendered a service to the national re- 
search effort. 

Subsequently, in transmitting an interim report of June 15, 1961, 
describing the actions taken by NIH in response to the committee’s 
recommendations, the Surgeon General wrote: 

It gives me real pleasure to transmit to you this interim report 
which describes the current status of actions taken by the 
8 


ADMINISTRATION OF GRANTS BY NIH 


9 


XIH with respect to each of the recommendations contained 
in your report. Again, may I compliment you upon a search- 
ing and constructive inquiry into the growing and complex 
set of activities administered by the National Institutes of 
Health. I am confident that many of the committee recom- 
mendations will be adopted more easily by reason of your 
independent recognition of their significance. 

The Surgeon General testified in hearings held by the Intergovern- 
mental Relations Subcommittee on August 1, 1961, at which time he 
stated : 

Although the Public Health Service activities are con- 
stantly under review, there is a tendency for long-established 
systems and procedures to appear adequate to those familiar 
with them even when they may no longer meet all of the new 
requirements imposed upon them by the growth or the 
changed character of the programs they serve. A critical 
review by an objective outside group is therefore of great as- 
sistance in calling attention to slowly growing but as yet 
unobserved administrative deficiencies. 

It is in this light in which I view and warmly welcome the 
reports comments on the administration of the XIH grant 
and award programs. The intelligent examination of recent 
practices and the thoughtful recommendations for their im- 
provement are very helpful in focusing attention on problem 
areas and suggesting the need for revised procedures. 

I want to assure the committee that each criticism is being 
most carefully examined and each recommendation most 
seriously considered both in my office, by the Director of the 
XIH, and by those immediately responsible for the grant 
administration at XIH. 2 

In the same hearings the Director of XIH testified: 

A good case can be made — as is done in the committees re- 
port — for a more businesslike approach to research project 
costs. We have therefore decided to modify our procedures 
with a view to asking the study sections and councils, in effect, 
to set a dollar ceiling for each grant they approve, leaving 
the exact amount to be paid to be negotiated, when necessary, 
by the staff. It would be quite impractical to ask the study 
sections to do this. Their members are purposely chosen for 
their scientific competence — they have neither the back- 
ground, the time, nor the inclination to act as budget 
examiners. 

As some 15,000 applications must be reviewed each year, 
the time needed for detailed budgetary reviews could alone 
make it impossible to use study sections for this purpose. 

The amount to be paid in subsequent “continuation” years 
of multiyear grants, and the purpose for which these funds 
will be used, will be similarly negotiated by the staff on the 
basis of actual need but within the ceiling set during the 
initial review process. 3 


2 Hearings, p. 2. 

3 Hearings, p. 16. 


10 


ADMINISTRATION OF GRANTS BY NTH 


In January 1962, the subcommittee requested that NIH furnish a 
detailed description of the agency’s progress in carrying out each of 
the committee’s recommendations made in House Report No. 321. 
The Acting Director of NIH, in replying to this request on January 22, 
wrote : 

We are in accord with the recommendations of your com- 
mittee and definitely intend eventually to make all desirable 
changes needed to effect the sounder administration which 
your committee recommended. 

The letters and progress reports referred to in this section are re- 
produced in appendix 1. 


IV. AUDIT OF NIH GRANTS TO PUBLIC SERVICE 
RESEARCH, INC. 

An audit was made of the research grants awarded to Public Service 
Research, Inc., a commercial firm operating for profit, in order to pro- 
vide detailed information on the adequacy of NIH policies and pro- 
cedures for insuring the appropriate expenditure of public funds. 
The audit review was made in January 1962 with the assistance of 
personnel from the General Accounting Office. The audit covered the 
period of July 3, 1959-December 31, 1961, during which the company 
received $378,596, or 85 percent of its total cash funds, from NIH 
grants. 

The subcommittee had previously found from NIH records that 
there were large discrepancies between the purposes for which the 
company had requested research grant funds and the manner in which 
these funds were reported as spent. Also, it had come to the subcom- 
mittee’s attention that the company had used grant funds for the pay- 
ment of fees to an affiliated company for the recruitment of personnel. 

While the amount of NIH research funds paid to Public Service 
Research, Inc., represents only a small percentage of total NIH grant 
expenditures, NIH policies and management procedures provide no 
assurance that practices similar to those followed by this grantee are 
not widespread. Although NIH relies upon the grantee institutions 
for the effective management of grant funds, NIH conceded in hear- 
ings that adequate administrative machinery does not presently exist, 
either in NIH or in the grantee institutions, to insure that this respon- 
sibility is being met. 

The audit findings are summarized below. The complete audit re- 
port appears in appendix 2. 

SUMMARY OF FINDINGS 

(1) Grant funds were used to finance capital and other costs asso- 
ciated with establishing a new corporation. During the first year and 
a half of its existence, Public Service Research, Inc., acquired prac- 
tically all of its office equipment and furnishings from Federal re- 
search grants and contracts. 

(2) The corporation, according to its records, claimed a deprecia- 
tion allowance in its Federal income tax returns for equipment pur- 
chased from NIH grants. 

(3) The corporation’s rent, maintenance, and moving expenses, and 
the expense of remodeling its rented quarters, were charged as direct 
costs to individual Federal grants and contracts. 

(4) The corporation derived a profit in excess of its actual indirect 
costs from the overhead allowance (15 percent of total direct costs) 
paid by NIH to cover indirect costs. 

(5) Fees paid by the corporation to its affiliate, Clark, Channell, 
Inc., for hiring expenses included a profit to the affiliate. Such fees 

H. Kept. 1958, 87-2 3 11 


12 


ADMINISTRATION OF GRANTS BY NIH 


were improperly billed as direct costs to particular NIH projects; 
the persons for whom hiring fees were paid worked on several 
projects and, in one case, the employee performed no research on the 
project to which his fee was charged. 

(6) Salary costs were improperly charged to NIH grants for (a) 
time spent by corporate officers in meetings of directors or stockholders 
and in the administration of corporation business; (b) time spent by a 
corporate officer as a consultant to NIH, for which he was also paid 
$50 a day plus travel expenses; and (c) an employee who was hired to 
staff the company’s Washington office and performed no research on 
the project to which his salary was charged. 

(7) Various expense items were incorrectly classified as direct costs 
of particular grant projects, and in several instances entertainment 
expenses were improperly charged to NIH grants. 

(8) Travel expenses were incurred in some instances for purposes 
which do not appear to have a direct relationship to the projects 
charged. 


V. MARCH 1962 HEARINGS 


Hearings were held by the subcommittee on March 28, 29, and 30, 
1962, to obtain further information on the progress of XIH in imple- 
menting the committee’s recommendations. These hearings were con- 
cerned principally with the administration of research grants. 

The committee was informed that certain actions had been taken in 
response to several of its recommendations. First, grants for the sup- 
port of conferences are no longer treated as research project grants; 
instead, more restrictive policies have been adopted with respect to the 
use and accountability of funds for this purpose. Second, XIH has 
broadened the availability of information on its research work and, 
therefore, has reduced the possibility of undesirable duplication of 
research in the health field by commencing to report on its intramural 
research projects to the Science Information Exchange — the agency 
which serves as a clearinghouse for grant information on research in 
the biomedical sciences. Third, XIH has taken action to exclude or 
negotiate the payment of indirect costs in certain instances where the 
direct expenses of a project either entail no significant overhead costs 
or indirect costs substantially lower than 15 percent. 

However, it became evident in the course of the hearings that XIH 
has done relatively little to improve the overall management of its 
grant programs since the committee’s report of April 1961. The com- 
mittee is particularly concerned by the continued absence of sound 
procedures for determining the initial and the continuing financial 
needs of grantees. 

GRANT MANAGEMENT 

In progress reports and in hearings, XIH officials had affirmed that 
the agency would strengthen its procedures and staff to obtain more 
effective examination of the financial requirements of research proj- 
ects. This was to be accomplished through systematic staff negotiation 
to determine the actual amount of a grant within the ceiling approved 
by consultants in the course of Study Section and Advisory Council 
review. XIH proposed also that as an interim procedure its staff 
would evaluate the equipment needs of grantees, to avoid duplicate 
and nonessential purchases ? by the examination of previous grant 
records together with the justifications contained in current appli- 
cations. 

XIH stated last August that its proposed procedures would be im- 
plemented by immediately assigning a budget analyst and an assistant 
to each of the seven Institutes and the Division of General Medical 
Sciences. The committee was informed that as of March 1962 only two 
professional and four nonprofessional staff had been assigned to de- 
vote full time to various aspects of grants management. 

The committee last year found a need for some form of continu- 
ing contact between XIH and its grantees to observe the progress of 
selected projects and to obtain feedback of information necessary for 

13 


14 


ADMINISTRATION OF GRANTS BY NIH 


meaningful and reliable budgetary as well as scientific review. For 
this purpose the committee recommended that NIH consider the feasi- 
bility of forming field review teams. In the hearings that followed 
the Director of NIH reacted favorably to this recommendation and 
said it was under study. Early this year the subcommittee was in- 
formed that until such a plan could be implemented NIH would 
improve its surveillance of the handling of grants by decentralizing 
this function to the several Institutes. However, nothing of conse- 
quence has yet been accomplished along these lines to meet the need 
outlined by the committee. 

The committee is disappointed to find that little serious effort has 
been made to effectuate these measures. The data on staffing and on 
the minor extent to which the dollar requests of grantees are admin- 
istratively examined show that there has been no significant improve- 
ment in the inadequate fiscal review of project requirements brought 
to light by the committee last year. 

It is apparent from the subcommittee’s recent hearings that weak- 
nesses in the grant programs are due to causes more fundamental 
than staff inadequacies and faulty procedures. The committee be- 
lieves these weaknesses are due in large measure to the failure of NIH 
officials to understand the nature of their responsibility for the man- 
agement of public funds. 

This is reflected in testimony given by the Director of NIH : 

The recipients are selected on the basis of a rigorous screen- 
ing by their scientific peers. The idea and the man are 
both examined with care. 

This is the point at which the really significant admin- 
istrative actions designed to make the program efficient and 
productive are taken. Selection of good men and good 
ideas — and rejection of the inferior — is the key . All sub- 
sequent administrative actions having to do with the adjust- 
ment of budgets , and so forth , are essentially trivial in rela- 
tion to this basic selection process . 4 

The Director further stated : 

The research grant is, in essence, a trust. It is an award 
made to an individual or group after a critical examination 
of past performance and of the proposed line of research. 
Once the award is made, the use of granted funds is left to 
the investigator and the institution. They are accountable 
for exercising the trusteeship responsibility. 

This is in marked contrast with the essential idea of a 
contract, which is a promise by a contractee to deliver a pre- 
determined product to a contractor for a predetermined price. 

In actual operation, research grants and research contracts 
are not always so widely separated. But the essential dif- 
ference exists. A grant is a trust which makes the effective 
expenditure of funds the responsibility of the recipient . 

A contract is for specific performance — production of some- 
thing for the contractor for a price and under terms set by 
the contractor. 


4 Hearings, p. 14. [Emphasis added.] 


ADMINISTRATION OF GRANTS BY NIH 


15 


Under a contract, the purchaser has the right and the 
obligation to check on any relevant detail of the expenditure 
of funds. NIH uses research contracts under appropriate 
circumstances, but the research grant is the device to which 
the committee’s inquiry has been directed. 

Mr. Chairman, it has been my observation that many of the 
committee’s inquiries seemed to rest implicitly upon the as- 
sumption that we are — or should be — operating a research 
contract and not a research grant system. We deliberately 
do not do many things which are necessary and proper under 
a contract system. The question from our point of view is 
not whether we do these things well, but whether we should 
do them at all. 5 

The committee cannot accept the NIH view that administrative 
actions for the effective and economical expenditure of grant funds 
are “trivial” or are matters of little importance. Nor can the com- 
mittee agree that the choice of the grant rather than the contract as 
the device for supporting research relieves NIH of normal responsi- 
bility for the proper and prudent expenditure of Government funds. 

While the manner of obtaining accountability and the required de- 
gree of adherence to the research plan may differ under a grant and 
a contract, the committee believes that a Government agency is 
equally responsible for the proper, efficient, and economical use of 
public funds irrespective of the fiscal instrument employed. 

The committee is aware of the utility of the grant as a means of 
supporting basic research in an academic environment and does not 
intend its criticism of NIH grant administration to imply a prefer- 
ence for contracts. It might be noted, however, that other Federal 
agencies, notably the Atomic Energy Commission, use contracts ex- 
tensively to support basic research in the same institutions and for 
many of the very same investigators whom NIH assists. 

Under questioning, the NIH Director amplified his prepared state- 
ment, quoted above, in the following exchange : 

Mr. Fountain. Dr. Shannon, I want to be sure that the 
subcommittee understands your statement. While I didn’t 
so construe it, one of the members of the subcommittee told 
me that he interpreted your statement to mean that any at- 
tempt to strengthen management procedures or reduce waste 
would be bureaucratic and infringe on scientific freedom. 

Dr. Shannon. Oh, no, sir ; I didn’t mean that. 

Mr. Fountain. I didn’t think you intended to give that 
impression. 

Dr. Shannon. No, sir. 

Mr. Fountain. Do you still agree with us that manage- 
ment procedures should be strengthened in these areas, and 
will be strengthened ? 

Dr. Shannon. Yes, sir; and we accept Dr. Goldberg’s view 
that the progress in recruiting people appears to be quite 
slow. It is. I attempted to explain that. There are two 
areas of difficulty : One is the uphill battle we have with some 
of our own people to accept such a plan. But we are making 


6 Hearings, p. 15. [Emphasis added.] 


16 


ADMINISTRATION OF GRANTS BY NIH 


progress, and the meeting last week was illustrative of our 
attempts to resolve the difficulties . 6 

With respect to NIH’s acknowledged reliance upon the investiga- 
tor’s institution to assure the careful expenditure of grant funds for 
equipment, travel, etc., the hearings revealed there is reason to doubt 
that institutions are adequately performing this responsibility. The 
Director of NIH testified : 

The thing that we would propose to do is to try to push as 
hard as we can for better management within the institu- 
tions, and to provide the institutions with the resources 
to undertake better management. I truly believe that a 
decentralized system such as we operate within the frame- 
work of a grant — which, in the final analysis, whether rightly 
or wrongly, is a conditional gift — involves a partnership 
both in the doing and in the responsibility for what is done. 

The institution must share with the Federal agency, whether 
it be NIH or AEC or any of the others, the responsibility 
to expend those funds rightfully and prudently. 

I don’t think that this is being done adequately at the 
present time. We propose to try, during the coming year, 
to work out the mechanics that will give us better assurance 
that it is being done . 7 

He acknowledged in this connection : 

In view of our basic concept of how the grant operation 
can most properly be conducted in this complex situation, I 
feel that we have been deficient in not making explicitly 
clear to the institutions the obligations they assume when 
they accept a grant, the functions that we expect them to 
perform, and the functions that we will perform. 

I think this is what we have to remedy above all else . 8 

The Director commented further on the need for strengthening 
grant management both within NIH and in the grantee institutions : 

Because of some of the discussion that took place yesterday, 

I am increasingly aware that it probably is necessary to de- 
velop internal mechanisms that will make more abundantly 
clear to the supported institutions the specific areas upon 
which we, in our partnership with them, must depend for 
their judgments. 

These areas at the present time are, I believe, generally 
understood. When I say generally understood, I have in 
mind such broad matters as personnel policies, equipment 
purchases, and things of that general sort. 

What I think we have not done, on the other hand, is to 
set up an organizational entity at NIH that can, in fact, 
assure us that the institutions in receipt of our grants have, 
in all cases, a highly organized central organization and the 
capabilities for doing those things which we say can only 
be done by the local institution and cannot be done centrally. 


6 Hearings, p. 36. 

7 Hearings, pp. 64-65. 

8 Hearings, p. 62. 


ADMINISTRATION OF GRANTS BY NEH 


17 


I tliink for us to take the position that certain things that 
have been proposed are not meaningful if done centrally does 
not discharge our responsibility for seeing that they are done. 

We have to assume responsibility for being certain that 
those areas of grant management that cannot be handled 
centrally are handled and can be handled locally. * * * we 
have not specifically indicated to the institution that when the 
head of a department or the head of the institution signs a 
research grant application or approves the purchase of a sub- 
stantial piece of equipment, he has the direct obligation to 
XIH, and through XIH to the taxpayer, for having carefully 
considered the need for this piece of equipment and deter- 
mined that the expenditure is a prudent one . 9 

GRANTS TO COMMERCIAL ORGANIZATIONS 

XIH proposed in the hearings that in the future the agency support 
research in companies operating for profit by contracts rather than by 
grants. 

With reference to Public Service Research. Inc., the company whose 
XIH grant expenditures were audited by the subcommittee, the Direc- 
tor of XIH testified : 

I think these grants were made under guidelines that were in 
error. It was done under a judgment which we now see to 
be an error. This was a very positive judgment on our part 
that we could handle grants to commercial firms in the same 
way as we did to institutions of higher education. 

As I say, I think that this was in error. I don’t think that 
it was lax in the sense that we did this without — we made a 
poor judgment . 10 

He further stated in this connection : 

I said yesterday that I had concluded that we should only 
deal with commercial firms in the future via contracts. This 
is not to say that a contract is invulnerable to misuse or that, 
automatically, when one does things by contract, as opposed 
to support by grants, one has conditions that are more or 
less restricting. 

In point of fact, as you well know, sir, a contract can be as 
loose as a grant ; or a grant can be as tight as a contract. 

I have more reference to the contexts within which we op- 
erate contracts and operate grants. 

A contract with the XIH automatically assures the partici- 
pation by an XIH project officer, who will be concerned with 
the substance of the work done as well as with the generalities 
of the support in terms of long-range objectives. 

A project officer is required to know much more about the 
details of how the work is conducted, as well as what the end 
results of the work are. 


9 Hearings, pp. 45-46. 

10 Hearings, pp. 75-76. 


18 


ADMINISTRATION OF GRANTS BY NIH 


We do not run a contract operation on a very broad scale 
in the general areas of our work, although we do run quite a 
broad contract program in cancer chemotherapy. 

We are not staffed to conduct a broad contract operation 
along the restrictive lines that I have indicated. It was de- 
ficiencies of staff that led us to attempt to use a modified grant 
by putting restrictive clauses in the terms of the grant. 

But I am convinced now that this is inadequate. I think 
that this was a refuge we took in weakness rather than from 
strength. 11 

INDIRECT COSTS 

The committee sought last year to clarify the nature of the indirect 
costs of research and their measurement. An institution’s indirect 
or overhead costs are those incurred for facilities and services (e.g., 
general administration, library, heat, and light) which are jointly 
used for teaching, research, and other purposes and, therefore, can- 
not be allocated directly to a single project or program. It was the 
committee’s view that, with respect to the Government’s obligation 
for the payment of indirect costs, there is a difference between pur- 
chased research performed for a Federal agency and the support of 
nondirected research which is closely related to an institution’s educa- 
tional program and from which the institution’s faculty and students 
benefit. With regard to the latter, the committee expressed the belief 
that institutions which engage in this type of research as a normal 
activity should continue to pay the costs of basic administrative and 
auxiliary services that exist primarily for regular institutional pur- 
poses but are used also for Government-supported projects. 

The committee proposed, accordingly, that the determination of in- 
direct costs take into account the extent to which such costs are brought 
into existence or increased by grant-supported research. In effect, 
this means that the indirect cost rate applicable to supported research 
in any institution will be lower than the indirect cost rate for pur- 
chased research. 

In testifying before the subcommittee, the Director of NIH endorsed 
this view and agreed that Budget Bureau Circular A-21 12 includes 
expense items which should not be charged to the Government in 
connection with grant supported research. He said : 

Lest there be any misunderstanding, let me tell you what 
I mean when I say “full indirect costs.” I do not mean full 
indirect costs in the sense that you have used it. I do not 
feel we should undertake the payment of some of the liberal- 
ization of A-21. In our discussion with Mr. Fogarty in 
relation to this, we have used the term “additional costs” or 
“costs attributable to the additional activities.” 


11 Hearings, p. 45. 

12 Circular A-^21, first issued by the Bureau of the Budget in September 1958, contains 
accounting principles which provide the basis for a uniform approach to determining the 
allowable costs of research performed by educational institutions under Federal contracts or 
grants. Circular A-21 is intended to measure an institution’s applicable research costs, 
both direct and indirect, as a basis for negotiating the extent of Federal participation in 
the financing of a particular project. 


ADMINISTRATION OF GRANTS BY NIH 


19 


Now, the difficulty here is that this can only be calculated 
once. Once this has been blanketed in, then you do not have 
a basis for continued computation. 

But what I really would like to see is for us to pay the cost 
that is over and ablove that which the institution would have 
to carry, in the absence of our making funds available to 
undertake certain specific additional activities . 13 


18 Hearings, p. 87. 


H. Kept. 1958, 87-2- 


4 


VI. CONCLUDING OBSEEVATIONS AND 
RECOMMENDATIONS 


GRANT MANAGEMENT 

The committee is dissatisfied with the slow progress which NIH has 
made to strengthen the management of the grant programs for health 
research. While NIH has acted in several areas in response to the 
committee’s recommendations, relatively little effort has been made to 
improve the overall management of these important grant programs. 
In particular, the committee has found no significant improvement in 
the inadequate fiscal review of project requirements on which it re- 
ported last year. 

In the absence of appropriate policies, procedures, and adequate 
staffing, the nongovernmental scientists who serve on study sections 
are, in effect, determining the budgetary needs of research projects. 
Yet, the Director of NIH has testified that these consultants have 
neither the background, the time, nor the inclination to act as budget 
examiners. The committee stated in its report last year that the 
responsibiliy for obtaining the efficient and economical use of public 
funds cannot properly be delegated to advisory bodies. This is un- 
questionably the responsibility of NIH officials. 

The committee has called attention also to the fact that a grantee 
who obtains a commitment for long-term support has unlimited free- 
dom under NIH policy to change the subject matter of his approved 
project without further review. While this policy may have merit 
from a scientific standpoint, it is questionable that grant funds can 
properly be used under NIH’s research project authority for a pur- 
pose other than the scientific problem or area of research which NIH 
reviewed and approved for support. 

The committee has proposed in this connection that NIH use field 
review teams, or some other method, to maintain continuing contact 
with grantees so as to provide an adequate feedback of information 
relating to the progress and budgetary needs of projects. The com- 
mittee recommended further that for projects approved for long-term 
support, NIH determine the amount of each grant at frequent inter- 
vals on the basis of an adequate review of project accomplishment, 
project potential, and financial need. NIH has not yet taken effective 
action in these areas. 

The adequacy of NIH policies and procedures for insuring the 
appropriate expenditure of research funds was tested earlier this year 
by means of a detailed audit of the grants awarded to Public Service 
Research, Inc., a company which has received substantial NIH sup- 
port. The audit report, which is reproduced in appendix 2, disclosed 
that the company misused and profited from grant funds and, in 
general, the company used the very broad discretion which NIH al- 
lows grantees in expending research money for its own advantage. 

The audit also disclosed poor coordination between NIH and the 
20 


ADMINISTRATION OF GRANTS BY NIH 


21 


Public Health Service, of which NIH is a part. NIH continued to 
pay Public Service Research, Inc., a 15-percent indirect cost allowance 
on grants after the Public Health Service had established an indirect 
cost rate of 6.66 percent for the company in connection with a research 
contract. Following completion of the contract, the Public Health 
Service permitted the company to retain Government-owned equip- 
ment for use in connection with an NIH grant but made no effort to 
ascertain that the equipment was necessary for the NIH project. 
Shortly thereafter, NIH awarded a new grant to the company which 
included funds for the purchase of equipment similar to that which 
the company already had in its possession from the completed Public 
Health Service contract. 

The suggestion has been made that the findings of this audit are not 
applicable to most NIH grants, since the grantee in this instance 
is a company operating for profit while most NIH grants are made 
to nonprofit institutions. This reasoning misses the essential point 
that under its present inadequate administrative arrangements NIH 
does not know whether or not grant funds are expended prudently 
and for the intended purposes and, consequently, NIH cannot provide 
reasonable assurance that the misuse of grants is not widespread. 

SCIENTIFIC FREEDOM 

The committee wishes to emphasize that it is fully committed to 
the principle of allowing scientific investigators the greatest possible 
freedom of action in carrying out their research. The history of 
science clearly demonstrates that scientific achievement and progress 
have generally occurred under conditions which allow maximum free- 
dom of inquiry for the investigator. 

However, freedom for the scientist should not be confused with 
license or fiscal irresponsibility. One cannot condone waste and 
extravagance wherever it exists as being either in the public interest 
or in the interest of science. Grant money that is imeconomically 
or inefficiently spent deprives other scientists of support for their 
work. Moreover, the injudicious use of research funds is grossly un- 
fair to the American public which is required to support this activity 
through taxation. What we must achieve is a harmonizing of free- 
dom for the investigator with responsibility to the public in the ex- 
penditure of Government funds. NIH has the obligation to develop 
adequate policies and procedures for assuring that grant funds are 
prudently spent within this context. 

GRANT POLICIES 

The committee believes there is need for NIH to give special at- 
tention to improving its policies relating to grant expenditures for 
salaries, equipment, and travel. Certain policies which appear to be 
appropriate and feasible at this time are discussed below. 

Salaries . — The committee reported last year that it supports the 
principle of compensating the participants in Government -supported 
research in accordance with the regular salary schedules of their insti- 
tutions, and that it is concerned by reports that some institutions are 
using Federal funds to pay higher than regular salaries. Since this 
is a matter of concern to many Federal agencies, the committee felt 


22 


ADMINISTRATION OF GRANTS BY NTH 


it should be dealt with on a Government- wide basis rather than by 
XIII alone. However, it is each agency’s responsibility to ascertain 
that salaries charged to a grant properly represent the proportion of 
each investigator’s work actually devoted to the project. The com- 
mittee was recently informed that XIH has agreed to establish a pro- 
cedure which will insure that salary charges are not made to research 
grants for time devoted to other activities. 

Equipment. — The committee has found that grant funds are unnec- 
essarily spent for the purchase of duplicate or other nonessential items 
of equipment. The excessive purchase of equipment is undoubtedly 
due to a combination of factors, including inadequate NTH review of 
equipment needs, the almost unlimited freedom permitted scientific 
investigators in expending funds, and the fact that institutions nor- 
mally do not assume a direct and positive responsibility for the ex- 
penditure of project funds. 

It is estimated that at the present time more than $1 million a year 
is spent from regular research grants for the purchase of office equip- 
ment and furnishings, as distinguished from scientific equipment. 
The committee believes much of this expenditure is unnecessary for 
the performance of research. Accordingly, the committee recom- 
mends that NIH change its policy so that the purchase of office equip- 
ment and furnishings from grants will not be permitted except in 
special circumstances. Testimony was received from NTH in the re- 
cent subcommittee hearings that it favors this recommendation and 
will act to implement it. 

The committee recommends also that NIH require , as a grant con- 
dition, that scientific equipment purchased for a research project 
remain with the project when the principal investigator changes 
institutions , unless transfer of the equipment is found to be uneco- 
nomical. Under existing practice, the equipment is treated as the 
property of the institution receiving the grant and is usually pur- 
chased again from grant funds for use in the investigator’s new 
institution. 

Travel. — It has become the accepted practice that grantees request 
and NIH allows funds for travel as a part of the grant award. The 
travel expenditures of grantees are estimated to be about 2.5 percent 
of total project costs, with approximately 15 percent of all travel being 
used for trips outside the United States. At the present time ap- 
proximately % h l 1 / 2 million is being spent for travel from regular proj- 
ect grants. 

The committee recognizes that travel is a necessary and appropriate 
expense item for many research projects. On the other hand, a 
substantial amount of research funds is being spent for attending 
professional society meetings, conferences, etc., which are not essential 
to NIH projects. It is noteworthy that in some instances scientists 
devoting only a portion of their time to NIH projects may have a num- 
ber of individual grants and obtain travel funds from each. Moreover, 
under NIH policy, grantees may freely use funds requested for other 
purposes for travel. 

At the present time NIH provides grantees no policy guidance on 
travel, leaving the type and amount of travel completely to the dis- 
cretion of the investigator and his institution. However, NIH does 
have a policy governing allowable travel for its own scientists. The 


ADMINISTRATION OF GRANTS BY NIH 


23 


committee sees little merit in permitting nongovernmental scientists 
to use grant funds for attending professional meetings or for making 
routine visits to other laboratories on a more liberal basis than NIH's 
own scientists. 

The committee believes NIH should critcially examine budget re- 
quests for travel before awarding grants , and restrict the transfer 
of f unds for this purpose when travel requests are disapproved . Fur- 
ther, grant funds should not be used for travel to professional meet- 
ings which are not essential to the project in cases where the scientist 
involved devotes only a minor part of his worktime to NIH projects. 

GRANTS TO COMMERCIAL ORGANIZATIONS 

The committee has been advised that the Department of Health, 
Education, and Welfare has adopted the policy that its constituent 
agencies will restrict research grants to public or private nonprofit 
institutions or agencies, and will use contracts exclusively to support 
research in organizations operating for profit. While the committee 
agrees that a contract, if properly administered, is preferable to a grant 
for providing research support in commercial organizations, the prob- 
lem to which the committee has called attention is not solved simply 
by substituting one type of financial instrument for another. The 
principal need is the formulation and effectuation of policies and pro- 
cedures which will assure the most effective and careful use of re- 
search funds. 

The committee recommended last year that grants for research 
projects initiated by commercial organizations be placed on a cost- 
sharing basis. It was the committee's conviction that the Congress 
did not intend these health research funds to be used for private 
profit. In view of the misuse of research funds disclosed by the audit 
of grants to Public Service Research, Inc., the committee believes it 
preferable that NIH limit its support for research projects originat- 
ing with the investigator to nonprofit organizations , and extend such 
assistance to commercial organizations only in exceptional circum- 
stances. 

INDIRECT COSTS 

As a general rule, the committee believes it undesirable that the 
Federal Government assume responsibility for the total cost of health 
research conducted in universities and other non-Federal institutions. 
It has long been the accepted principle in other Federal grant pro- 
grams that the participating units of government or institutions pay 
a predetermined share of the cost in recognition of the cooperative 
nature of the program and as a means of assuring fiscal responsibility. 
The non-Federal agency or institution which receives Federal grants 
is likely to exercise greater care in spending program funds if it con- 
tributes a portion of the money. 

The committee recognizes, however, that in certain instances proj- 
ects and facilities may possess a special national character which justi- 
fies their being supported wholly by Federal funds. A research proj- 
ect or facility might be of this kind, for example, if it had no sub- 
stantial relationship to the educational or regular research activities 
of an institution, or if the degree of scientific and administrative par- 
ticipation by the supporting Federal agency is larger than in the 


24 


ADMINISTRATION OF GRANTS BY NIH 


normal grant project. The committee believes that the nature of the 
project should determine the extent of Federal financial participation 
in both the direct and the indirect costs. It is noteworthy that the 
Bureau of the Budget recently expressed a similar view. 14 

Some proponents of larger Federal indirect cost payments have sug- 
gested that the Government forces institutions to share indirect costs 
to the extent that the 15-percent overhead rate paid by NIH provides 
less than the full amount the institution could obtain under Budget 
Bureau Circular A-21. This contention ignores the essential question 
of whether or not all of the indirect cost items recognized by Circular 
A-21 are appropriate charges for grant-supported research on the 
same basis as for purchased research. Moreover, as the committee 
noted last year, it is ordinarily misleading to compare the 15-percent 
rate paid by NIH directly with the indirect cost rate determined for 
an institution under Circular A-21. These dissimilar rates are not 
comparable for two reasons: First, the NIH rate applies to the total 
direct costs of a project, while the Circular A-21 rate is usually paid 
only for the salary and wage portion of direct project costs. And, 
second, many institutions account for employee benefit expenses as an 
indirect cost in determining their overhead rates under Circular A-21, 
but charge these same items as a direct expense against NIH grants. 
This practice, allowable under NIH policy, not only increases the 
amount the institution obtains directly from the grant, but the in- 
direct cost payment is also increased by the receipt of 15 percent on 
the additional items treated as direct expenses. 

The committee favors the adoption of a uniform Government-wide 
policy for indirect costs which will take into account the nature of the 
research project and the benefits to the grantee institution. With re- 
spect to basic and other nondirected research supported by Federal 
agencies, the committee finds considerable merit in the concept of Gov- 
ernment participation in indirect costs to the extent they are brought 
into existence or increased by such support. The Director of NIH has 
expressed agreement with this view. 

Until a uniform Federal policy is established and as long as NIH 
operates under a maximum indirect cost rate determined by the Con- 
gress , the committee recommends that NIH — 

( 1 ) Pay no more than the actual indirect cost rate for any in- 
stitution having a lower rate than the maximum set by the Con- 
gress; and 

(2) Prohibit the use of direct grant funds to defray employee 
benefit costs unless the usual accounting practices of the institu- 
tion properly and consistently treat these costs as direct expenses. 

NEED FOR A MORE POSITIVE GRANT PHILOSOPHY 

The committee is concerned by reports of the widely held attitude 
of scientists toward NIH grants. It is apparent to the committee that 
many scientists regard their grants as personal resources and use sur- 
plus funds that remain after providing for necessary project expenses 
for nonessential purposes, rather than return surplus money to the 
Government. It is significant in this connection that supplemental 


14 “Report to the President on Government Contracting for Research and Development” 
(Apr. 30, 1962), pp. 39-40. 


ADMINISTRATION OF GRANTS BY NIH 


grants amounting to more than 5 percent of total project awards are 
made to investigators who underestimate their needs, while virtually 
no money is returned to the Government because grant needs are over- 
estimated. 

There is also a tendency for institutions to permit project grants to 
be spent less carefully than the institution’s own funds. Since the 
grant is awarded for use under the direction of a particular investiga- 
tor selected by XIH. the institution often tends to regard itself as 
only the “host” for the project and does not exercise the same degree 
of management responsibility as for the research which it sponsors. 

The committee finds that the policy statements issued for the XIH 
grant programs do not adequately inform the scientist or his institu- 
tion of the obligations which accompany the discretionary handling 
of public funds. 

The committee recommends , accordingly , that NIH formulate grant 
'principles which icill clarify the moral obligations of the scientist a* 
a trustee of public fund-s. The committee recommends also that NIH 
develop administrative arrangments for obtaining greater responsi- 
bility on the part of grantee institutions for the prudent expenditure 
of project funds. 

SOME FURTHER OBSERVATIONS 

The committee agrees that the selection of good investigators and 
good projects is vital to productive scientific research, but the effective 
management of grants is also a fundamental responsibility of a Gov- 
ernment agency charged with administering grant programs. 

The committee takes strong exception to the view expressed by XIH 
that all administrative actions subsequent to the selection of grant 
projects are “essentially trivial” in relation to the basic selection proc- 
ess. The selection process and grant management are essential and 
complementary parts of XIH research support. Excellence is re- 
quired of both. 

While the committee has not attempted to evaluate the effectiveness 
of XIH’s grant selection system, a few observations are pertinent here. 

According to the XIH criteria for rating grant projects, the average 
quality of such projects has been steadily declining in recent years. 
The proportion of the best projects (the 100-199 group) has declined 
while there has been a corresponding increase in the proportion of 
supported projects in the lowest priority class (the 400-500 group). 
The latter has increased from 1 percent in 1956 to 3.8 percent of the 
total in Xovember 1961. 

It is probable that the large annual increases in the XIH appropria- 
tion made in the past several years has contributed to the increasing 
support of lower quality research. The committee is aware that ail 
projects supported by XIH have been found by consultants to possess 
scientific merit. The main question raised by this development, how- 
ever. is whether or not it is sound public policy and in the best interest 
of science that every project found technically sound and approvable 
by XIH's outside consultants receive support, regardless of its rela- 
tive quality. A related matter is the need for XIH to increase the 
capability of its own professional staff for determining whether the 
projects recommended by the scientific consultants should be supported 


26 


ADMINISTRATION OF GRANTS BY NIH 


in the light of broader policy considerations. The committee urges 
that NIH give critical attention to these matters. 

It appears that the Congress has been overzealous in appropriating 
money for health research. The conclusion is inescapable, from a 
study of NTH’s loose administrative practices, that the pressure for 
spending increasingly large appropriations has kept NIH from giving 
adequate attention to basic management problems. The committee ex- 
pects NIH to give high priority at this time to the task of correcting 
its management deficiencies and strengthening its capacity for the 
effective and efficient operation of these vital health programs. 


APPENDIXES 


APPENDIX 1.— CORRESPONDENCE AND PROGRESS 

REPORTS 

Department of Health, Education, and Welfare, 

Public Health Service, 

National Institutes of Health, 

Bethesda , Md ., April 25 , 1961. 

Hon. L. H. Fountain, 

Chairman , Intergovernmental Relations Subcommittee , Committee 
on Government Operations , House of Representatives , 
ington , Zhtf. 

Dear Mr. Chairman: It was considerate of you to give me an 
opportunity to review the very thorough report by the Intergovern- 
mental Relations Subcommittee of the Committee on Government 
Operations, entitled “The Support of Extramural Research and 
Training by the National Institutes of Health.” 

I should like to express my sincere appreciation for the opportunity 
to offer comment on tills excellent report. While most of the recom- 
mendations would be entirely acceptable to the National Institutes 
of Health, there are several on which I should like to make statements : 

1. The subcommittee recommends that study section review be com- 
plemented by a thorough review of each projects financial require- 
ments to be pel-formed by qualified analysts of the Division of Re- 
search Grants. While this recommendation is sound, I believe that 
a modification would effect both the systematic budget examination 
desired and significant economy in the cost of review. The modifica- 
tion would be that study sections and councils review applications 
and establish approximate levels of support subject to annual staff 
negotiation of the precise amounts to be awarded. Such a change 
in procedure would meet the objections of the subcommittee and 
would decrease the number of applications subjected to review, par- 
ticularly since under such a plan of operations study sections and 
councils would feel more comfortable in awarding longer term 
support — now averaging only 3 years. Staff members could, where 
necessary, draft expert consultants to assist in the review of program 
accomplishments and financial needs. 

2. The subcommittee recommends that special advisory committees 
be organized for review of “general support” programs. The NIH 
has just established such committees in the Division of Research 
Grants. These committees will review projects which cannot appro- 
priately be reviewed by the study sections and will include fiscal and 

27 


H. Rept. 1958, 87-2 5 


28 


ADMINISTRATION OF GRANTS BY NIH 


management analysts, as well as expert scientists. These new com- 
mittees will review applications for the next round of council meetings. 

3. The subcommittee recommends that grants for projects initiated 
by commercial firms be placed on a cost-sharing basis. The NIH would 
not take exception to this recommendation but does believe that fur- 
ther study should be made as to the comparable advantages and dis- 
advantages of the grant and contract in awarding support to com- 
mercial firms. Negotiated contracts would prevent the abuses 
described. 

4. The subcommittee recommends that special developmental -type 
grants be made as a means of stimulating research in universities and 
professional schools which have training responsibilities in scientific 
fields relating to health but which have little health research activity. 
The NIH believes that the institutional grant, when fully imple- 
mented, will serve the purpose indicated. When criteria were origi- 
nally developed for the establishment of this program, it was con- 
sidered desirable to include funds for developmental-type programs in 
the determination of the total amount of the grant to be awarded. 
This particular criterion was tabled, however, until the institutional 
grant program could be evaluated after a year or more of operation. 
The NIH would therefore prefer to wait for that period of time in 
order to decide whether modification of the institutional grant would 
be the preferable way to provide for special developmental-type 
support. 

5. The subcommittee recommends that the Congress authorize the 
PHS to award research grants to scientists in Veterans’ Administra- 
tion hospitals. The NIH strongly believes that the current procedure 
should not be extended. Only those VA employees who have bona fide 
affiliations with medical schools are presently eligible to apply for 
support. It is believed that the employees of VA hospitals should look 
to the VA for their research support and that the VA can better 
accomplish its own research objectives if it makes the determination 
as to which scientists and what research should be supported. In view 
of the findings of the subcommittee, the NIH would not object to 
the termination of the present agreement provided the VA could re- 
ceive the necessary increase in appropriations to permit continuation of 
the projects currently supported by the NIH. 

6. The subcommittee recommends that the NIH reexamine its policy 
of making indirect costs payments on renovations and major equip- 
ment expenditures from clinical research facility grants. The NIH 
is certainly willing to reexamine its policy but tentatively concludes 
that a simple modification of this recommendation would be prefer- 
able. The modification would disallow indirect costs on any renova- 
tion for which contract is issued. It is believed that any renovation 
completed by regular institution staff and all equipment in amounts up 
to $2,500 should be a part of the direct costs for which indirect costs 
are allowed. 

Sincerely yours, 


James A. Shannon, Director . 


ADMINISTRATION OF GRANTS BY NIH 


29 


Department of Health, Education, and Welfare, 

Public Health Service, 

W ashington, D.C. , May 12, 1961. 

Hon. L. H. Fountain, 

Chairman , Intergovernmental Relations Subcommittee , 

Committee on Government Operations , 

House Office Building , W ashing ton, D.C. 

Dear Mr. Fountain: Thank you for your letter of May 1 and the 
copy which you enclosed of the report on the health and research 
training programs administered by the National Institutes of Health. 

You will note from the enclosed statement that I feel your study 
and report have rendered a service to the national research effort. 

I have asked the staff of the National Institutes of Health to work 
with my immediate staff in preparing a comment on the specific recom- 
mendations in the report, I shall be happy to forward it to you as 
soon as it is completed. 

With all good wishes. 

Sincerely yours, 

Luther L. Terry, Surgeon General. 


(The press statement dated May 2, 1961, referred to in the Surgeon 
General’s letters follows:) 

Dr. Luther L. Terry, Surgeon General of the Public Health 
Service, today issued the following statement concerning the report 
of the House Committee on Government Operations which dealt with 
the administration of grants and awards by the National Institutes 
of Health : 

“The House Committee on Government Operations, through its 
study and report on the research and training programs of the National 
Institutes of Health, has rendered a service to the national research 
effort by suggesting measures for strengthening administration. This 
report comes at an opportune time as the National Institutes of Health 
moves rapidly into the administration of larger and more complex 
programs of medical research and training directed by the Congress 
over the past 3 years. 

“The report of the committee has pointed out some procedural 
measures that will be very seriously considered in the interest of 
economical and businesslike administration. However, in working 
out these measures, care must be taken that they do not adversely 
affect the attainment of the essential purpose of the programs — the 
production of research findings contributing to the conquest of dis- 
ease.” 

Dr. Terry said that the National Institutes of Health has analyzed 
the committee’s several recommendations and provided him with the 
following summary : 

The recommendations applicable to NIH fall generally into four 
categories : 


1. Recommendations already acted upon by the National Institutes 
of Health. — These cover recommendations that NIH establish special 
advisory groups for financial and administrative review of the grants 
and training projects and the development of better procedures for 
avoiding undesirable duplication of project support. 


30 


ADMINISTRATION OF GRANTS BY NIH 


2. Recommendations which NIH is now placing in effect . — These 
include measures for more thorough review of long-term budgetary 
needs of proposed research grants ; initiation of special grants to de- 
velop the research potentials of institutions now having limited 
research programs ; more consistent NIH policies and procedures for 
the training grant programs. 

3. Recommendations which NIH has not acted upon but will give 
serious consideration . — These cover development of a cost-sharing 
approach to research grants made to commercial firms ; separate poli- 
cies for grants to support scientific meetings ; reexamination of policies 
for allowing indirect costs for large grants for research which does not 
involve any considerable indirect cost expenditure by the grantee 
institution. 

4. Recommendaton which NIH would prefer not to adopt . — This 
recommendation was to the effect that NIH should make direct re- 
search grants to Veterans’ Administration hospitals. NIH believes 
the VA can better accomplish its research objectives if it makes its 
own determination as to which scientists and research should be sup- 
ported, and that this support should come from VA funds. 

Dr. Terry said that the Public Health Service concurred in this 
recommendation. He said that the report included a few recommen- 
dations that concerned other agencies of the Federal Government. 
This group of recommendations deals in particular with uniform sal- 
ary scales to be paid from Federal grants, new methods of computing 
indirect costs of research grant projects, and the impact of research 
and research training grants upon the teaching function of universities 
and medical schools. The Public Health Service is ready to cooperate 
fully with all groups concerned with these questions in an effort to find 
effective solutions, the Surgeon General said. 


Department of Health, Education, and Welfare, 

Public Health Service, 

Washington , D.C. 

Hon. L. H. Fountain, 

Chairman , Intergovernmental Relations Subcommittee , Committee on 
Government Operations , House of Representatives , W ashing ton. 
D.C . 


Dear Mr. Chairman : In my letter of May 12 commending your 
report, “Health Research and Training: Administration of Grants 
and Awards by the National Institutes of Health,” I advised that a 
more detailed report of progress would be forthcoming from the 
National Institutes of Health. It gives me real pleasure to transmit 
to you this interim report which describes the current status of actions 
taken by the NIH with respect to each of the recommendations con- 
tained in your report. Again, may I compliment you upon a search- 
ing and constructive inquiry into the growing and complex set of 
activities administered by the National Institutes of Health. I am 
confident that many of the committee recommendations will be adopted 
more easily by reason of your independent recognition of their 
significance. 

Study of the matters set forth in your report continues at the 
National Institutes of Health. I shall keep you informed of further 


ADMINISTRATION OF GRANTS BY NIH 31 

major developments in connection with the recommendations con- 
tained in the report of jour committee. 

I should also add that the present interim report has been only 
hastily reviewed by this office and has not yet been reviewed at all 
by the Department. We are forwarding the report in order to meet 
your committee’s deadline. If there should be further comments from 
this office or from the Department, they will be forwarded in due 
course. 

Sincerely yours, 

Luther. L. Terry. Surgeon General. 

June 15 , 1961 . 

Summary of XI H Actions and Attitudes With Respect to the 
Recommendations Contained in the Report, “Health Research 
and Training — The Administration of Grants and Awards by 
the National Institutes of Health” 

(A second report by the Committee on Government Operations, House of 
Representatives, April 28, 1961) 

This summary is an interim report of the current status of actions 
and the nature of present viewpoints taken by the National Institutes 
of Health concerning each of the recommendations contained in the 
Fountain committee report : 

Recommendation No. 1 . — Additional measures be taken to improve 
the effectiveness of the present project review system : 

First: The scientific review conducted by the study sections should 
be complemented by a thorough review of each project’s financial re- 
quirements performed by qualified analysts in the Division of Re- 
search Grants. 

Second : NIH should consider the feasibility of forming field review 
teams composed of staff representatives to visit grantee institutions 
on a regular basis, perhaps once a year. 

Third: NIH should determine the dollar amount of support, for 
projects receiving grant commitments for extended periods of time, 
at frequent intervals and on the basis of an adequate review of pro- 
gram accomplishment, potential, and financial needs. 

Fourth: Special advisory committees should be organized to review 
grants which are intended to provide general support for whole 
programs or divisions of institutions. 

Action . — NIH is in the process of implementing these recommenda- 
tions by strengthening its procedures and staff for more thorough 
examination of the budgets of research proposals. Under these 
revised procedures, study sections and councils will review applica- 
tions and establish approximate levels of future support subject to 
annual staff negotiations of the precise amounts to be awarded. These 
procedures will also insure closer scrutiny of equipment requirements 
in order to determine the essentiality of proposed equipment pur- 
chases, particularly when similar equipment has been provided under 
earlier grants. This budgetary review procedure will also facilitate 
continuing contact with grantees through determination at frequent 
intervals of the dollar amount of support required for projects receiv- 
ing long-term support. 


32 


ADMINISTRATION OF GRANTS BY NIH 


Most important, this improvement in the review of budgetary re- 
quirements of research projects will enable study sections and councils 
to act with greater confidence in awarding longer term support when 
they know that the details of the budget will be subjected to annual 
staff review and negotiation. At the same time, it goes without saying 
that enlargement of the review process will substantially increase ad- 
ministrative costs ; it will also insure greater accountability and pru- 
dence in the use of grant funds. 

With respect to the specific recommendation concerning field review 
teams, NIH has a task force at work exploring the feasibility of this 
proposal. This task force is charged with recommending the most 
appropriate ways and means to accomplish this objective in a manner 
that will sustain the quality of review, be sensitive to Institute statu- 
tory responsibilities and missions, and establish optimum rapport with 
institutions and investigators. At this stage, the use of field review 
teams seems a desirable course of action. A more definitive evaluation 
must await the considered appraisal of the task force. 

With regard to the fourth element of this recommendation NIH has 
already established special advisory groups for grants providing sup- 
port for whole programs or divisions of institutions. This action was 
taken because, as noted by the committee, “large grants of this kind 
are not for projects in the conventional sense and, consequently, require 
a special type of review by a competent body.” Review of applica- 
tions for such program project support involves considerations of 
institutional organization, complex problems of administration, and 
other features not present in the regular project grant. NIH has long 
utilized special review procedures for such grants. These procedures 
are now being formalized. This formalization will include the issu- 
ance of new procedures for the guidance of applicants and for review 
of such applications. 

Recommendation No. 2 . — Grants for projects initiated by commer- 
cial firms be placed on a cost-sharing basis. 

The committee believes this action, together with implementation of 
its recommendations for strengthening the review of projects and the 
management of grants, will place grants to commercial firms on a 
sounder foundation. 

Action . — A task force is examining, carefully and critically, the 
comparative advantages and disadvantages of alternative grant and 
contract mechanisms in providing support for investigators located in 
commercial firms. NIH has taken the tentative position that nego- 
tiated contracts may represent the more prudent course of action. 
Final action necessarily has been deferred pending completion of the 
task force’s review of the pros and cons of the alternative methods for 
supporting research in commercial firms. 

Recommendation No. 3 . — NIH develop a separate policy governing 
the purpose and use of, and the eligibility conditions for, grants to 
help support national and international meetings of recognized scien- 
tific organizations. 

Action . — NIH agrees with the recommendation that “policies and 
procedures designed for support of scientific investigation should not 
be applied to conference grants.” Careful review has confirmed the 
soundness of NIH current policies in this regard, with two significant 
exceptions. A revised statement of policy and procedures under 


ADMINISTRATION OF GRANTS BY NIH 


33 


which NIH grant funds may be used for the support of scientific 
meetings will be published shortly. This revised policy specifically 
prohibits the use of grant funds for (1) indirect costs or (2) honoraria 
in connection with such meetings. 

Recommendation No. J±. — NIH seek to further improve its methods 
for coordinating research activities with other Government and pri- 
vate agencies so as to minimize unnecessary or unintended duplication 
of research in the health field. 

Action. — The report notes, “NIH has developed workable arrange- 
ments for avoiding undesirable duplication of project support.” NIH 
has taken additional steps to further improve the information ex- 
change system with other Federal agencies. Data on NIH intra- 
mural research projects are now being made available to the Science 
Information Exchange. In this connection, it should also be noted 
that NIH helped found, and has long been a strong supporter of, the 
Science Information Exchange (formerly the Biosciences Informa- 
tion Exchange), and we attempt to utilize these facilities to the maxi- 
mum. Continued attention is being given to means for improving 
coordination and facilitating communication among Federal agencies 
engaged in biomedical research. 

Recommendation No. 5. — The President establish a uniform policy 
with respect to acceptable salary practices in the use of Federal re- 
search funds applicable to all Federal agencies making grants to edu- 
cational and other research institutions. 

Action. — NIH heartily endorses this recommendation and advocates 
the establishment of an interagency committee under the aegis of the 
Federal Council on Science and Technology or a special group imder 
the President’s Science Advisory Committee to study the problem in 
its total setting and to recommend uniform policies to be utilized by 
national agencies for the President’s consideration. 

Recommendation No. 6 . — NIH initiate for a limited time a special 
developmental-type grant as a direct means of stimulating research 
capability in those universities and professional schools which have 
training responsibilities in scientific fields related to health, but are not 
actively engaged in health research. 

Action . — There are few, if any, major universities in the United 
States not now participating in NIH programs. Between 1957 and 
1960 the number of colleges and universities receiving research grants 
through NIH grew from 209 to 293 — an increase of 40 percent. The 
distribution of research grant awards to colleges and universities has 
steadily broadened over the past decade. With respect to the few in- 
stitutions not now participating in the NIH research program, the 
Fountain committee report indicates that the so-called limited partici- 
pation is “due more to the paucity of project applications than to the 
high disapproval rate of proposals.” While this observation applies 
generally to academic institutions as a whole, NIH is keenly sensitive 
to the need for developing research potential in health professional 
schools such as veterinary medicine, pharmacy, nursing, and social 
work. The NIH believes that the institutional grant, when fully 
implemented, will in large measure serve the purpose sought by the 
committee. 

With respect to the larger issue raised by the committee’s recom- 
mendation, it should be emphasized that scientific merit — the criterion 


34 


ADMINISTRATION OF GRANTS BY NIH 


of excellence — governs today’s decisions to support university research. 
This criterion assures support for the brilliant, young innovators as 
well as the mature investigators. Diversion of research funds from 
the talented to the mediocre would be a poor investment of public 
moneys both in the short run and over the long haul. No Federal 
agency now has a clear statutory role either to facilitate the upgrading 
of weaker institutions or to foster the creation of brandnew univer- 
sities. This may be a serious gap in national policy. 

Recommendation No. 7 . — The Congress consider action to permit 
the awarding of research project grants under the Public Health 
Service Act to VA hospitals on the same terms and conditions as apply 
to non-Federal institutions. 

Action . — At this time only those VA employees who have bona fide 
affiliations with medical schools are eligible to apply for such support 
through university sponsorship as a staff member. 

In the submission of the President’s budget to the Congress the 
administration indicated the desirability of providing a legal base to 
permit NIH research grants to be made to all VA investigators under 
the general review and award procedure. If the Congress concurs in 
the administration’s proposal to extend its current procedures to enable 
all VA scientists, irrespective of medical school affiliation, to compete 
for research support, NIH is prepared to implement necessary proce- 
dures immediately. 

Recommendation No. 8 . — The Director of NIH review the training 
policies and procedures of the Institutes and the Division of General 
Medical Sciences for the purpose of obtaining a greater degree of 
uniformity and simplification. 

Action . — Studies of various aspects of NIH training policies and 
procedures of the nature recommended by the committee have been in 
process for 2 years, and extensive changes have been made in these 
programs. Substantial gains in the direction of uniformity and 
simplicity have been possible in the past year. The remaining differ- 
ences in policies and practice may, in the words of the committee re- 
port, “be necessary in view of the individualized nature of NIH 
training programs.” However, this is a complex area of activity that 
is under constant surveillance. 

NIH has taken prompt and effective action to develop training pro- 
grams to meet research training needs. The level of training expendi- 
tures has grown from $33 million in 1957 to $132 million in 1961 — a 
fourfold increase. The emphasis in this process has been upon action 
and results, perhaps somewhat to the detriment of ideal coordination. 
Administratively, the position has been taken to restrain the rate of 
growth momentarily so that NIH may consolidate more effectively 
the management of these programs. 

Recommendation No. 9 . — The Secretary of Health, Education, and 
Welfare carefully examine the existing programs and administrative 
arrangements for special-purpose training in the health field both 
in terms of overall Federal objectives in support of education and the 
impact of these programs on our educational institutions. 


ADMINISTRATION OF GRANTS BY NIH 


35 


Action . — This recommendation is addressed to the Secretary; it 
would be inappropriate for NIH to respond in advance of a depart- 
mental position. 

Recommendation No. 10. — The appropriate executive agencies and 
committees of the Congress give particular attention to the problem of 
attracting outstanding students to the field of medicine. 

Action. — The scope of this recommendation exceeds existing NIH 
authority. However, itis believed that fellowships for medical stu- 
dents such as is provided for in legislation recommended by the ad- 
ministration and now before the Congress would substantially expand 
the opportunity for qualified youth to seek careers in medicine. 

Recommendation No. 11. — Each participating institution be given 
the option of using either of two methods for computing the over- 
head allowance on supported research. 

One method would be the continued use of a flat rate adjusted 
periodically to equal approximately 50 percent of the average rate 
of indirect expenses based on total direct costs for all grantee institu- 
tions as a group, as measured by appropriate cost accounting princi- 
ples and procedures. In lieu of the standard rate, and in order to 
provide equitable treatment for those institutions possessing relatively 
high overhead costs, an institution would be allowed 50 percent of its 
actual indirect cost rate determined in the same manner as above. 

Action. — The problem of indirect cost has received a great deal of 
attention by the executive branch, the Congress, and the universities. 
The National Science Foundation is currently conducting a compre- 
hensive study to determine more accurately the various components of 
indirect and direct cost. It is the view of the National Institutes of 
Health that substantial cost-sharing as recommended by the Fountain 
committee may seriously restrict the ability of topflight investigators 
and institutions to participate in NIH programs. Irrespective of 
philosophy, the decision rests with the Congress which has for 4 years 
restricted NIH to a 15-percent allowance for indirect costs. 

Recommendation No. 12. — No overhead be allowed on grants or 
grant items which do not entail actual indirect expenses, and an amount 
less than the regular rate be allowed when extramural research requires 
few institutional services. 

Recommendation No. 13. — NIH reexamine its policy of making in- 
direct cost payments on renovation and major equipment expenditures 
from grants for the establishment of clinical research facilities. 

Action . — NIH concurs, in general, with the soundness of committee 
recommendations Nos. 12 and 13. In the past, NIH has not excluded 
specific direct cost items within a grant from the computation of over- 
head in view of the general congressional limitation on the 15-percent 
maximum indirect cost rate — a rate which results in less than full in- 
direct costs for essentially all grantee institutions. However, the re- 
cent growth of program and center projects has pointed up the need 
for more explicit guidance on items such as those referred to in the 
recommendations. Accordingly, procedures are now being revised to 
exclude items such as rental and renovation from the indirect cost 
computation base. 


36 


ADMINISTRATION OF GRANTS BY NIH 


Department of Health, Education, and Welfare, 

Public Health Service, 

W ashing ton, D.C. , July 26, 1961. 

Hon. L. H. Fountain, 

Chairman, Subcommittee on Intergovernmental Relations, 

Committee on Government Operations, 

Rouse of Representatives, W ashington, D.C . 

Dear Mr. Chairman : In preparation for the hearings scheduled for 
August 1 and 2 on “Health Research and Training : Administration 
of Grants and Awards by the National Institutes of Health,” the at- 
tached statement has been prepared to show action to date on the 
several recommendations for which the National Institutes of Health 
has direct responsibility. This statement gives somewhat greater de- 
tail than that shown in the summary provided under date of June 15, 
1961. 


We shall be pleased to answer any questions you or the committee 
members may have either at the scheduled hearings or otherwise. 
Sincerely yours, 

Luther L. Terry, 

Surgeon General. 


July 25, 1961. 

Summary of NIH Actions and Attitudes With Respect to the 
Recommendations Contained in the Report “Health Research 
and Training — The Administration of Grants and Awards by 
the National Institutes of Health” 


(A second report by the Committee on Government Operations, House of 
Representatives, April 28, 1961) 

This summary is a report of position and action taken to date by the 
National Institutes of Health on the various recommendations con- 
tained in the Fountain committee report. 

Recommendation No. 1 . — Additional measures be taken to improve 
the effectiveness of the present project review system : 

First: The scientific review conducted by the study sections should 
be complemented by a thorough review of each project’s financial re- 
quirements performed by qualified analysts in the Division of Research 
Grants. 

Second: NIH should consider the feasibility of forming field re- 
view teams composed of staff representatives to visit grantee institu- 
tions on a regular basis, perhaps once a year. 

Third : NIH should determine the dollar amount of support, for 
projects receiving grant commitments for extended periods of time, at 
frequent intervals and on the basis of an adequate review of program 
accomplishment, potential, and financial needs. 

Fourth : Special advisory committees should be organized to review 
grants which are intended to provide general support for whole pro- 
grams or divisions of institutions. 

Action . — NIH is in the process of implementing these recommenda- 
tions by strengthening its procedures and staff for more thorough 
examination of the budgets of research proposals. Under these re- 
vised procedures, study sections and councils will review applications 
and establish ceilings for future support subject to annual staff nego- 


ADMIXISTRATIOX OF GRANTS BY XIH 


37 


tiations of the precise amounts to be awarded. These procedures will 
insure closer scrutiny of equipment requirements in order to deter- 
mine the essentiality of proposed equipment purchases, particularly 
when similar equipment has been provided under earlier grants. This 
budgetary review procedure will also facilitate continuing contact 
with grantees through determination at frequent intervals of the 
dollar amount of support required for projects receiving long-term 
support. 

Specifically, a revised application form to be used by investigators 
in requesting previously recommended years of research grant support 
(PHS Form 2590) has been prepared. This form, and the accom- 
panying instructions, require each PHS grantee to provide a sub- 
stantially more detailed exposition and justification of each year's 
research budget than has hitherto been required. The grantee is now 
being requested to explain any significant change in the proposed use 
of funds as compared with expenditures during the current-year 
grant. Changes in the investigator's plans for the purchase of equip- 
ment will be detailed in order that an appropriate evaluation of these 
requirements can be made. 

This improvement in the review of budgetary requirements of re- 
search projects will enable study sections and councils to act with 
greater confidence in awarding longer term support when they know 
that the details of the budget will be subjected to annual staff review 
and negotiation. This enlargement of the review process will of course 
substantially increase administrative costs. 

Consideration has been given to maintaining detailed records of all 
equipment purchased on PHS grants in order to assess the need for 
new equipment in each department of every grantee institution. Firm 
conclusion has been reached however, that the adoption of such pro- 
cedure would be impractical and potentially very damaging to the 
grant program. To accomplish such an end would require continuous 
Federal surveillance of the condition of each piece of major equipment 
in hundreds of private and State universities and hospitals ; the fre- 
quency of its use by thousands of research workers in the department 
and related departments: and the availability, condition, and use 
of the many accessory units which frequently determine the suitability 
of a complex instrument for a particular research requirement. 

The Xational Institutes of Health has a task force at work exploring 
the feasibility of using field review teams. This task force is charged 
with recommending the most appropriate ways and means of using 
field review teams in a manner that will sustain the quality of review, 
be sensitive to institute statutory responsibilities and missions, and 
establish optimum rapport with institutions and investigators. A 
definitive evaluation must await the considered appraisal of the task 
force. 

TTith regard to the fourth element of this recommendation, XIH 
has already established special advisory groups for larger grants 
which provide support for whole programs of institutions. This ac- 
tion was taken because, as noted by the committee, “large grants of 
this kind are not for projects in the conventional sense, and conse- 
quently, require a special type of review by a competent body.” Re- 
view of applications for such program project support involves con- 
siderations of institutional organization, complex problems of admin- 
istration, and other features not present in the regular project grant. 


38 


ADMINISTRATION OF GRANTS BY NIH 


The National Institutes of Health has already completed the estab- 
lishment of seven such special review panels, with two more to be 
added shortly, organized with these objectives in mind. In addition 
to scientific competence, the membership of the committees includes 
individuals expert in medical administration, research organization, 
hospital business management, and research cost accounting. These 
panels, and additional ones to be added as required, will be adminis- 
tered by the new Special Programs Review Branch in the Division of 
Research Grants, and will commence meetings during the fall of 1961. 
All applications for program support will continue to receive a sec- 
ond review by the appropriate national advisory council. 

A supplemental policy statement has been prepared and dissemi- 
nated clarifying the objectives and conditions surrounding the award 
of grants for the support of major programs of research. 

Recommendation No. 2. — Grants for projects initiated by commer- 
cial firms be placed on a cost-sharing basis. 

The committee believes this action, together with implementation 
of its recommendations for strengthening the review of projects and 
the management of grants, will place grants to commercial firms on a 
sounder foundation. 

Action . — A task force has examined the comparative advantages 
and disadvantages of various grant and contract mechanisms for pro- 
viding support of investigators located in commercial firms. The 
tentative conclusion has been reached that negotiated contracts repre- 
sent the preferable mechanism for such research support. This group 
is now exploring the feasibility of negotiating contracts with the 
commercial firms which now have grants from NIH. This involves 
review of the type of work now being supported and assessment of 
the general terms and conditions most suitable for such contractual 
relationships. 

Recommendation No. 3. — NIH develop a separate policy governing 
the purpose and use of, and the eligibility conditions for, grants to 
help support national and international meetings of recognized sci- 
entific organizations. 

Action . — NIH agrees with the recommendation that “policies and 
procedures designed for support of scientific investigation should 
not be applied to conference grants.” A revised statement of policy 
and procedures under which NIH grant funds may be used for the 
support of scientific meetings has been released. This revised policy 
specifically prohibits the use of grant funds for (1) indirect costs, 
(2) honoraria in connection with such meetings, and (3) purchase 
of equipment. It also provides for much more detailed breakdown 
of proposed expenditures and forbids the transfer of funds from 
one category of expense to another without PHS approval. 

Recommendation No. 4- — NIH seek to further improve its methods 
for coordinating research activities with other Government and pri- 
vate agencies so as to minimize unnecessary or unintended duplication 
of research in the health field. 

Action. — The report notes, “NIH has developed workable arrange- 
ments for avoiding undesirable duplication of project support.” NIH 
has taken additional steps to improve the information exchange sys- 
tem with other Federal agencies. Data on NIH intramural research 
projects are now being made available to the Science Information 


ADMINISTRATION OF GRANTS BY NTH 


39 


Exchange. In this connection, it should also be noted that MH 
helped found, and has long been a strong supporter of. the Science 
Information Exchange (formerly the Bio-Sciences Information Ex- 
change), and tte attempt to utilize these facilities to the max im um. 
Continued attention is being given to means for improving coordina- 
tion and facilities communication among Federal agencies engaged 
in biomedical research. 

Recommendation No. 5 . — The President establish a uniform policy 
with respect to acceptable salary practices in the use of Federal re- 
search funds applicable to all Federal agencies making grants to 
educational and other research institutions. 

Action . — The XIH heartily endorses this recommendation and 
advocates the establishment of an interagency committee under the 
aegis of the Federal Council on Science and Technology or a special 
group under the President's Science Advisory Committee to study 
the problem in its total setting and to recommend uniform policies to 
be utilized by national agencies for the President's consideration- 

Recommendation No. 6 . — XIH initiate for a limited time a special 
developmental-type grant as a direct means of stimulating research 
capability in those universities and professional schools which have 
training responsibilities in scientific fields related to health, but are 
not actively engaged in health research. 

--’on . — The number of universities receiving XIH grant support 
is growing steadily. Between 1957 and 1960 the nu mber of colleges 
and universities receiving research grants through XIH grew from 
209 to 293 — an increase of 40 percent. The number of institutions 
receiving support grew in the same period from 572 to 973. an increase 
of 70 percent. 

With respect to the few institutions not now participating in the 
XIH research program, the Fountain committee report indicates that 
the so-called limited participation is “due more to the paucity of 
project applications than to the high disapproval rate of proposals.'* 
While t his o bservation applies generally to academic institutions as a 
whole. XIH is keenly sensitive to the need for developing research 
potential in health professional schools such as veterinary medicine, 
pharmacy, nursing, and social work. The XIH believes that the 
general research support grant, when fully implemented, will in large 
measure serve the purpose sought by the committee. 

With respect to the larger issue raised by the committee's recom- 
mendation. it should be emphasized that scientific merit — the criterion 
of excellence — governs today's decisions to support research. This 
criterion assures support for the brilliant, young innovators as well 
as the mature investigators. Diversion of research funds from the 
talented to the mediocre would be a poor investment of public moneys 
both in the short run and over the long haul. Xo Federal agency 
now has a clear statutory role either to facilitate the upgrading of 
weaker institutions or to foster the creation of new universities. This 
may be a serious gap in national policy. 

nendation No. 7 . — The Congress consider action to permit 
the awarding of research project grants under the Public Health 
Service Act to VA hospitsds on the same terms and conditions as 
apply to non-Federal institutions. 


40 


ADMINISTRATION OF GRANTS BY NIH 


Action . — When originally negotiated the memorandum of agree- 
ment between the National Institutes of Health, Public Health Serv- 
ice, and the Veterans’ Administration intended that only those Vet- 
erans’ Administration employees with bona fide affiliations with medi- 
cal schools (usually a joint appointment) would be eligible to apply 
for NIH research grant support. The procedure necessarily called 
for submission of the application by the medical school since the 
PHS had no authority to make grants to a hospital of the Veterans’ 
Administration. The report by the Committee on Government Oper- 
ations points out that the procedure has been liberalized through 
interpretation to include any employees in a Veterans’ Administra- 
tion hospital which has a formal affiliation with a medical school. 
This liberalization has been accepted by the NIH in view of the close 
working relationships of such VA hospitals with the medical schools, 
our understanding being that the selection of VA staff in such hos- 
pitals is subject to the dean’s committee approval and that the VA 
hospital becomes a part of the medical school complex. 

In the submission of the President’s budget to the Congress the 
administration indicated the desirability of providing a legal base to 
permit NIH research grants to be made to all VA investigators under 
the general review and award procedure. If the Congress concurs in 
the administration’s proposal to extend its current procedures to 
enable all VA scientists, irrespective of medical school affiliation, to 
compete for research support, NIH will implement necessary proce- 
dures just so soon as legal authority is provided. 

Recommendation No. S . — The Director of NIH review the training 
policies and procedures of the Institutes and the Division of General 
Medical Sciences for the purpose of obtaining a greater degree of 
uniformity and simplification. 

Action . — Studies of various aspects of NIH training policies and 
procedures of the nature recommended by the committee have been 
in process for 2 years, and extensive changes have been made in these 
programs. Substantial gains in the direction of uniformity and sim- 
plicity have been possible in the past year. 

Examples of gains in uniformity which have recently been accom- 
plished include (1) establishment of a central office and mechanism 
for receipt and referral of all training grant applications in the Divi- 
sion of Research Grants, (2) adoption of a common appointment form 
(2271) , and (3) procedure to provide for DEG editing and coding for 
informational purposes of all trainee appointment notifications sub- 
mitted by all training grant program directors. 

Policies acceptable uniformly to all Institutes have been developed 
in regard to (1) indirect cost payments on stipends, (2) payment of 
tuition and fees, (3) carryover to succeeding year of unexpended 
funds, and (4) a common forward financing procedure. 

There remain several differences in policies and practices among 
the several Institutes in regard to training grants which may in the 
word of the committee report “be necessary in view of the individual- 
ized nature of NIH training programs.” These are complex areas of 
activity that will be kept under constant surveillance. 

Recommendation No. 9 . — The Secretary of Health, Education, and 
Welfare carefully examine the existing programs and administrative 
arrangements for special-purpose training in the health field both in 


ADMINISTRATION OF GRANTS BY NIH 41 

terms of overall Federal objectives in support of education and the 
impact of these programs on our educational institutions. 

Action . — This recommendation is addressed to the Secretary. The 
XIH will be guided by action taken by that office. 

Recommendation No. 10 . — The appropriate executive agencies and 
committees of the Congress give particular attention to the problem 
of attracting outstanding students to the field of medicine. 

Action . — The scope of this recommendation exceeds existing XIH 
authority; however, it is believed that fellowships for medical stu- 
dents such as is provided for in legislation recommended by the ad- 
ministration and now before the Congress would substantially expand 
the opportunity for qualified youth to seek careers in medicine. 

Recommendation No. 11 . — Each participating institution be given 
the option of using either of two methods for computing the overhead 
allowance on supported research. 

One method would be the continued use of a flat rate adjusted peri- 
odically to equal approximately 50 percent of the average rate of indi- 
rect expenses based on total direct costs for all grantee institutions as 
a group, as measured by appropriate cost accounting principles and 
procedures. In lieu of the standard rate, and in order to provide equi- 
table treatment for those institutions possessing relatively high over- 
head costs, an institution would be allowed 50 percent of its actual 
indirect cost rate determined in the same manner as above. 

Action . — The problem of indirect cost has received a great deal of 
attention by the executive branch, the Congress, and the universities. 
The Xational Science Foundation is currently conducting a compre- 
hensive study to determine more accurately the various components of 
indirect and direct cost. It is the view of the Xational Institutes of 
Health that substantial cost-sharing as recommended by the Fountain 
committee may seriously restrict the ability of top-flight investigators 
and institutions to participate in XIH programs. Irrespective of 
philosophy, the decision rests with the Congress which has for 4 years 
restricted XIH to a 15-percent allowance for indirect costs notwith- 
standing the recommendation of the Department of Health, Educa- 
tion, and Welfare that this restriction be removed. 

Recommendation No. 12 . — Xo overhead be allowed on grants or grant 
items which do not entail actual indirect expenses, and an amount 
less than the regular rate be allowed when extramural research re- 
quires few institutional services. 

Recommendation No. 13 . — XIH reexamine its policy of making in- 
direct cost payments on renovation and major equipment expenditures 
from grants for the establishment of clinical research facilities. 

Action * — The XIH concurs with the soundness of committee recom- 
mendations Xo. 12 and 13. In the past. XIH has not excluded specific 
direct cost items from the computation of overhead since the 15-per- 
cent rate has resulted in less than full indirect costs for essentially all 
grantee institutions. The recent growth of program and center proj- 
ects has pointed up the need to single out these items for special at- 
tention. Accordingly, procedures have been revised to exclude in- 
direct costs on items such as (1) alteration and renovation, (2) fixed 
equipment that becomes part of real property, (3) rental equipment, 
and (4) conferences and symposia. Previous procedure will be con- 
tinued to exclude indirect costs on research bed costs and on any part 


42 


ADMINISTRATION OF GRANTS BY NTH 


of the cost of equipment in excess of $2,500. Indirect costs will be 
negotiated on rentals and on such grants as those to medical schools 
in behalf of Veterans’ Administration employees. 


Department of Health, Education, and Welfare, 

Public Health Service, 
National Institutes of Health, 

Bethesda , Md ., January 22, 1962. 

Hon. L. H. Fountain, 

Chairman , Intergovernmental Relations Subcommittee , 

Committee on Government Operations , House of Representatives , 

W ashing ton, D.C. 


Dear Mr. Chairman : In Dr. Shannon’s absence from the National 
Institutes of Health on an extended field trip, I am pleased to reply 
to your letter of January 15, 1962, and to comply with your request 
for detailed description of what the National Institutes of Health 
has done toward carrying out each of the recommendations of the 
Committee on Government Operations, issued as House Report 
No. 321. 

I note your request for information on further development of our 
statistical reporting and analysis facilities. In addition to comment- 
ing on each of the formal recommendations, I am therefore adding a 
special statement on statistical reporting and analysis. 

We are in accord with the recommendations of your committee 
and definitely intend eventually to make all desirable changes needed 
to effect the sounder administration which your committee recom- 
mended. 

Sincerely yours, 

David E. Price, M.D., 

Acting Director. 


January 22, 1962. 

A Second Progress Report by the National Institutes of Health 
on Action Taken With Respect to the Recommendations Con- 
tained in the Report, “Health Research and Training — The Ad- 
ministration of Grants and Awards by the National Institutes 
of Health” 


(A second report by the Committee on Government Operations, House of 
Representatives, April 28, 1961) 

This report is a second progress report by the National Institutes 
of Health of action taken to date on the various recommendations con- 
tained in the Fountain committee report. There is also included a 
statement on progress by the National Institutes of Health in the 
development of its statistical and analysis facilities. 

Recommendation No. 1 . — Additional measures to be taken to im- 
prove the effectiveness of the present project review system: 

(a) Procedures and staff for more thorough examination of the 
budgets of research proposals have been strengthened. Discussions 
have been held with study sections and councils concerning the need 
for more thorough review of budgets including future requirements 


ADMINISTRATION OF GRANTS BY XIH 


43 


and requests for equipment. Future support of grants awarded for 
periods longer than 1 year is now understood to be “ceilings under 
which annual staff negotiations of the precise amounts to be awarded 
may be made/’ The application form has been modified and is now 
in use. It requires each Public Health Service grantee to provide a 
substantially more detailed exposition and justification of each year’s 
research budget than has hitherto been required. The grantee is now 
requested to explain any significant change in the proposed use of 
funds as compared with expenditures during the current-year grant. 
Changes in the investigator’s plans for the purchase of equipment are 
detailed and an appropriate evaluation of these requirements is made. 
Further, the budget is now subject to annual staff review and nego- 
tiation. 

A procedure has been designed to enable XIH staff to keep abreast 
of equipment levels at institutions receiving PHS grants and to eval- 
uate requests for equipment. All movable equipment purchased with 
PHS grant funds is reported annually to the XIH by means of regu- 
lar expenditure reports. It is contemplated that the data from these 
reports will be captured centrally by machine operation, stored indefi- 
nitely, and subsequently retrieved as needed for use by study sections, 
councils, or staff. Different obsolescence factors will apply to different 
situations, needs, and items of equipment. While a 3- to 5-year ob- 
solescence factor would generally be reasonable, the attendant circum- 
stances at the time of review will dictate the precise obsolescence fac- 
tor. Prior to making an award, the staff of the appropriate Xational 
Institute or division will examine the equipment requested in the 
budget and follow up on duplications not adequately justified. From 
time to time the equipment data stored will be retrieved for compari- 
son with equipment described in applications and for a check on the 
effectiveness of the questions in the revised application form. This 
particular procedure cannot be implemented until space and necessary 
equipment can be obtained. 

(h) We have considered further the feasibility of decentralizing 
our grants management function by forming field review teams com- 
posed of staff representatives, but are not prepared as yet to imple- 
ment such a plan. Instead, as a means of improving our surveillance 
of the handling of our grants by the recipient institutions, we are 
planning to decentralize our currently centralized Grants Manage- 
ment Branch to the several Institutes and Divisions concerned with 
the awarding and programing of grant funds and thereby to involve 
an additional number of staff in management business. In the process 
of decentralizing, however, the Division of Research Grants will con- 
tinue to accept coordinating responsibility. 

(c) Special advisory committees have been organized and are func- 
tioning to review grants which are intended to provide support for 
broadly based and long-term programs of research activity. A Special 
Programs Review Branch is now part of the Division of Research 
Grants. It includes a series of advisory committees organized in such 
manner as to provide review of applications for grants for research 
program projects and research center projects in terms of the pro- 
gram interests of the various Institutes and Divisions of the XIH. 
These panels consist of experts in the various disciplines and special- 
ties which, as a composite, cover the broad purview of one of the Insti- 


44 


ADMINISTRATION OF GRANTS BY NIH 


tutes or Divisions. Thus, for example, there is an Arthritis and Meta- 
bolic Disease Program Project Committee, a Neurology and Blindness 
Program Project Committee, etc. Included among the consultants to 
these committees are experts in various fields representing considera- 
tions peculiar to these broader forms of support such as research cost 
accounting, hospital management and administration, medical care, 
institutional organization, and other features not present in the regu- 
lar project grant. 

Recommendation No. 2 . — Grants for projects initiated by commer- 
cial firms be placed on a cost-sharing basis. 

A special task force has further explored the feasibility of negotiat- 
ing contracts with commercial firms, as well as other methods of sup- 
porting projects initiated by commercial firms, with conclusion reached 
that profitmaking institutions should still be eligible to receive re- 
search grant awards (as well as contracts) but that the grants should 
be subject to certain terms and conditions that may not be changed by 
the grantee without prior PHS approval. These terms modifying 
certain sections of the policy and information statement on research 
grants are as follows : 

( a ) The research project must be conducted substantially as out- 
lined in the application, and subject to a special patent agreement. 

( b ) Funds may be spent only for items specified in the budget. 
Grantee must request advance approval of PHS before modifying the 
approved budget. 

(c) Grantees are encouraged to rent equipment, rather than pur- 
chase it. Title to any equipment purchased with grant funds remains 
with the PHS. 

(d) Funds may not be used for renovation and alteration. All 
grants to profitmaking institutions are subject to a complete and 
thorough audit after termination, and are limited to the indirect cost 
allowance of up to 15 percent of certain direct costs as in research 
grant awards to other types of institutions. 

Recommendation No. 3 . — NIH develop a separate policy governing 
the purpose and use of, and the eligibility conditions for, grants to 
help support national and international meetings of recognized scien- 
tific organizations. 

The NIH agreed with the recommendation that policies and proce- 
dures designed for support of scientific investigation should not be ap- 
plied to conference grants. A revised statement of policy and pro- 
cedures under which NIH grant funds may be used for the support 
of scientific meetings has been released. This revised policy specif- 
ically prohibits the use of grants funds for (1) indirect costs, (2) 
honoraria in connection with such meetings, and (3) purchase of 
equipment. It also provides for much more detailed breakdown of 
proposed expenditures and forbids the transfer of funds from one 
category of expense to another without PHS approval. 

Recommendation No. 1 ±. — NIH seek to further improve its methods 
for coordinating research activities with other Government and private 
agencies so as to minimize unnecessary or unintended duplication of 
research in the health field. 

The report notes, “NIH has developed workable arrangements for 
avoiding undesirable duplication of project support.” NIH has taken 
additional steps to improve the information exchange system with 


ADMINISTRATION OF GRANTS BY NIH 


45 


other Federal agencies. Data on NIH intramural research projects 
are now being made available to the Science Information Exchange, 
In this connection, it should also be noted that NIH helped found, and 
has long been a strong supporter of, the Science Information Ex- 
change (formerly the Bio-Sciences Information Exchange), and that 
we attempt to utilize these facilities to the maximum. Continued at- 
tention is being given to means for improving coordination and facili- 
tating communication among Federal agencies engaged in biomedical 
research. 

Recommendation No. 5 . — The President establish a uniform policy 
with respect to acceptable salary practices in the use of Federal re- 
search funds applicable to all Federal agencies making grants to 
educational and other research institutions. 

The NIH heartily endorsed this recommendation and advocated the 
establishment of an interagency committee under the aegis of the F ed- 
eral Council on Science and Technology or a special group under the 
President’s Science Advisory Committee to study the problem in its 
total setting and to recommend uniform policies to be utilized by 
national agencies for the President’s consideration. 

Recommendation No. 6 . — NIH initiate for a limited time a special 
developmental type grant as a direct means of stimulating research 
capability in those universities and professional schools which have 
training responsibilities in scientific fields related to health, but are 
not actively engaged in health research. 

The number of institutions receiving NIH grant support is growing 
steadily. Between 1957 and 1961 the number of institutions receiving 
support grew from 572 to 1,224, an increase of more than 100 percent. 

With respect to the few institutions not now participating in the 
NIH research program, the Fountain committee report indicates 
that the so-called limited participation is “due more to the paucity of 
project applications than to the high disapproval rate of proposals.” 
While this observation applies generally to academic institutions as 
a whole, NIH is keenly sensitive to the need for developing research 
potential in health professional schools such as veterinary medicine, 
pharmacy, nursing, and social work. The NIH believes that the gen- 
eral research support grant, when fully implemented, will in large 
measure serve the purpose sought by the committee. 

The first awards under this program have been made early this 
month to 86 schools of medicine, 49 schools of dentistry, and 6 schools 
of osteopathy. Upon receipt of a memorandum of consent from the 
Director of Budget, awards will be made to the 12 schools of public 
health, bringing the total of awards under this program to $20 million. 

With respect to the larger issue raised by the committee’s recom- 
mendation, it should be emphasized that scientific merit — the criterion 
of excellence — governs today’s decisions to support research. This 
criterion assures support for the brilliant, young innovators as well 
as the mature investigators. Diversion of research funds from the 
talented to the mediocre would be a poor investment of public moneys 
both in the short run and over the long haul. No Federal agency 
now has a clear statutory role either to facilitate the upgrading of 
weaker institutions or to foster the creation of new universities. This 
may be a serious gap in national policy. 

Recommendation No. 7 . — The Congress consider action to permit 
the awarding of research project grants under the Public Health 


46 


ADMINISTRATION OF GRANTS BY NIH 


Service Act to VA hospitals on the same terms and conditions as 
apply to non-Federal institutions. 

When originally negotiated the Memorandum of Agreement be- 
tween the National Institutes of Health, Public Health Service, and 
the Veterans’ Administration intended that only those Veterans’ Ad- 
ministration employees with bona fide affiliations with medical schools 
(usually a joint appointment) would be eligible to apply for NIH 
research grant support. The procedure necessarily called for sub- 
mission of the application by the medical school since the PHS had 
no authority to make grants to a hospital of the Veterans’ Admin- 
istration. The report by the Committee on Government Operations 
points out that the procedure has been liberalized through interpreta- 
tion to include any employees in a Veterans’ Administration hospital 
which has a formal affiliation with a medical school. This liberaliza- 
tion has been accepted by the NIH in view of the close working rela- 
tionships of such VA hospitals with the medical schools, our under- 
standing being that the selection of VA staff in such hospitals is subject 
to the Deans’ Committee approval and that the VA hospital becomes 
a part of the medical school complex. 

The budget for fiscal year 1962 submitted to Congress by President 
Eisenhower contained, among the general provisions in the HEW 
section, a provision which would have made PHS research grants 
specifically available “to hospitals of the Service, of the Veterans’ Ad- 
ministration, or to St. Elizabeths Hospital.” The phrase “of the 
Veterans’ Administration” is in italics identifying it as an amendment 
to existing language. In the appropriations bill (H.R. 7035), as 
enacted, this section (sec. 205) appeared without the amendment — it 
referred only to “research grants to hospitals of the Service or to 
Saint Elizabeths Hospital.” 

Once again, the Budget Bureau is revising in fiscal year 1963 section 
206 of the general provisions to make appropriations of the Public 
Health Service available for research grants to hospitals of the Vet- 
erans’ Administration. This will, if enacted, enable physicians and 
scientists of the Veterans’ Administration to compete for research 
project grants through methods comparable to those used by scien 
fists in the Public Health Service hospitals and in the St. Elizabeths 
Hospital. 

Recommendation No. 8 . — The Director of NIH reviews the training 
policies and procedures of the Institutes and the Division of General 
Medical Sciences for the purpose of obtaining a greater degree of uni- 
formity and simplification. 

Studies of various aspects of NIH training policies and procedures of 
the nature recommended by the committee have been in process for 2 
years, and extensive changes have been made in these programs. Sub- 
stantial gains in the direction of uniformity and simplicity have been 
possible in the past year. 

Examples of gains in uniformity which have recently been accom- 
plished include (1) establishment of a central office and mechanism for 
receipt and referral of all training grant applications in the Division 
of Research Grants, (2) adoption of a common appointment form 
(2271), (3) procedure to provide for DRG editing and coding for in- 
formational purposes of all trainee appointment notifications submit- 
ted by all training grant program directors, and (4) establishment of 


ADMINISTRATION OF GRANTS BY NIH 


47 


an Interbureau Advisory Committee to coordinate and seek uniformity 
of research and training policies and procedures. 

Policies acceptable uniformly to all Institutes have been developed 
in regard to (1) indirect cost payments on stipends, (2) payment of 
tuition and fees, (3) carryover to succeeding year of unexpended 
funds, and (4) a common forward financing procedure. 

There remain several differences in policies and practices among the 
several Institutes in regard to training grants which may be in the 
word of the committee report “be necessary in view of the individual- 
ized nature of XIH training programs/’ These are complex areas of 
activity that will be kept under constant surveillance. 

Recommendation No. 9 . — The Secretary of Health, Education, and 
Welfare carefully examine the existing programs and administrative 
arrangements for special-purpose training in the health field both in 
terms of overall Federal objectives in support of education and the 
impact of these programs on our educational institutions. 

This recommendation was addressed to the Secretary. The XIH 
will be guided by action taken by that Office. 

Recommendation No. 10 . — The appropriate executive agencies and 
committees of the Congress give particular attention to the problem 
of attracting outstanding students to the field of medicine. 

The scope of this recommendation exceeded existing XIH authority ; 
however, it was believed that fellowships for medical students such 
as is provided for in legislation recommended by the administration 
and now before the Congress would substantially expand the oppor- 
tunity for qualified youth to seek careers in medicine (H.K. 4999 ) . 

Recommendation No. 11. — Each participating institution be given 
the option of using either of two methods for computing the overhead 
allowance on supported research. 

One method would be the continued use of a flat rate adjusted pe- 
riodically to equal approximately 50 percent of the average rate of in- 
direct expenses based on total direct costs for all grantee institutions 
as a group, as measured by appropriate cost accounting principles and 
procedures. In lieu of the standard rate, and in order to provide equi- 
table treatment for those institutions possessing relatively high over- 
head costs, an institution would be allowed 50 percent of its actual in- 
direct cost rate determined in the same manner as above. 

The decision on indirect costs still rests with the Congress which has 
for 5 years restricted XIH to a 15-percent allowance for indirect costs 
notwithstanding the recommendation of the DHEW that this restric- 
tion be removed. 

Recommendation No. 12 . — Xo overhead be allowed on grants or 
grant items which do not entail actual indirect expenses, and an 
amount less than the regular rate be allowed when extramural re- 
search requires few institutional services. 

Recommendation No. IS. — XIH reexamine its policy of making in- 
direct cost payments on renovation and major equipment expenditures 
from grants for the establishment of clinical research facilities. 

The XIH concurred with the soundness of committee recommenda- 
tions Xos. 12 and 13. In the past. XIH had not excluded specific 
direct cost items from the computation of overhead since the 15-per- 
cent rate had resulted in less than full indirect costs for essentially all 
grantee institutions. The recent growth of program and center proj- 
ects pointed up the need to single out these items for special attention. 


48 


ADMINISTRATION OF GRANTS BY NIH 


Accordingly, procedures have been revised to exclude indirect costs on 
items such as (1) alteration and renovation, (2) fixed equipment that 
becomes part of real property, (3) rental equipment, and (4) confer- 
ences and symposia. Previous procedure will be continued to exclude 
indirect costs on research bed costs and on any part of the cost of 
equipment in excess of $2,500. Indirect costs will be negotiated on 
rentals and on such grants as those to medical schools in behalf of 
Veterans’ Administration employees. 

STATISTICAL AND ANALYTICAL ACTIVITIES 

In respect to your inquiry concerning the status of statistical and 
analytical activities for the grants program, I should like to empha- 
size, as Dr. Shannon did in the hearings before your subcommittee 
last August, that we do have in operation a statistical system which 
provides essential data covering the operations of the NIH extramural 
programs. This involves a framework of statistical and analytical 
activities ranging from the staff role of the Office of Program Plan- 
ning in the Office of the Director, NIH, including the basic data 
collecting activities of the Statistics and Analysis Branch of the Divi- 
sion of Research Grants, to the program analytical activities of the 
several Institutes and Divisions. The concern that we have expressed 
with this system relates to problems involved in its improvement, 
taking advantage of the capabilities presented by electronic data proc- 
essing and extending the valuable functional role that such activities 
can play in the conduct of the several programs of the National 
Institutes of Health. 

Although progress has been made in respect to such improvements, 
a number of complex problems have been encountered. A major prob- 
lem centers in the complexities involved in transforming the basis of 
our data processing activities from the current electric accounting ma- 
chine methods to the use of large-scale electronic data processing 
equipment utilizing magnetic tape methods. This fundamental pro- 
cedural change has involved extensive review and revision of the basic 
internal paper processing routines. Certain aspects of these changes 
are dependent upon the installation of new “data capturing” equip- 
ment. However, perhaps the biggest single problem we have en- 
countered in this area has been the difficulty of acquiring skilled pro- 
gramed upon whose capabilities the translation of the present data 
forms into those compatible with electronic data manipulation is de- 
pendent. This is an extremely scarce category of personnel as the 
help wanted ads in the Sunday New York Times will testify. 

The present salaries which the Federal Government has to offer in 
this area are just not competitive enough to enable recruitment and 
retention of a staff adequate to our needs. 

The situation has also been complicated by the involved task of 
shifting from a small-scale computer (IBM 650) to large-scale equip- 
ment (Honeywell 800 system) which is now in process of being in- 
stalled. Because of these difficulties we are at the present moment 
examining the feasibility of contracting with a suitable organization 
for the programing of our basic data processing routines and for the 
development of optimum systems for the maximum extension of elec- 
tronic techniques in this area. Such systems would substantially 


ADMINISTRATION OF GRANTS BY NIH 


49 


enhance the scope of data which can be encompassed within the basic 
statistical records and the speed with which such data can be made 
accessible for analytical and informational purposes. 

As noted in my comments during the committee hearing, we have 
also been reviewing the organizational arrangement under which the 
extramural statistical and analytical activities are now being con- 
ducted. We are at the present moment studying certain alternatives 
to the present setup which may provide for a closer relationship in the 
conduct of these activities with the process of policy and decision- 
making in the overall direction of NIH activities. We shall be glad 
to report further to you and your committee concerning such addi- 
tional developments in this area as they may emerge from our present 
activities. 


APPENDIX 2.— STAFF REPORT ON AUDIT OF EXPENDI- 
TURES OF NIH RESEARCH GRANT FUNDS BY PUBLIC 
SERVICE RESEARCH, INC. (SUBSIDIARY OF DUNLAP 
& ASSOCIATES, INC.), STAMFORD, CONN. 

CONTENTS 

Introduction : 

Background. 

Purpose and nature of review. 

Summary of findings. 

Findings : 

Public Service Research, Inc. 

Source of funds. 

Indirect costs. 

Equipment purchases. 

Hiring expense. 

Salary charges. 

Double salary charges. 

Rental expense. 

Travel expense. 

Expenses incorrectly treated as direct costs. 

Miscellaneous unallowable expenses. 

Exhibits. 

INTRODUCTION 

Background 

The Intergovernmental Relations Subcommittee, Committee on 
Government Operations, has for some time been studying the opera- 
tion of the extramural grant programs administered by the National 
Institutes of Health for the support of research and training activities 
conducted in university and other non-Federal facilities. NIH is a 
bureau of the Public Health Service within the Department of Health, 
Education, and Welfare. 

In House Report No. 321, issued April 28, 1961, the Committee on 
Government Operations called attention to a number of areas in 
which NIH policies and administrative practices were inadequate to 
assure the proper and economical expenditure of grant funds and 
made certain recommendations for correcting those deficiencies. The 
subcommittee has continued its study of the NIH grant programs and 
its efforts to secure improved management in their administration. 


50 


ADMINISTRATION OF GRANTS BY NIH 


Purpose and nature of review 

An audit was made of the research grants awarded to Public Serv- 
ice Eesearch, Inc. (PSE), in order to provide additional information 
concerning the extent to which NIH policies and procedures are 
adequate to insure the appropriate expenditure of public funds. The 
subcommittee had noted from NIH records that there were large 
discrepancies between the purposes for which the company had re- 
quested research grant funds and the manner in which these funds 
were reported as spent. Also, it had come to the subcommittee’s 
attention that PSE had used grant funds for the payment of fees to 
an affiliated company for the recruitment of personnel. 

While the amount of NIH research funds paid to PSE represents 
a small percentage of total NIH grant expenditures, NIH policies 
and management procedures provide little or no assurance that prac- 
tices similar to those followed by PSE in the use of grant funds are 
not widely prevalent. 

At the request of the subcommittee, the General Accounting Office 
assigned auditors to the subcommittee to review the expenditures 
made by Public Service Eesearch, Inc., from NIH grant funds. Due 
to time limitations, detailed examination was made only of selected 
transactions, and all expenditures were not reviewed. 

The findings are based on the review of pertinent records, tests of 
transactions, and discussions with PSE officers and other interested 
persons. 

The audit review was conducted during January 1962, at the office 
of Public Service Eesearch, Inc., 91 Prospect Street, Stamford, Conn. 

SUMMARY OF FINDINGS 

The audit of selected expenditures of NIH research grant funds by 
Public Service Eesearch, Inc., established that — 

(1) Grant funds were used to finance capital and other costs 
associated with establishing a new corporation. During the first 
year and a half of its existence, Public Service Eesearch, Inc., 
acquired practically all of its office equipment and furnishings 
from Federal research grants and contracts. 

(2) The corporation, according to its records, claimed a depre- 
ciation allowance in its Federal income tax returns for equipment 
purchased from NIH grants. 

(3) The corporation’s rent, maintenance, and moving expenses, 
and the expense of remodeling its rented quarters, were charged 
as direct costs to individual Federal grants and contracts. 

(4) The corporation derived a profit in excess of its actual in- 
direct costs from the overhead allowance (15 percent of total di- 
rect costs) paid by NIH to cover indirect costs. 

(5) Fees paid by the corporation to its affiliate, Clark, Chan- 
nell, Inc., for hiring expenses included a profit to the affiliate. 
Such fees were improperly billed as direct costs to particular 
NIH projects; the persons for whom hiring fees were paid 
worked on several projects and, in one case, the employee per- 
formed no research on the project to which his fee was charged. 

(6) Salary costs were improperly charged to NIH grants for 
(a) time spent by corporate officers in meetings of directors or 


ADMINISTRATION OF GRANTS BY NIH 


51 


stockholders and in the administration of corporation business; 
(5) time spent by a corporate officer as a consultant to XIH, for 
which he was also paid $50 a day plus travel expenses ; and (c) an 
employee who was hired to staff the company ? s W ashington office 
and performed no research on the project to which his salary was 
charged. 

(7) Various expense items were incorrectly classified as direct 
costs of particular grant projects, and in several instances enter- 
tainment expenses were improperly charged to XIH grants. 

(8) Travel expenses were incurred in some instances for pur- 
poses which do not appear to have a direct relationship to the 
projects charged. 

FINDINGS 


Public Service Research , Inc. 

Public Service Research, Inc., a commercial firm operating for 
profit, was formed on July 3, 1959, as a subsidiary of Dunlap & Asso- 
ciates, Inc., which held 2,000 of the 3,050 shares of PSR stock issued 
at the time of incorporation. Practically all of the remaining stock 
issued was held by officers of Dunlap & Associates. On June 29, 1961, 
Dunlap & Associates, Inc., acquired all shares of PSR stock not already 
held in exchange for shares of its own stock ( exhibit A) . 

From date of incorporation through the last board meeting of 
record, held on December 4, 1961, the PSR board of directors, con- 
sisted of three members — Dr. Jack TV. Dunlap, chairman ; Dr. Herbert 
H. Jacobs, president ; and Ralph C. Channell. As of December 4, 
1961, these directors were president, vice president, and executive vice 
president, respectively, of Dunlap & Associates, Inc. Ralph C. Chan- 
nell was also chairman of the board of Clark, Channell, Inc., an 
affiliated company. Since December 9. 1961, Dr. Robert J. Schreiber 
has served as president and a director of PSR. He was previously vice 
president of the firm. 

Public Service Research, Inc., was established for the stated purpose 
of conducting fundamental and applied research in public health, 
education, welfare, safety, and related fields. Its research work is 
housed in rented quarters in Stamford, Conn. An office was main- 
tained bv the company in Washington, D.C., from July 1960 through 
March 1961. 

As of December 30, 1961, PSR had 10 full-time and 11 part-time 
employees, 4 of whom divided their time between activities of PSR and 
Dunlap & Associates. PSR, from date of incorporation to December 
30, 1961, had used 20 Dunlap & Associates employees for some of its 
work. The permanent and part-time staff of PSR consists of 6 senior 
scientists, 3 research associates, 1 research assistant, and 11 technical 
assistants. 

Source of funds 

From July 3, 1959, to December 31, 1961, PSR received cash funds 
from all sources in the amount of $445,161, of which $426,601 (95.9 
percent) came from Federal sources and $378,596 (85.1 percent) from 
XIH grants alone. A total of $18,560 (4.1 percent of all funds) was 
obtained from nongovernmental sources, including the sale of capital 
stock (exhibit B.) 


52 


ADMINISTRATION OF GRANTS BY NIH 


For the period July 3, 1959, to January 28, 1960, the date on which 
stock subscriptions were paid, PSE operated solely with funds from 
NIH grant EG-6073(E1). Although 2,000 shares of the total original 
stock issue of 3,050 shares were subscribed to by Dunlap & Associates, 
Inc., the latter did not pay for this PSE stock until more than 6 
months after the corporation was formed. On April 3, 1959, NIH 
research grant EG-6073(E1) in the amount of $86,020 was awarded 
to Dunlap & Associates, Inc., for the period of April 1, 1959, to March 
31, 1960 (later extended to August 31, 1960). On April 27, 1959, 
NIH made the first grant advance of $43,010, which was never de- 
posited by Dunlap & Associates, Inc, Dunlap & Associates, Inc., as a 
result of a meeting held on June 16, 1959, with NIH representatives, 
obtained approval for transferring the grant EG-6073(E1) to an 
existing or new corporation. On July 3, 1959, PSE was established. 
The expenses incurred (about $2,500) by Dunlap & Associates, Inc., 
prior to the transfer of this grant and the undeposited check of $43,010 
were transferred to PSE. 

Indirect costs 

The appropriation act permits NIH to pay grantees up to 15 per- 
cent of the direct costs of a project as an allowance to cover the in- 
direct or overhead costs of performing research. With certain ex- 
ceptions, it is NIH’s policy to allow grantees a fiat 15 percent over- 
head rate. The purpose of the indirect cost allowance is to compensate 
an institution or firm for the multipurpose facilities and “housekeep- 
ing” services that are normally required for the conduct of a research 
project. These facilities and services ordinarily include such things 
as office and laboratory space and equipment, library facilities, light, 
heat, maintenance, and administrative services. 

Wliile PSE accumulated total overhead expenses (identified in its 
records as general and administrative costs) of only $33,000 from 
incorporation in July 1959, to December 31, 1961, it charged overhead 
costs totaling $47,500 to NIH grants. Moreover, this amount 
($47,500) does not include overhead allowances received from several 
other grants and contracts. 

In a completed Public Health Service contract (SAph 76293), PSE 
was allowed, in a final invoice dated August 23, 1961, an amount of 
$2,260, and an indirect cost rate of 6.66 percent of all direct costs under 
the contract, to cover general and administrative expenses. Despite 
the establishment of a 6.66 percent overhead rate for the Public Health 
Service contract, NIH has continued to allow PSE an overhead rate 
of 15 percent. 

It should be noted that the indirect cost payment is computed as a 
percentage of total direct costs. Consequently, when charges which 
are properly overhead expenses are treated as direct costs of a project, 
the Government not only finances 100 percent of such costs but also 
pays an indirect cost allowance on the misclassified items as well. 

Equipment purchases 

The total cost of equipment items, valued at $50 or more, purchased 
by PSE from its inception to December 31, 1961, amounted to $16,235 
(general purpose $8,335, and special purpose $7,900) . Of this amount, 
$11,373 was charged to NIH grants, $4,397 was charged to another 
Federal grant and to a Public Health Service contract, and only $465 


ADMINISTRATION OF GRANTS BY NIH 


53 


($340 for a car and $125 for a file cabinet) was charged to corporate 
funds. In addition, $743, covering the cost of dividing the rented 
area which houses the corporation's offices was charged as a direct cost 
to NIH grants. 

Under the NIH policy in effect until July 1, 1960, equipment pro- 
cured from grants awarded prior to this date became the property of 
the firm acquiring it. Of the $11,373 charged to NIH grants, title to 
equipment costing about $7,500 (charged to the first two grants 
awarded April 3, 1959, and December 1, 1959) vests with PSR, while 
title to about $3,900 vests with NIH. According to the company’s 
records, it not onl} T charged to Federal funds the cost of the equipment 
to which it was given title (plus $1,125, representing a 15 percent over- 
head allowance), but also claimed a depreciation allowance of 
$2,576 for this equipment in its Federal tax returns for the fiscal years 
ended March 31, 1960, and March 31. 1961. By taking this deprecia- 
tion, the corporation, in effect, reduced its actual income for tax 
purposes. For the $3,900 of equipment owned by NIH. the company 
has not established a liability to the Government for the funds ad- 
vanced to purchase this equipment, but instead has treated the cost of 
the equipment as a direct cost of the project. Under this accounting 
practice the company has claimed 15 percent of the cost of this equip- 
ment as overhead allowance and, consequently, has received $585 for 
acquiring the equipment for the Government. 

The following details were ascertained from a review of equip- 
ment transactions under the first two NIH grants received by PSR. 
NIH grant RG-6073(R1), for $86,020, included $3,800 for the pro- 
curement of office equipment. Grant RG-7025, for $98,644. also 
contained provision for office equipment ($3,783) and various instru- 
ments and devices ($2,500). Together these two grants provided 
$7,583 for the purchase of office equipment. PSR bought one less 
calculator than requested, but purchased considerably more items of 
office equipment at a total cost of $8,813. These purchases include 
some office furnishings such as carpets, curtains, Venetian blinds, pic- 
tures, desk trays, and lamps which were not requested in either of the 
grant applications (exhibit C). Moreover, while one grant provided 
$2,500 for instruments and devices. PSR procured only a single such 
item costing about $34. According to the president of PSR, this 
piece of equipment was never used. Also, subsequent to the exten- 
sion of the period of NIH grant RG-6073 (Rl) from March 31. 1960, 
to August 31, 1960. PSR charged the cost of two desks ($168.97 each) 
to this grant. The cost of one calculator ($1,075) and one electric 
typewriter ($715) were charged in October I960 and January 1961, 
respectively, to a grant (RG-7025) which was to exoire on January 
31,1961. 

A contract (HETT : SAph 76293) for $37,390, awarded to PSR by 
the U.S. Public Health Service on December 8, 1960, authorized the 
procurement of special purpose and general office equipment costing 
over $5,000. with title to remain with the Government. The work 
covered by the contract was performed between December 20. I960, 
and April 15, 1961. On December 11. 1961. PSR submitted a bid to 
the Public Health Service for the purchase of most of the equipment 
that was not declared expendable at prices substantially below the 
Government’s costs. For example, a tape recorder costing $160.76 


54 


ADMINISTRATION OF GRANTS BY NTH 


was priced at $60 and oscilloscopes costing $625 each were priced at 
an average of about $200 each. This equipment was offered for sale 
to PSE on February 15, 1962, at the bid price. When the transaction 
is completed, the Government will recover approximately one-third 
of the cost of this equipment used only a few months on the project. 

Included in the PSE bid proposal was a request to use, rather than 
purchase, one oscilloscope and one tape recorder in connection with 
NIH grant B-2875. This request was agreed to by the Public Health 
Service despite the fact that no showing was made or required that 
the equipment is necessary for the grant project. Moreover, in a new 
grant (MY-5888) awarded to PSE during March 1962, ISTIH pro- 
vided funds for the purchase of a tape recorder even though the 
company now has two such instruments on hand from the completed 
Public Health Service contract. 

Title to $1,312 of equipment acquired under a National Science 
Foundation grant presently vests with the Government. This grant 
will terminate in September 1962. 

In addition to acquiring practically all of its office equipment and 
furnishings from Federal grants and contracts, PSE also charged 
the cost of dividing the area rented at its new location, 91 Prospect 
Street, as a direct cost to Federal grants and contracts. The total cost 
of this work was $877, of which $743 (plus 15 percent for overhead 
expenses) was charged to NIH grants. These improvements had not 
been requested in any of the firm’s approved grant applications. 

Equipment items less than $50 each . — From date of incorporation 
to December 31, 1960, PSE expended $6,695 for equipment items cost- 
ing less than $50 each. Of this amount, $3,783 was charged to various 
NIH grants and $2,912 to other Government grants and contracts. 

All of these items were charged as direct costs, rather than over- 
head expenses. However, many of the items purchased, such as pic- 
tures, waste baskets, floor covering, desk trays, curtains, lamps, and 
Venetian blinds, do not appear to be the type of equipment that is 
necessary for the conduct of a research project and, therefore, allow- 
able as a direct cost. 

Hiring expense 

From the date of its incorporation (July 1959) to December 31, 
1961, PSE expended about $4,900 for hiring expense. Of this amount, 
$4,738 was charged to NIH grants, including $3,628 in fees paid to 
Clark, Channell, Inc., a company in which Dunlap & Associates, Inc., 
had a financial interest. The remaining $1,110 charged to NIH 
grants was primarily for advertising, travel reimbursements to pro- 
spective employees, and dinner expenses. 

Three employees were hired by PSE through Clark, Channell, Inc. 
One of these employees was hired for the Washington, D.C., office 
as a result of an oral hiring agreement between PSE and Clark, Chan- 
nell, Inc. (job A), and the other two employees were hired as a 
byproduct of a hiring agreement between Dunlap & Associates, Inc., 
and Clark, Channel!, Inc. (job B). These two agreements were 
treated by Clark, Channell, Inc., as two jobs, and assigned separate 
job numbers. 

PSE was originally billed $2,350 by Clark, Channell, Inc., in June 
1960, for Job A. The person for whom this fee was incurred was 
separated from PSE after being employed about 2 months. Dunlap 


ADMINISTRATION OF GRANTS BY NIH 55 

& Associates, Inc., directed Clark, Channell, Inc., to cancel this bill- 
ing, and a credit memo in the amount of $2,350 was issued in August 

1960. Later in August PSR was rebilled $253 for this service. 
PSR paid this fee in September 1960, and charged it to XIH grant 
RG-6073 (Cl). However, during his employment with PSR, none 
of the employee’s salary ($3,099) was charged to this grant. Instead, 
$1,630 of his salary was charged to general and administrative ex- 
pense and $1,469 was charged to XIH grant RG-7025, although he 
performed no research work on that project. 

PSR was billed $3,376 by Clark, Channell, Inc., for the two em- 
ployees hired through job B. Clark, Channell’s records did not iden- 
tify the costs applicable to the two employees hired by PSR since 
the recruitment effort was directed toward selecting employees for 
various Dunlap & Associates positions and costs were accumulated 
for the entire job. The fees paid by PSR consisted of $900 and 
$2,476 computed on the basis of 15 percent of each employee’s first- 
year salary. A comparison of the total billing and the costs recorded 
for job B indicate that the fees charged PSR include a profit for its 
affiliate, Clark, Channell, Inc. 

With respect to the services of the employees hired through job B. 
it was found that they worked on several PSR projects, although their 
entire fees of $900 and $2,476 were charged, respectively, to XIH grants 
RG-6073 (Rl) and RG-7025. This employment pattern suggests 
their hiring was intended to fill general staffing requirements of the 
firm, rather than intended for any specific XIH project. It should be 
noted that PSR did not request funds for hiring expenses in its grant 
applications. 

/Salary charges 

From the date of incorporation (July 1959) through December 31, 

1961, salarly payments of $67,800 (exclusive of leave and holiday costs 
amounting to $6,400) were paid to PSR officers. Of this amount, 
$58,200 was charged as direct costs to XIH grants, $5,300 was charged 
to other Government grants and contracts, $3,200 was charged to non- 
Government projects, and only $1,100, or iy 2 percent, was charged to 
general and administrative expenses. During this period, six meet- 
ings of directors or stockholders were held during regular working 
hours and PSR recorded salary payments to one or more of the officers 
attending these meetings as direct charges to XIH grants. Only one 
instance was found where any part of the salary of an officer who at- 
tended these meetings was charged to general and administrative 
expenses (exhibit D). 

During its first 9 months of operation, PSR charged only 11 hours 
of salary costs to general and administrative expenses for corporation 
officers. 

For an employee hired by PSR to staff the Washington office, a total 
of 191 hours ($1,469) was charged to XIH grant RG-7025 and 212 
hours ($1,630) was charged to general and administrative expenses. 
A review of the research project file and an interview with this em- 
ployee revealed that he did not participate directly in grant project 
RG-7025 and little, if any, of his time was actually spent on research 
work. 


56 ADMINISTRATION OF GRANTS BY NIH 

Double salary charges 

Dr. Herbert H. J acobs, director of research and former president of 
PSE, has served as a consultant to NIH since June 29, 1959. He is 
paid $50 per day, in addition to travel expenses, when actually serving 
in this capacity. On nine separate occasions, while being reimbursed 
by NIH as a consultant, Dr. Jacobs also charged a total of $825 to 
NIH grants for the same day (exhibit E) . 

Dr. Jacobs has been a member of the NIH Accident Prevention 
Study Section since June 29, 1959. As such, he was a member of that 
advisory panel when it reviewed and approved grant EG-7025, for 
which he was the principal investigator, and at the time NIH re- 
newed its support of grant EG-6073(E1) , for which he was identified 
as senior scientist. However, in accordance with NIH practice, Dr. 
Jacobs did not take part in the study section’s consideration of his 
company’s grant applications. 

Rental expense 

In August 1959, PSE rented space at 65 South Street in Stamford, 
Conn., to house its operations. PSE maintained space at this address 
for almost 2 years. Of the total rental cost of $3,900, $3,620 was 
charged to the first two NIH grants (EG-6073(E1) and EG-7025), 
and the remainder to a Public Health Service contract. None of the 
$3,900 rental cost was charged to general and administrative expenses, 
although at least part of the rental cost should have been so charged. 

Since PSE moved into its new quarters on Prospect Street, Stam- 
ford, Conn. (March 1961), the rental of $700 per month has been 
allocated to all projects, including administration, on the basis of an 
estimated percentage of the total space required for each project for 
a given period. 

For the period July 1960 through March 1961, the rental cost of the 
Washington office (Munsey Bldg.) was $1,270, of wdiich approxi- 
mately $100 was charged to grant EG-7025 and $1,170 to general and 
administrative expense. According to the president of PSE, this 
office was maintained subsequent to the termination of its only em- 
ployee (July 22, 1960) for use by PSE officers when in Washington 
on business. He stated that PSE had considered hiring someone else 
to head this office but later decided to close it. 

From date of incorporation (July 1959) through December 31, 1961, 
PSE did not request a rent item in any of its grant applications, in- 
cluding applications for the renewal of grants, despite the fact that 
rent was consistently paid directly from grant funds. 

Travel expense 

Based on a sample test of travel expenses of PSE employees, no 
instances were found on duplicate travel charges. In several in- 
stances travel expenses were incurred for the purpose of attending pro- 
fessional society meetings which do not appear to have a direct rela- 
tionship to the projects charged. 

Expenses incorrectly treated as direct costs 

Maintenance and repair. — For the company’s first 9 months ending 
March 31, 1960, the PSE books showed that approximately $187 was 
incurred for maintenance and repairs. Of this amount, about $140 
was for cleaning of the premises occupied by PSE. The $187 was not 
charged to general and administrative expenses but was charged in- 


ADMINISTRATION OF GRANTS BY NIH 


57 


stead to NIH grant RG-6073 (Rl). In subsequent periods, mainte- 
nance and repair expenses have been charged to various project ac- 
counts and to administrative expense on the basis of "reasonableness." 

Books, subscriptions, and magazines. — NIH policy provides that 
books and periodicals necessary to the conduct of an individual re- 
search project may be purchased from grant funds. However, grant 
funds may not be used for the purchase of books to be placed on li- 
brary shelves for general use by staff. Direct charges were made to 
grants RG-6073 (Rl) and RG-7025 for such general reference ma- 
terials as a private secretary’s Encyclopedia Dictionary, subscrip- 
tions to New York Times and New York Herald-Tribune, and the 
Statistical Abstract of the United States. 

Miscellaneous charges . — A review of vouchers selected at random 
revealed that such items as hand soap, toilet tissue, office supplies, ac- 
counting supplies, light bulbs, paint and paint roller, and paper towels 
were charged to NIH grants RG-6073 (Rl) and RG-7025. 

The expense incurred, $187, for moving from 65 South Street (old 
location) to 91 Prospect Street (new location) was charged to NIH 
grants RG-6073 (Cl ) , RG-7025 (Cl ) , and B-2875. 

Miscellaneous unallowable expenses 

Expenses for entertainment, meals, refreshments, and parties may 
not be charged against a grant account under NIH policy. 

NIH grant RG-7025 was charged with $55.11 as "meeting expenses." 
This entire amount was spent for luncheons and dinners, for which 
PSR employees were reimbursed. NIH grant RG-6073 (Rl) was 
charged with $7.50 as “registration fees,” when the expense was ac- 
tually for a luncheon for which a corporate officer was reimbursed. 
Approximately $82 for luncheon and dinner expenses for PSR em- 
ployees and job candidates were found included in the hiring expenses 
charged to NIH grants. 


Exhibit A . — Exchange of stock , Dunlap & Associates , Inc. ( D . & A.) for Public 
Service Research, Inc. (PSR), June 29, 1961 


Stockholder 

Title 

PSR shares 
| exchanged i 

Dunlap & 
Associates 
shares 
received ! 

Dunlap & Associates, Inc __ 


2,000 


Jack W. Dunlap _ . 

President, Dunlap & Associates and chair- 
man of board, PSR. 

300 

780 

Ralph C. Channell 

Executive vice president and a director, 
Dunlap & Associates; chairman of 
board, Clark, Channell, Inc.; a director, 
PSR. 

300 

780 

Herbert H. Jacobs 

Vice president and a director, Dunlap & 
Associates; a director, PSR, president 
of PSR until December 1961. 

800 

2, 080 

Alvin M. Miller. 

Treasurer, Dunlap & Associates 

100 

260 

Donald E . Payne . 

Secretarv-treasurer, PSR 

100 

260 

Robert J. Schreiber . 

j President and a director, PSR, since 
December 1961. 

500 

1.300 

Total 


*4,100 

5,460 


1 Source: PSR stock record book. 

2 Source: Dunlap <k Associates’ books of account. 

2 1,000 shares (150 Jack W. Dunlap, 150 Ralph C. Channell, 400 Herbert H. Jacobs, 50 Donald Payne, 
250 Robert Schreiber) issued on June 28, 1961, the day prior to Dunlap & Associates acquiring outstanding 
minority interest. 


58 


ADMINISTRATION OF GRANTS BY NIH 


Exhibit B. — Schedule of funds made available to PSR, by source , from 
incorporation to Dec. IS, 1961 


Source 

Period of grant 

Amount 

Percent 

NIH grants: 

RG-6073(R1) 

Apr. 1, 1959, to Aug. 31, I960. 

$86,020. 00 

84. 953. 00 

98. 644. 00 

46. 142. 00 

15. 464. 00 
i 6, 872. 00 

7. 475. 00 

4. 025. 00 
2 23, 037. 00 

3 5, 964. 00 


RG-6073(C1) 

Sept. 1, I960, to Nov. 30, 1961 


RG-7025 

Dec. 1, 1959, to Jan. 31, 1961 


RG-7025(C1) 

Feb. 1, 1961, to Jan. 31, 1962 


B-2875 ' 

Sept. 1, 1960, to Aug. 31, 1961 


B-2875(C1) 

Sept. 1, 1961, to Aug. 31, 1962 


B-3056 

Jan. 1 to Dec. 31, 1961. 


MY-5065(A) 

May 1, 1961, to Apr. 30, 1962 


GN-8035 

do. - 


M-5364 

Sept. 1, 1961, to Aug. 31, 1962 — 


Total ___ 



378, 596. 00 

85.1 

Other Government grants and contracts: 
NSF: C-180 

Oct. 14, 1960, to Sept. 14, 1962. 

< 10, 813. 99 
3 37, 191. 62 
60 


HEW SAph 76293 

Sept. 15, 1960, to Apr. 15, 1961 


HEW SAph 76970 

June 15, 1961, to June 1, 1962 


Total. 



48,005. 61 

10.8 

Other sources: 

Paid in capital and surplus 


8, 200. 00 
800. 00 

7 5,000. 00 

4,560.00 


Dunlap & Associates PO G2716, Mar. 

1 to 31, 1961. 

Kalamazoo Foundation, June 16, 
1961, to Feb. 28, 1962. 

Sale of self-sponsored research data __ 







Total 



18, 560. 00 

4.1 

Total. 


445, 161. 61 

100.0 




1 Total grant, $13,744. 

2 Total grant, $30,716. 

2 Total grant, $11,928. 

< Total grant, $28,800. 

* Total contract, $37,390. 

« Total contract, $31,304. 

2 Total amount, $20,000. 

Source: PSR general ledger and general journal. 


ADMINISTRATION OF GRANTS BY NIH 


59 


Exhibit C . — Schedule of equipment items budgeted and procured by PSR under 
NIH grants RGS07S(R1 ) and RG-7025 


Item 

RG-6073(R1) 

RG-7025 

Budget request 

Procured 

Budget request 

Procured 

Num- 

ber 

Amount 

Num- 

ber 

Amount 

Num- 

ber 

Amount 

Num- 

ber 

Amount 

Various instruments and 









devices 






(i) 

$2,500 

1 

* $33. 79 

Calculators 

2 

$2,000 1 

1 

$1,075.42 j 

1 

1,000 

1 

1, 075. 42 

Filp r>»hinp.t.«; 

3 

240 



6 

480 

1 

124.76 

Desks 

2 

350 



5 



844.85 

3 

525 

4 

675. 89 

Chairs 

2 

100 

12 

526.08 

3 

150 

10 

419.63 

Tables 

2 

160 

4 

361.59 

3 

240 

3 

317. 81 

Electric typewriters .. 

1 

600 

1 

715.13 

1 

600 

1 

715. 13 

Adding machines 

1 

350 

1 

292.48 

2 

788 



Typewriter platform 



1 

34. 76 





Wastebaskets 



4 

18.13 




4 

18. 13 

Bookcases 



5 

166.24 



3 

107.85 

Desk travs 



3 

18.30 


1 



Letter files 



3 

449.53 






Curtains 



2 

23.72 

1 






Carpets 



3 

208.58 





Pictures 



3 ! 

25.80 





Lamps 



3 

64.98 



3 



52. 18 

Venetian blinds 



7 

34. 51 





Chalk board 



4 

104.57 





Manual typewriter 







1 

230.66 

Calculator stand 







I “ 

1 

37.03 

Items under $10 




37.23 




12.83 

Letter trays 








8 

24. 39 











Total 

13 

3,800 

* 62 

5,001.90 

19 

6,283 

*41 

1 

3, 845. 50 


1 Not specified. 

1 This item classified as a dual-control brake is only item not office furniture or furnishings. 
* Does not include various items costing less than $10. 

Source: PSR grant applications and expenditure reports. 


60 


ADMINISTRATION OF GRANTS BY NIH 


Exhibit D. — Schedule of PSR selected administrative time ( director or stock- 
holder meetings) charged to NIH grants and other projects 


Date of meeting 

Time 

Person for whom 

Hours 

Project charged 


started i 

charged 

charged 2 

July 6, 1959 

4:00 p.m___ 

Herbert Jacobs 

7H 

8 

RG-6073(R1). 

RG-6073(R1). 

RG-6073(R1). 

RG-6073(R1). 

RG-7025. 



Robert Schreiber _ 

Nov. 12, 1959 

10:30 a.m__ 

Herbert Jacobs . _ 

Mar. 21, I960 

10:00 a.m__ 

Robert Schreiber. . 

8 

May 9, 1960 

9:30 a.m__ 

do ... 

8 

Dec. 23, 1960 

9:14 a.m___ 

Herbert Jacobs _ . 

8 

RG-7025. 


Robert Schreiber _ 

8 

RG-7025. 



Donald Payne 

8 

RG-7025. 

Sept. 21, 1961 

9:00 a.m___ 

Herbert Jacobs 

I i 

RG-7025 (Cl). 
Administration. 



\ 4 



Donald Payne 

8 

RG-7025 (Cl). 
RG-7025 (Cl). 
HEW: SAph 76970. 



Robert Schreiber 



1 


l o 


1 The minute book did not record the time of adjournment. 

2 Represents total time charged for that day. 

Source: PSR minute book and time and payroll records. 


Exhibit E. — Schedule of double salary payments from Government funds to a 

PSR officer 


Date 

Consultant 
fee paid 
by NIH 

Salary cl 
NIH g 

RG- 

6973(R1) 

larged to 
;rants 1 

RG-7025 

Leave 
charged 
to NIH 
grants 2 

Indirect 

cost 

allowance 
on salary 
and 
leave 3 

Total to 
NIH 
grants 

Jan 8, 1960 4 

$50. 00 

$77. 78 


$6. 55 

$12. 65 

$96. 98 

May 4, 1960 6 

50. 00 


$77. 78 

6. 55 

12. 65 

96. 98 

Aug 10 1960 4 

50. 00 

77. 78 


6. 65 

12. 65 

96. 98 

J- IV V-/V" — — — — 

Ai lff ii 1960 4 __ 

50. 00 

77. 78 


6. 55 

12. 65 

96. 98 

A n<r 19 1 960 4 

50.00 

77. 78 


6. 55 

12. 65 

96. 98 

Jan 4, 1961 4 

50. 00 


77. 78 

6. 55 

12. 65 

96. 98 

Jan* 10, 1961 5 

50. 00 


38. 89 

3. 77 

6. 32 

48. 98 

Jan* 11 1961 6 

50.00 


6 77. 78 

6. 55 

12. 65 

96. 98 

Apr*. 26, 1961 5 

50. 00 

e 38. 89 

8 38. 89 

6. 55 

12. 65 

96. 98 

Total 

450. 00 

350. 01 

311. 12 

56. 17 

107. 52 

824. 82 


1 Represents total salary cost of official recorded by PSR for that day. 

2 Computed according to PSR’s policy of accruing leave on basis of direct salary charges (0.084 X hours 
of salary charges X salary rate). 

3 Computed on basis of 15 percent allowed by NIH. 

4 NIH consultant fee paid for official on field trip for NIH. 

5 NIH consultant fee paid for official serving on study section panel, 
e Continuation grants. 

Source: NIH payroll records and vouchers; PSR time and payroll records. 

























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