Let the National Institutes of Health Delegate Medical Research to Private Foundations

Right now, the entire world of medical research is in turmoil because of a unilateral decision of the Trump Administration, driven no doubt by the pervasive influence of Elon Musk, to impose this edict about the operations of the National Institutes of Health:

For any new grant issued, and for all existing grants to IHEs [Institutions of Higher Education] retroactive to the date of issuance of this Supplemental Guidance, award recipients are subject to a 15 percent indirect cost rate.  This rate will allow grant recipients a reasonable and realistic recovery of indirect costs while helping NIH ensure that grant funds are, to the maximum extent possible, spent on furthering its mission.

There is an evident disjunction between the current contracts and future ones, for even though the changes are said to apply only after the date of issuance of the edict, these strictures are retroactive curtailment of existing contractual rights. It is a clear breach of contract, which could well support a constitutional challenge for a taking of vested rights under the Takings Clause of the Fifth Amendment to the US Constitution. But whatever the outcome of any such suit, it is always unwise to disrupt settled expectations on transactions of this magnitude, whose immediate consequences are likely freezes on hiring and research activities. Some fierce Trump supporters insist that these cuts were long overdue, as indirect costs have become a racket that allow self-indulgent universities to feed at the public trough. Yet the American system of medical research has been, for all its flaws, a long-term success. While modest reform should be welcome, taking the meat axe to these programs is just the wrong way. No private firm would ever engage in such reckless behavior. Putting these changes off until the new round of applications allows for these budget cuts to be carefully considered under the leadership of the new NIH director, Dr. Jay Bhattacharya.

The Trump directive notes that private grant agencies often use indirect cost recovery at 15 percent or less. But these are not apples-to-apples comparisons because of the inherent differences between these public and private institutions.  If these differential rates are driven by bureaucratic red tape and lead-footed oversight, then some cutback in indirect costs is needed, contingent on reforming the overall grant structure. Yet, if the government grants are run on a scale larger than any private grant, higher indirects could be cost justified.

The larger question is whether there is any sensible way to reform indirect costs for the government grant. Right now, the most salient figure is that all grants from the NIH are administered from the center through standardized NIH processes, which are hard to change.  Yet, if public grants are more costly because they lack incentives that private foundations dealing with medical research have to make their smaller operations run better, at this point, many players operate in a decentralized fashion such that they can avoid lockstep practices and learn from each other. 

In preparing for this column, I benefited from the advice of one such entrepreneur, Ilana Golant, who is the head of the Food Allergy Fund, which sponsors research on a massive social problem that often goes beneath the radar. She offered sensible reasons why these private institutions are nimbler and more inventive than their NIH-rivals. Thus, the natural inertia of government program comes from lockstep programs run by risk-averse administrators who will get little credit for silent improvements while taking the heat for notable failures, especially when there is not a trail of prior publications to pave the way. Private foundations are more likely to take fliers that often fail but which generally generate huge returns when they succeed.  That inertia, in turn, makes it difficult for public agencies to respond to recent advances in research. Their superior administrative skills often enable these private agencies to fund clinical trials earlier in the research cycle, which trims overall costs, speeds trials for good projects, and terminates bad projects early in the cycle. Shorter periods reduce the cost of running these trials and thus the indirect costs. Private foundations also find it easier to make midcourse adjustments in funding levels in response to new information that emerges within the general field or from the clinical trials themselves. Their active oversight of these projects by scientific boards pushes decisions forward without the NIH’s new layers of paperwork during and after the grant period. In addition, private funding groups can better combine basic research with tech transfer possibilities, which is a source of additional funding for research scientists and the institutions with which they work. Moreover, private organizations can better coordinate collaborative research across different research teams, further speeding research progress.

It is, of course, incumbent on the NIH to try to smooth out its internal processes, but the contrast between public and private institutions suggests a path for alternative funding paradigms for funding medical research by taking a leaf from private institutions. Here is the inspiration.  All universities and charitable institutions must manage their endowments to maximize the risk-adjusted rates of return from their financial investments. One inefficient way to do this is to have the parties in charge of these funds do all the work themselves. That approach, therefore, faces the systemic risk that this organization will not have reliable internal benchmarks against which to measure their performance or to be confident that they have not made some common mode error that undermines the whole portfolio. So, it is now an ever more common practice for these institutions to outsource this management responsibility. Nor is it necessary to turn over managing the endowment to a single outside firm, as a further element of competition sees the advantage in having several separate managers take responsibility for different portions of the endowment, which allows for both annual and continuous comparisons of outcomes.

The NIH should be able to adapt its grant-making processes to move in that direction. There is no reason why only NIH-run committees should make these grant evaluations. Instead, the NIH could turn over some substantial portion of its endowment to multiple private institutions like the Food Allergy Fund in the form of block grants, which they in turn can award to individual researchers and teams. These groups already have in place, in time-tested fashion, an oversight function for picking the grantees, advising them on project formation, new arrangements with other firms, and conducting periodic evaluations of their performance.  The NIH must exercise its oversight function in selecting the right institutional players and setting whatever terms and conditions are conducive to effective delegation of the granting process.  But that oversight burden should be a small fraction of the current costs to that agency for making individual grants. The different approaches of different foundations and grantees can act like laboratories for innovation, making it easier to expose and correct unanticipated glitches.  The NIH can continue to award some fraction of government grants directly as a further benchmark, just as fast-food franchisors operate some fraction of their outlets by themselves.

As a matter of general strategy, it would be unwise to make any organizational grants without requiring grantee institutions to contribute some of their own money, say 10 percent of the block grant, to act as an additional safeguard against abuse. Once this process is carried out, it becomes more likely that the 15 percent indirect cost limitation can be met, as the granting organizations can work with their research grantees to get have their home institutions to commit to covering some portion of their indirect costs, where the incentives to pad budgets are likely to be far weaker. And if these techniques work, the groups that receive federal funding in this way may find it easier to expand their private donations, thereby creating further expansion of activities for existing firms and encouraging new foundations to start up that could in time add to the roster of new applicants, and encouraging Congress to fund new researches for medical research given the higher rates of return. 

This strategy of mass grants is not limited to medical research but could be carried out for research grants in other areas dealing with such matters as education and welfare. Indeed, the Trump administration should be sympathetic to this overall approach because its close parallel is block grants from the federal government to the states designed to be responsive to the variations in their local conditions. In general, government intervention should be regarded as an evil until it is shown to be a good. The massive expansion of government involvement should be confined to areas where markets cannot supply the public goods needed. However, just because the government must run the military does not mean it should not contract out the construction of new weapons to private parties. Getting the right balance is key, so a dose of delegation is what the NIH needs.

Richard A. Epstein is a senior research fellow at the Civitas Institute. He is also the inaugural Laurence A. Tisch Professor of Law at NYU School of Law, where he serves as a Director of the Classical Liberal Institute, which he helped found in 2013.