Senator HARKIN. I would like to tackle this. Of course, we heard about the costs of the yacht and the flowers and things at Stanford University that were included. We have an indirect cost range from 6.3 percent for the foundation at New Jersey Institute of Technology to 155 percent for the Michigan Cancer Foundation.

For colleges and universities, the rate ranges from 26.3 percent for New Mexico State University to 108 percent for Gettysburg College.

We also computed the space difference between a research project at the University of Washington, I believe it was, and Southern California. I'll have my staff correct me as I go along, but at one university they had allocated 1.1 million square feet, and the other one was about 500,000 square feet for similar research projects, with obvious indirect costs being a lot more at one than the other. My staff says both received about the same amount of money from NIH for the research work, but the indirect costs are obviously a lot more in one case than in the other.

Tell me about these charts you have here, Mr. Kusserow. What should we be looking at here?

Mr. KUSSEROw. Let me see if I can put the whole discussion in context. First of all, there are roughly 2,800 colleges and universities in the country that have Federal money flowing through them, and all but 39 of those schools are under the cognizance of HHS, meaning under the cognizance of my office.

Cognizance means that, years ago, if the Department of Education had some money on a campus, they would go and audit it. Then the Department of Commerce would go out to the same university and audit their own money. Then we would go out and audit ours, and everybody in turn would go out.

What OMB has decided is that that is a very inefficient way in which to do audits. Plus, there is always the problem of whether people are moving money around, depending upon who is arriving to do the next audit. So they said whoever has the most money going to the school should have the responsibility of being the Federal auditor. They formalized that decision under OMB circular A88. The way that ended up, though, is that virtually the entire universe went to our Department because we have so much in the way of research money out there. So we had most cognizance assigned to us.

For the purpose of this discussion, I would mention that out of those 2,800 schools, the 39 that belong to the military industrial complex includes Stanford University. So that was not our school, it was the Defense Department's.

Senator

Department

HARKIN. The Stanford deal was a Defense

Mr. KUSSEROW. A Defense Department school, yes. I would be shocked if those kinds of horror stories appeared in our area of cognizance. The point of this is that it was not our school.

I think the more important thing in trying to get a handle on the problem is to realize that if you were to go from that 2,800 down to the number of schools that really engage in research grant work, then you get down from 2,800 to 600. If you were to ask who gets the most money, 95 percent of the money is flowing to 276 schools.

So suddenly we go from a universe of 2,800 down to 276 where virtually all the money is going.

The chart in front of you on the top left basically tries to outline how much money is out there. You can see that from our end of the pot, meaning from NIH research, we have about $3.9 billion out there. But it should be emphasized that if you were to add the research that comes from all the other departments like Defense or the National Science Foundation and a host of others, the overall number of research dollars going to these universities is much higher than that.

DIRECT VERSUS INDIRECT COSTS

The chart on the right tries to differentiate between direct and indirect costs. The confusing thing is that you will have somebody who says they can do a certain type of research in a certain area, whether it be cancer research or dealing with the HIV virus or whatever the case may be. So there is cost associated with engaging in that research that is direct; that is, you pay the researchers and you pay to sustain their operation.

Indirect cost is due to the fact that the principal investigator, who gets the grant, has to house the overall operation. In the housing of it they will go to a university, where they have what is called the indirect cost component. This includes items that are not specifically identifiable to the research grant, but are things that helps house it. So it would include the general administration of the university where this research is taking place, their portion of the overall departmental administration costs, campus guards, the mowing of the lawns, et cetera.

One of the most perplexing things that I have encountered over 10 years of looking at this area is that I cannot identify factors that would explain the differential between universities. The chart on the bottom is a fairly randomly selected number of universities and what their indirect costs are. You will see that there are both public and private schools, and they vary enormously.

Now I have tried over the years to identify common factors. Is it the size of the university that affects the indirect cost rate? Is it the amount of grants they are servicing? Is it the amount of money that is going to the universities? Pardon my French, Mr. Chairman, but I will be damned if I can figure out any correlation to any of these things.

We have developed a system by which we pay for the housing of this research, which almost involves a gentleman's agreement. That is, we have to depend a great deal upon what the university says indirect costs cover and what they should be. Now we do not trust them entirely, but we trust them to a certain measure. My wife always says that when you have a gentleman's agreement, really what it requires is that both parties be gentlemen. So if you have a situation where one is not, you have a problem.

We have a Division of Cost Allocation in our Department that tries to look at indirect cost aberrations and deal with them. I will tell you, Mr. Chairman, that they do a far better job with their huge host of responsibilities than the Defense Department does. There is an 8-point percentage difference between what we pay in indirect costs where we are the cognizant agency versus what the

Defense Department pays, and we are on the better side of it. So our Department is able to negotiate better rates.

The difficulty I have always had is that it seems to be an odd way to do business, and there must be a better way in which we can do business. For that reason, there are some alternatives or approaches that could be considered, and I would be pleased to dis#cuss them if you like..

WAYS OF MANAGING INDIRECT COSTS

Senator HARKIN. You just left me hanging there. You said there must be better ways of doing business. What are the possible ways? Mr. KUSSEROw. There are some options, I think, that are available. The problem is that, over the years as I have tried to work C with these options, they have been kind of elusive when trying to affect them. As we have looked back over the years, 20, 30, or 40 years, maybe the number of research dollars has gone up. But if you look at the percentages of the total pot, you see that the same schools are still getting about the same percentage. So why do we not just block grant those schools and say, "OK, here is a block grant; you get this much in research dollars and you work out what you want for direct or indirect costs." That would be one possibility. Another idea is this. There is a built-in tension in the research community, Mr. Chairman, between the business officers at the universities who are most interested in getting as much money as they can for indirect costs, and the principal investigators who are engaged in the research. But somehow we end up being the ones trying to decide how much money should go this way versus how much should go that way.

So one possibility might be to award money to the principal investigator. That is, in fact, the way it happens most of the timeyou do not give money to the university, you give it to some researcher who has some standing, who has a methodology and approach to a particular problem that we think is worthwhile researching. But perhaps we could give the entire pot, 100 percent, to the principal investigator and say, "OK, here is your money, go find a place to do the research." Then they could go to the university and fight it out with the business officers as to how much should be direct or indirect.

I kind of like that approach because it lets the people really fight for it. Say, "Here is the money, fight for it." Perhaps that might be a way to go. Of course, in each one of these areas, every time you come up with a good idea there are also problems on the other side.

Another approach, whether in totality or in part, is go back to the way it used to be. Up until the mid-1980's there was a provision in which we looked to the universities to cost share the research. In other words, we will put up some money for this research if they want to put up some money for it, and perhaps we can get them to contribute.

Somewhere along the line, though, that method was done away with. Maybe we might want to look back and see whether we want to reinstitute that, or even mandate it.

Senator HARKIN. Excuse me for interrupting. You said that was recently?

Mr. KUSSEROW. In 1984, 1985, sometime around then.

Senator HARKIN. So we had this cost share, and then it was dropped?

Mr. KUSSEROW. There were problems with it. But I think it is something where the issue could be revisited, and maybe we can see whether something like it might be reinstituted. Maybe we could file off some of the rough edges of the original idea.

INDIRECT COST CAPS

Senator HARKIN. I just asked my staff to go back and get me information on it. If you have any

Mr. KUSSEROW. I would be pleased to work with your staff on that, Mr. Chairman.

Another thing might be if you were to look at the whole area of developing a cap for these indirect cost rates. That might be another option.

Senator HARKIN. Has there ever been a cap in the past?

Mr. KUSSEROW. Yes; there has been, but the cap was very high. It is a controversial issue. It would have to be done with some real foresight if you wanted to avoid problems. It would depend on what the purpose of the cap would be.

If you want to put a cap on to generate money-in other words, to save money for the taxpayers and bank it away-that is probably a lot more politically difficult to do than the alternative would be. That is, to take that money from the indirect costs that would be saved and recycle it as additional research grants.

For example, the average indirect cost rate, if you average all the public and private schools together, comes out to almost exactly 50 percent. If you were to limit indirect cost rates to 50 percent, you would generate $125 million in indirect cost savings. That is about equivalent to a little more than 1,000 new research grants.

Senator HARKIN. $125 million if you cap it at 50 percent?

Mr. KUSSEROw. That is the median right now of all of these schools, both public and private. If you were to cap at 60 percent, which is the average of the private institutions and higher than the public schools, you would generate about $47 million. That would allow you to have an additional 400 research grants to be let out. Senator HARKIN. You said that $125 million translated into how many?

Mr. KUSSEROW. The average grant comes out to about $113,000. That is just an average. With $125 million you could probably generate about 1,000 new grants if you wanted to use the savings for that purpose.

Senator HARKIN. You got my attention.

Mr. KUSSEROW. As I mentioned, if you wanted to go to a higher level, the private schools have a higher average indirect cost rate than public schools. They are at about the 60th percentile. If you were to cap the rate at 60 percent of direct costs, that would generate about $47 million in savings, or enough money for about 400 new grants.

If you wanted to use the average for the public schools, it would be about 45 percent of direct costs. That would be about $183 or $184 million, which might be enough to generate another 1,500 research grants.

Of course, if you want to get really Draconian, Mr. Chairman, you could go the way the Department of Agriculture has. Mr. Whitten on the House side got a provision passed which said that at agricultural schools, the indirect cost rate would be 14 percent.

If you put our cap at 14 percent, you would not be able to ever again set foot on any major university in the United States, but you would probably be able to generate an extra 5,000 new grants per year to the schools. I would think that the researchers might love you, but I am afraid that I would never try to speak before a university again.

The only thing I am suggesting is that there is wide latitude in this area. The difficulty you have is that, since we have never been able to figure out what the variables are that account for all the differences, we are not sure we would know what to do. If you come down too little, what you might do is invite everybody to go up to the cap and, therefore, lose. So unless you come down significantly, you probably would not be able to generate the full savings. So there are a lot of unknown factors in this whole thing; but again, they could be worked out.

Now I have given you four possible approaches. There is a fifth one. If the answer is that you want the Division of Cost Allocation to really hammer down harder on these universities, it is going to have to be supported by more audits. Right now we are funding only 35 audit years to support this activity.

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Now if you have 35 audit years and are looking at 276 major schools, you can see that going in and looking at all those schools and engaging in audits is a physical impossibility. Some of these schools are gigantic. I could take my whole Boston staff and drop them into Harvard University and never see them again. These are very costly audits, but there is another option. We could increase the policing of these universities by having more auditors working with our Division of Cost Allocation and hammering down on a case-by-case basis.

INDIRECT COST CASE STUDIES

Senator HARKIN. I understand. Let me ask you this. How about zeroing in? Let us take some parameters. How about looking at one or two that are on the high end of the spectrum, one that may be right in the middle, and one or two at the bottom end, and go in there

Mr. KUSSEROW. We are doing more than that, Mr. Chairman. We are going to a number of schools, and there is very close cooperation between the Assistant Secretary for Management and Budget's Division of Cost Allocation and the Office of Inspector General's Audit Services. We look for aberrations, try to target those schools, and try to understand what is going on with indirect costs.

Again, one of the difficulties we have is that every school has a different system and different problems, and it is difficult to come to grips with all of them.

I think that in all fairness I should tell you that we have a major undertaking going on where we are trying to get a better handle on this. Our Dallas office has been commissioned to develop a computerized system which can ingest the more than 2,000 audit reports we have done, as well as those done by the public accounting