Sunday, December 12, 2010

On The Hidden Cost of Research 

Michael McNabb's Response to

Minnesota Magazine Article:
Research to Revenue

Jay Weiner has a thought-provoking article in Minnesota Magazine about research and money at the University of Minnesota: Research to Revenue.

It might not be obvious to the casual reader, but there are hidden costs of doing research. 

It is an open question whether the U drains tuition dollars to support research, the cost of which is not fully covered by outside grants and contracts. 

It is important to clarify the actual costs of research at the university as well as the costs for education. Having this information available in a transparent way is important for justifying requests for suppport of the U by the citizens of the State of Minnesota.

Mr. McNabb writes to Jay Weiner:

The focus of your report on Research To Revenue in the current issue of Minnesota Magazine is on revenue.  There is another aspect that you may wish to investigate further:  the cost of the research. 

You report that the University received $95.2 million in gross revenue from royalties in 2009 and that all but $8.7 came from the royalty paid by GlaxoSmithKline for the drug Ziagen.  Gross income declined to $75.2 million in 2010 according to the report of Jenna Ross in the December 10 Star Tribune.  

In 2010 the University received $823 million from outside sources for research according to the same Star Tribune report.  The University also allocated its own funds for the costs of research in an amount that is not included in the report.  

Those costs include the capital costs for construction and maintenance of  the research facilities plus the operating costs for the salaries of the researchers and staff.  The University classifies those costs as Facilities & Administrative Costs (F & A).  The March 2010 report of the Senate Research Committee includes a discussion of those costs by vice president Tim Mulchay:     

F & A costs (indirect costs, overhead) are real costs incurred while conducting research. . . .
[OMB] Circular A-21 classifies research costs as direct and indirect; the latter are F & A costs . . .  .  Indirect costs are administrative and research facilities costs.
The calculation of the F & A rate is different from the actual F & A costs.  Dr. Mulchay explained the formula used, which results in a calculation of 62% indirect cost rate for the University of Minnesota.  One would think that this would mean that the federal government would provide 62 cents in addition to each research dollar provided, but it does not.
The actual rate negotiated with the federal government is 51%.  The reason it is lower than 62% is because there is a federal cap of 26% on administrative F & A costs. . . .
If the full F & A rate of 51% were applied to all appropriate sponsored research costs, the University would receive $145 million per year.  The EFFECTIVE rate, however, is 37% because the University only received $104 million in 2009.  It is not that the federal government is not paying the full rate (which some agencies do not), but that other funding organizations do not either. . . .
Dr. Mulchay noted again that the University has a total unrecovered cost of research of about $75 million (the difference between the full rate of 62% or $179 million and the effective rate of 37% or $104 million) . . . .
See pp. 2-4 of the March 22, 2010 report of Senate Research Committee at

Even the "full rate" of 62% of indirect costs leaves the University responsible for payment of the remaining 38% of indirect costs of research.

Here is the math.  If $179 million equals 62% of the indirect costs of research, then $289 million equals 100% of the indirect costs.  In 2009 the University received $104 million for indirect costs.  So the University paid $185 million in indirect costs ($289 million minus $104 million) and received $92.5 million in gross revenue from royalties.  

What is the source of the funds used to pay the $185 million in indirect costs of research?  

Then there are related questions.  What is the cost of instruction for undergraduate education?  Does tuition exceed that cost?  Is undergraduate tuition used to subsidize research in a vain attempt by the senior administrators and the Regents to make the University "one of the top three public research universities in the world?"  Have undergraduate students and their parents endured years of huge tuition increases in order to pay for the indirect costs of research rather than to pay for the costs of teaching the undergraduate students?    

See the 2009 Report of the Future Financial Resources Task Force.  New Fiscal Reality No. 2 (on p. 8 of the Report) declares that "tuition is the revenue stream with the highest potential for significant, long-term growth."  Tuition Policy Question No. 2 (on p. 17 of the Report) asks:  "What should tuition pay for when tuition revenue exceeds the cost of instruction?"  The Report is included in the October 2009 report of the Board of Regents at

Your report notes that "some professors are wary of the influences of the corporate world on their research."  There is a reason to be wary.  Ever since Congress passed the Bayh-Doyle Act on technology transfer in 1980 (the University Small Business Patent Procedures Act) there has been an increasing blurring of the line between the priorities of non-profit institutions of higher education and the priorities of the for-profit commercial ventures operated by those institutions.  For a brief discussion of one aspect of this development at the University of Minnesota see  University Inc. at .

Jennifer Washburn delivers a compelling exposition of this national trend in her book,  University Inc. (New York:  Basic Books, 2005).  Her book is the product of four years of reseach and writing with financial assistance provided by the New America Foundation and the Rockefeller Foundation.

Michael W. McNabb
Attorney at Law

From the Introduction to University Inc. by Jennifer Washburn (New York:  Basic Books 2005):

Page x
The problem is not university-industry relationships per se; it is the elimination of any clear boundary lines separating academia from commerce.  Today, market forces are dictating what is happening in the world of higher education as never before, causing universities to engage in commercial activities unheard of in academia a mere generation ago.  Universities now routinely operate complex patenting and licensing operations to market their faculty's inventions (extracting royalty income and other fees in return).  They invest their endowment money in risky start-up firms by their professors.  They run their own industrial parks, venture-capital funds, and for-profit companies, and they publish newsletters encouraging faculty members to commercialize their research by going into business.

Page xii
In fact, only a small minority of schools prove successful at licensing research to industry, despite the enormous time, energy, and money that they have devoted to such efforts in recent years.  Although every university president eagerly awaits that blockbluster discovery--a cure for cancer, an inexpensive way to desalinate sea water--that would generate millions in royalties, in reality a mere two dozen universities in the entire country make significant profits from technology licensing .  Many others barely break even--or lose money.  The more universities try to sell politicans on the idea that they can serve as engines of economic growth, the more they are setting themselves up for failure and undermining the basis for their public support.  (emphasis added)

Page xii-xiii
The same universities that invest millions in high-tech research labs and industrial parks have been whittling down the professoriate, replacing tenured and full-time faculty with part-time adjuncts and graduate students.  Whereas star professors in fields like computer science and economics are recruited with six-figure slaaries (and assurances that they will have to do little teaching), humanities courses, which form the core of the academic curriculum, are taught to several hundred undergraduates at a time in large lecture halls, with graduate student teaching assistants (TAs) bearing nearly full responsibility for the one-on-one instruction and grading.  Indeed, with the exception of the smaller liberal arts colleges, the job of undergraduate education often seems like a subsidiary activity at many universities today--a task farmed out to the growing army of part-time instructors who receive no benefits and meager pay.

Page xiv
Indeed, one could argue that in a knowledge-driven economy it is all the more important that undergraduates are provided not with narrow vocational training but with a broad-based foundation in reading, writing, arithmetic, and science--an education that sharpens the students' intellectual faculties, their curiosity about the world, and their ability to think critically and creatively.  Because technology and the state of knowledge in nearly every discipline are changing so rapidily, the most valuable skills universities could impart is the capacity to learn and grow intellectually throughout one's lifetime.

Page xv-xvi
But much of the university research that we assume is independent often is anything but.  Today, at prominent medical colleges, it is not unusual for professors to be paid by drug companies to put their names on review articles and academic papers ghostwritten by industry.  These articles are then published in leading medical journals without any disclosure of corporate involvement.  Whereas, in the past, clinical studies at universities were conducted at "arm's length" from the industry sponsor, today these sponsors routinely exert control over the study design, the raw data, and even the way results get reported.  What's more, it is increasingly common for the lead investigator and the university itself to own equity in the company sponsoring a drug trial, so they have a direct financial interest in a favorable outcome.
It would be hard to overstate the importance of preserving a space in our culture where the ideal of disinterested inquiry is preserved.  Many major public-policy questions Americans will grapple with in the decades to come--global warming, the search for alternative fuels, the safety of genetically engineered crops, international ecomomic development, the regulation of human cloning--will require us to turn to trained experts to help us untangle the complex moral, social, and scientific issues involved.  Unfortunately, it has already grown difficult to find disinterested authorities in many fields.

Page xviii
This book is written out of a belief that although the profit motive plays an important role in our society, so do other values that limit and constrain what unregulated markets will do if left to their own devices.  In the past, our universities have played a vital role in this regard, not least by focusing on issues the markets ignore.  Traditionally, for example, universities tackled public health threats that offered little immediate financial return but impacted millions of lives.  They protected and defended the information commons, the pool of public knowledge that is freely available for researchers and creators to use and build upon.  Academic scientists also excelled in the performance of research that corporations were reluctant to undertake:  undirected "blue-sky" research, risk-taking experimentation, and unconventional inquiry that yielded important practical results over time.

Page xix-xx
Universities have served as a check on market values in another way:  by providing an environment where young people have been encouraged to think critically and explore ideas, not because of their dollar value but because of how captivating or original they are.  Without this independent academic sphere, would the United States be as open, pluralistic, and democratic a society? . . .
To invoke this ideal is not hopelessly quixotic.  Nor does it mean we must call on universities to beat a hasty retreat to the ivory tower and wall themselves off from private industry.  As I argue in my conclusion, universities should be places that are engaged with the outside world, encourage creative problem solving, and support entrepreneurial thinking.  They should have mechanisms in place to facilitate the transfer of new knowledge and inventions to industry and should provide students with the tools and training they need to start up new companies and pursue careers.  It is imperative, however, that universities accomplish all of this without sacrificing their autonomy or compromising the values and ideals they have long pledged to uphold.
This book is written for parents, students, professors, administrators, and all those who care about such ideals, who take it as a given that the university's primary mission is still the education of well-rounded citizens and the performance of public research, not merely service to industry's short-term bottom line; who expect academic administrators to stand up to corporations when they threaten to sue a professor who has unearthed information that the public deserves to know; and who want to see the line separating business and academia preserved, even as universities continue to play a role in fueling innovation and stimulating economic growth.

U.S. colleges and universities, whether they are public or private, enjoy enormous levels of public support and tax exemptions because of a belief that they are generating goods that no other market actor would produce without a public subsidy:  basic science; liberal education; independent, publishable research.  Every year the federal government pays roughly $20 billion in taxpayer money to subsidize the research at our nation's colleges and universities, and another $60 billion more in loans and grants to help financially disadvantaged students attend these schools.  At the state and local levels, taxpayer contributions to higher education now run around $68 billion.  In addition, hundreds of thousands of Americans carefully put aside their hard-earned income to pay for tuition, room and board, books, and other expernses needed to send their kids to college.  It is up to them--up to all of us--to make sure that the world of higher education is not for sale.


No comments: