VA Health Care: Nonprofit Corporations Enhance VA Research, but Would Benefit from Increased Oversight
Published: 2002-09-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: GAO reviewed the Department of Veterans Affairs' (VA) nonprofit research corporations, which receive funds primarily from non-VA sources to conduct medical research at VA facilities.
section_title: What GAO Found
paragraphs: Since VA's nonprofit corporations were first established, there has been limited oversight of their operations and contributions to VA research. Nonprofit corporations support VA's research environment by funding a portion of the department's research needs, such as laboratory equipment and improvements to infrastructure, and by providing flexible personnel and contracting arrangements to respond to investigators' needs. To detect conflict of interest, investigators on research projects administered by VA's nonprofit corporations are subject to federal statutes and regulations applicable to federal employees concerning conduct and conflicts of interest and may be required to disclose their financial interests. Institutional conflicts of interest are unlikely to occur in VA's nonprofit research corporations because they cannot own stock, have an equity interest in private companies, or obtain intellectual property rights. VA has delegated responsibility for monitoring and overseeing the activities of nonprofit corporations to the directors of VA medical centers; however, VA headquarters does not oversee and monitor corporations' financial activities and ensure that identified deficiencies are corrected.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the Department of Veterans  Affairs’ (VA) nonprofit research corporations, which receive funds  primarily from non-VA sources to conduct medical research at VA  facilities. In fiscal year 2000, these corporations administered funds  amounting to $174 million, or about 15 percent of VA’s total medical  research dollars. The authority to establish private nonprofit research  corporations, contained in the Veterans’ Benefits and Services Act of  1988, provides a flexible funding mechanism for, among other things,  hiring and contracting for goods and services for certain medical center  research.
Since VA’s nonprofit corporations were first established, there has been  limited oversight of their operations and contributions to VA research. For  example, the VA Inspector General’s last major review of the program  occurred in 1994, when VA was cited for failing to provide adequate  policies and guidance relating to budgeting, accounting, and oversight of  these corporations. On May 16, 2002, this subcommittee, along with the  Subcommittee on Health, conducted a hearing on VA’s nonprofit research  corporations. In following up on that hearing, you asked that we provide  additional information on the corporations. My testimony today will focus  on (1) the benefits nonprofit research corporations provide to VA, (2)  processes to detect individual and institutional conflicts of interest within  nonprofit research corporations, and (3) nonprofit research corporations’  financial activities and how they are monitored by VA.
To conduct our work, we visited 5 of the 88 nonprofit corporations based  on their dollar revenues for 2000. We compared and analyzed data from  each of the five nonprofit research corporations’ audited financial  statements to their Internal Revenue Service (IRS) tax forms for 2000 and  2001, along with general ledger account balances and supporting  documentation for revenues and expenses. We also reviewed VA’s annual  reports on nonprofit research corporations’ activities for fiscal years 1998  through 2000, and relevant legislation and regulations. We visited each of  the nonprofit corporations’ affiliated VA medical centers and interviewed  officials from VA’s Offices of Research and Development, General  Counsel, and Financial Management. We also spoke with principal  investigators, who are usually either part- or full-time VA employees. They  design and control research projects and frequently have dual  appointments with the VA medical centers’ affiliated universities. We also  interviewed officials from federal agencies that provide funds to VA  nonprofit research corporations, including the National Institutes of  Health (NIH) and the Centers for Disease Control and Prevention (CDC)  within the Department of Health and Human Services (HHS), and the  Department of Defense (DOD). Our work was conducted from June 2002  through September 2002 in accordance with generally accepted  government auditing standards.
In summary, we found the following:    Nonprofit corporations support VA’s research environment by funding a  portion of the department’s research needs, such as laboratory equipment  and improvements to infrastructure, and by providing flexible personnel  and contracting arrangements to respond to investigators’ needs.    To detect conflicts of interest, investigators on research projects  administered by VA nonprofit corporations are subject to federal statutes  and regulations applicable to federal employees concerning conduct and  conflicts of interest and may be required to disclose their financial  interests. Institutional conflicts of interest are unlikely to occur in VA’s  nonprofit research corporations because they cannot own stock, have an  equity interest in private companies, or obtain intellectual property rights.
VA has delegated responsibility for monitoring and overseeing the  activities of nonprofit corporations to the directors of VA medical centers,  however, VA headquarters does not oversee and monitor corporations’  financial activities and ensure that identified deficiencies are corrected.
subsections: section_title: Background
paragraphs: In carrying out its mission, VA conducts medical research to find new  treatments for diseases and disabilities that affect veterans and the  nation’s population as a whole. VA researchers have been involved in a  variety of important advances in medical research, including development  of the cardiac pacemaker, kidney transplant technology, prosthetic  devices, and drug treatments for high blood pressure and schizophrenia.  VA’s research programs include nine high-priority areas: acute and  traumatic injuries, military and environmental exposures, special high-risk  or underserved populations, sensory disorders and loss, aging, mental  illness, substance abuse, chronic diseases, and health services and  outcomes research.
In fiscal year 2000, funding for VA research totaled almost $1.2 billion,  supporting research projects conducted by more than 3,800 scientists at  115 VA medical centers across the country. These funds finance research  projects and their supporting infrastructure, including capital  expenditures for buildings, animal laboratories, and equipment. Funding  made available for medical research through annual appropriations  provided $666 million of VA’s fiscal year 2000 research dollars; the other  $491 million was provided by other federal and nonfederal sources (see  fig. 1). Federal funding comes from such sources as NIH and DOD, while  nonfederal funding sources include private organizations, such as drug or  biotechnology companies, or organizations such as the American Lung  Association, the American Heart Association, and the American Diabetes  Association. Of the $491 million, $174 million was administered by the  nonprofit corporations, and the remaining $317 million was administered  by VA medical centers or their affiliated universities.
Nonprofit research corporations exist solely to support VA research and  education, using their funds to support local VA medical centers’ research  environments. They are collocated with VA facilities and usually do not  pay VA for services such as rent, utilities, local telephone services, and  janitorial services. Currently, there are 88 chartered nonprofit research  corporations, of which 85 are actively conducting research.
In 2000, the most recent year for which revenue data are available, VA’s  nonprofit research corporations received about $174 million in revenues— almost a 140-percent increase over the last 5 years—and administered  4,651 VA-approved research projects. The largest source of funding for  VA’s nonprofit research corporations has been private organizations,  averaging more than 40 percent from fiscal years 1996 through 2000 (see  table 1). NIH has been the largest government source of funding for the  corporations.
VA treats all funds administered by VA medical centers as appropriated  funds, and medical centers are generally required to comply with statutory  and other restrictions on the use of those funds, as well as with federal  regulations governing procurement and the hiring of employees. Prior to  the establishment of nonprofit corporations, VA administered research  funding from external sources through special accounts at local medical  centers—known as general post funds—or through its affiliated  universities.
section_title: Flexibility Allows Nonprofit Corporations to Enhance VA Research
paragraphs: Nonprofit corporations provide a flexible funding mechanism to support  the indirect cost of VA’s research environment. For example, nonprofit  corporations’ funds can be used to renovate laboratory space and support  start-up research to develop grant proposals. Nonprofit research  corporations also have more flexibility with respect to personnel and  procurement issues than VA medical centers because, as private  corporations, they are not subject to federal personnel or procurement  regulations.
The five nonprofit corporations we visited typically obtained donated and  grant funds of between 10 and 20 percent of direct project costs to apply  to indirect costs. According to the nonprofit corporations’ executive  directors we interviewed, these indirect cost rates are generally based on  what other nonprofit organizations normally charge and not based on their  actual indirect costs. These indirect costs include the costs for running the  corporation, equipment purchases, facility upgrades, subscriptions to  scientific journals, travel to research conferences, maintaining VA  research libraries, and renovating and maintaining VA animal laboratories.  Further, nonprofit corporations can use the funds they obtain for indirect  costs to support research. For example, at one VA medical center, the  nonprofit research corporation incurred $8,451,000 in expenses in 2001,  with $7,693,000 spent on the direct costs of research projects; $413,000  spent on corporation operating expenses, such as grant administration and  payroll processing for research staff; and $345,000 spent on activities and  improvements to the medical center’s research environment. Some of  these activities and improvements included maintaining a clinical studies  center, paying the salaries of a research science officer and assistant, and  providing the “seed” or project start-up money for scientists to perform  initial research to generate data necessary to apply for research grants.
According to VA’s Office of Research and Development, the funds used by  the nonprofit corporations to purchase equipment and maintain and  upgrade VA’s facilities allow VA to use more of its appropriated funds for  conducting research. For example, at one facility we visited, the nonprofit  corporation is renovating laboratory space necessary to conduct a VA- funded research project. While grants to affiliated universities can also be  used to cover indirect costs of research conducted at VA facilities, VA  officials told us that universities generally do not provide funding to help  pay for VA’s indirect costs; instead, they use it to support the indirect costs  of the universities and their own research facilities. At another medical  center, VA’s Office of Inspector General suggested security improvements  be made in research laboratories containing hazardous materials. About  $56,000 was needed from either VA’s Office of Research and Development  or the medical center to make these improvements. Instead, the nonprofit  corporation provided the funding. This preserved the Office of Research  and Development’s funds for research and the medical center’s funds for  patient care.
In addition to the improvements in equipment, facilities, and research- related services, nonprofit corporations bring other benefits to VA’s  research environment. Because private nonprofit corporations are not  subject to the regulations that govern federal agency hiring practices, they  can hire and release employees more quickly than VA, which, according to  researchers, can be more responsive to their individual project personnel  and contracting needs. For example, at some of the VA nonprofit  corporations we visited, the principal investigators stated that because  funding for research is dependent on the number, length, and timing of  grants received, they prefer to quickly hire research technicians and  support staff after project funds are awarded and release them from the  projects as soon as their work is completed. The principal investigators  noted that if nonprofit corporations did not exist, it would take longer to  begin the research because they would have to hire staff through VA. A  medical center official reported that it usually took 6 weeks or more to  hire a research employee through VA compared to less than a week  through the nonprofit corporation.
Nonprofit corporations can also contract for goods and services more  quickly than VA can because they do not have to follow the federal  acquisition process. For example, two of the nonprofit corporations we  visited were able to quickly order highly specialized digital, computerized  microscopes needed by several research teams. Officials told us that based  on their past experiences, if those microscopes had been purchased  through VA’s competitive process, it could have taken months to award a  contract.
Finally, VA’s research environment is key to attracting and retaining highly  qualified physicians, according to officials at some of the medical centers  we visited and in VA’s Office of Research and Development. Investigators  we interviewed said their research directly related to and benefited the  care they provided to their patients, such as administering experimental  research drugs for cancer. Some of the researchers we interviewed also  noted that the nonprofit corporation’s contribution to the local VA  research facility was one of the main reasons they came to or remained at  the facility. For example, at one nonprofit corporation we visited, the  corporation renovated laboratory space needed to attract an investigator,  who is also a physician.
section_title: VA Has Processes in Place to Help Detect Conflicts of Interest
paragraphs: Conflicts of interest can occur in connection with medical research when  an individual or an institution has financial interests in the research.  Conflicts of interest impair the conduct of objective, unbiased research  and create the risk that an investigator will compromise a study’s integrity  to gain financial rewards or recognition. Investigators may establish  financial relationships with donors—for example as employees,  consultants, board members, or stockholders—as long as these  relationships do not compromise, or appear to compromise, their  professional judgment and the independence of the research.  For  example, an investigator’s financial relationships must not bias or appear  to bias the development of the study to ensure certain outcomes. A  conflict of interest would also result if investigators reported only  favorable research results or withheld certain study findings to maintain a  competitive edge for the entities in which they have financial interests.  Conflicts of interest have the potential to put study subjects and the  general population at risk.
Investigators on research projects administered by VA nonprofit  corporations must follow federal statutes and regulations applicable to  federal employees concerning conduct and conflicts of interest. They  cover, for example, restrictions on gifts from outside sources, the use of  non-public information, and employees’ financial interests. Because  investigators design and control the research, they may also be subject to  additional federal conflict of interest regulations. For example, principal  investigators conducting research under NIH grants are subject to Public  Health Service regulations, and investigators conducting pharmaceutical  trials are subject to Food and Drug Administration regulations. These  regulations require investigators to disclose their financial interests.
There are other conflict of interest procedures that investigators in some  locations must follow. For example, investigators at three of the five VA  nonprofit corporations we visited were required by the VA medical center  or its affiliated university to disclose their financial interests related to  each research project they conducted. At one of these locations, the  corporation, the university, and VA formed a conflicts of interest  committee to review financial disclosures and identify and manage  conflicts of interest. The results of these reviews are documented in the  committee’s meeting minutes and forwarded for review to the VA medical  center’s institutional review board (IRB).
Additionally, to guard against potential conflicts of interest, nonprofit  corporation board members, officers, and employees must sign a  certification that they comply with federal statutes and regulations on  conflicts of interest; however, they are not required to file financial  disclosure forms. Certain nonprofit corporation board members and  officers are required to file financial disclosure forms because of their  positions at the medical center. For example, a VA medical center’s  director and chief of staff, who also serve on the nonprofit corporation’s  board of directors, are required to file financial disclosure statements  because of the positions they hold at the medical center. A VA official told  us that there is no routine comparison of these financial disclosure forms  and ongoing research projects at a particular facility.
While federal regulations govern the financial interests of individuals, no  similar regulations apply to the financial interests of an institution.  Institutional conflicts of interest occur when an entity’s financial interests  conflict with its goals of conducting and fostering objective, unbiased  research. Financial interests may color an entity’s review, approval, or  monitoring of research conducted under its auspices or its allocation of  equipment, facilities, and staff for research. Some institutions, such as  universities, may obtain financial benefits from owning stock in a  company that sponsors research or from owning patents that result from  research. In contrast, VA nonprofit research corporations cannot own  stock, have an equity interest in private companies, or own patents.  Consequently, these types of institutional conflicts are unlikely to occur.  VA nonprofit corporations may only invest in government-backed  securities such as certificates of deposit or U.S. Treasury bonds. VA, not  the nonprofit corporations, controls the rights to patents arising from  research administered by nonprofit corporations. In addition, nonprofit  corporations cannot accept funds to administer a research project unless  the local VA medical center approves it.
section_title: VA Headquarters Does Not Monitor or Oversee Nonprofit Corporations’ Financial Activities
paragraphs: The Secretary of VA has delegated responsibility for overseeing and  evaluating nonprofit corporations to the directors at local medical centers.  This responsibility includes ensuring that deficiencies noted in audited  financial statements and management letters are corrected. VA requires  that nonprofit corporations submit their audited financial statements and  management letters; tax forms; and supplemental information on donors,  payees, and research projects to the medical center’s chief financial officer  and the nonprofit corporation’s board of directors—which must, by  statute, include the medical center’s director, chief of staff, and assistant  chief of staff for research—for review prior to the issuance of VA’s annual  report to the Congress. At all five sites we visited, the nonprofit  corporations provided their 2000 and 2001 audited financial statements as  required, and all five received unqualified opinions on their financial  statements, indicating that none contained material misstatements.
We also reviewed a sample of the five nonprofit corporations’  expenditures from their most recent annual financial statements— including those for travel, meetings, conferences, professional dues and  memberships, publications, and office supplies—and generally found that  the expenditures were related to research or to running the nonprofit  corporation and were consistent with its internal control procedures.  However, no standard body of rules exists that governs the type and  amount of expenditures made by nonprofit corporations, although specific  requirements may be established by the source of the funds. For example,  if the nonprofit corporations receive funds from a federal agency, then the  Office of Management and Budget Circular A-122 applies, which does not  allow certain expenses, such as for entertainment or alcohol. Other donors  may place specific restrictions on the use of their funds.
We reviewed a sample of travel expenditures—including the travel of  members of the board of directors and executive directors—and found  that while nonprofit corporations are not eligible for government rates, the  rates they paid were comparable to the federal government’s rates for  meals and lodging. Of the 66 travel vouchers we reviewed, only one first- class airline rate was charged and for only one segment of the trip because  no economy seats were available.
In addition, we reviewed expenses related to meetings. They generally  covered food and beverages provided at staff meetings, team building  sessions, and dinners with potential recruits. The dollar amounts were  typically a small portion of the nonprofit corporation’s total expenditures.  For example, one nonprofit corporation with annual expenditures of  almost $8.5 million spent $16,171 on these expenses. Another nonprofit  corporation with expenditures of about $25 million spent $66,469 on these  expenses.
Two of the five locations we visited received management letters from  their independent auditors in 2000 and 2001, citing areas for improvement  in internal controls. We found that these nonprofit corporations had either  corrected or were in the process of correcting problems cited in the  previous years’ management letters. For example, at one nonprofit  corporation, the external audit of its year 2000 financial records found that  it did not reconcile its general ledgers at month end in accordance with  generally accepted accounting practices. Although the nonprofit  corporation’s 2001 management letter still identified some problems with  month-end reconciliations, the auditor noted that improvements had been  made. While each nonprofit corporation submits its financial statements  and management letters to VA, VA headquarters does not use this  information to oversee and monitor the nonprofits’ financial activities and  ensure that identified deficiencies are corrected.
According to VA, it relies in part on the VA Inspector General, IRS, GAO,  and state and local authorities to identify fraud, waste, and abuse.  However, officials at the five nonprofit corporations we visited stated that,  for the last 5 years, their corporations have not been the subject of  systematic review, although the VA Inspector General is currently  investigating specific matters related to nonprofit corporations reported  through its fraud hotline. The two largest corporations we visited stated  that their state labor departments conducted reviews, but these reviews  were limited to their personnel practices and records.