Clinical Trials: New policies directed at developing budgets, reporting expenses and effort, and using residual funds

by Thomas B. Higerd, Ph.D., Professor and Associate Dean, College of Medicine

As David Stockman, former U.S. budget director, quipped, “None of us really understands what’s going on with all these numbers.”

I get the impression that federal auditors and our own business people who review the accounting practices of clinical trials share the same confusion. Even a simple definition of what constitutes a clinical trial is illusive and elicits various images from drug substitution studies to vaccine testing to home care evaluations. Defining the term “clinical trials” was the clinical trials working group’s first challenge.

What are clinical trials and when are IRS taxes levied?

The report from the working group, chaired by Patrick Mauldin, Ph.D. (director, the clinical Innovation Group; Biometry), provides a definition which states that a clinical trial is “any form of a planned experiment which involves patients and is designed to elucidate the most appropriate treatment for future patients with a given medical condition.” The report clarifies this definition by supplying the general characteristics of a typical clinical trial. In so doing, it provides a framework for developing policies and for illustrating those scholarly attributes that may exempt clinical trials from taxation by the Internal Revenue Service.

The vast majority of clinical trials are concerned with the evaluation of drug or device therapy, surgical procedures, radiotherapy, medical advice (such as dieting or exercise options), and alternative treatment approaches (such as home care). In academia, faculty who conduct these trials are concerned with clinical outcomes relative to future management of patients and not with the financial interest of the sponsoring pharmaceutical company. As such, these studies have scholarship and research merit, therein fulfilling one of the purposes of this tax-exempt institution.

When the research and scholarship merits of a clinical trial are not apparent, the IRS may rule that the activity is simply work being performed by a tax-exempt organization such as MUSC. This work generates income by performing a regular trade or business outside the purpose for which the organization was granted its tax-exempt status. Under the circumstances, the IRS will impose an Unrelated Business Income Tax (UBIT).

Why are budgets necessary?

The word that seems to dominate all discussions is “consistency.” The policy of requiring a budget should help assess the consistency with which costs are being expensed and recorded across all research endeavors.

I view three of the report’s recommendations as affecting faculty directly. The first is the requirement that all clinical trials must have a budget to establish an account. For CAS, the budget is needed to assess the true cost of a study, to provide information to negotiate an acceptable agreement with the sponsor, and to manage the funds appropriate to resource planning, expense accounting and financial reporting. It is anticipated that clinical trial budgets will be comparable to an NIH budget in detail and scope. Beginning and ending (close-out) dates must be included in the budget.

What is the clinical trial indirect cost rate?

The second policy that affects faculty involved in clinical trials relates to the indirect cost rate (overhead) imposed on the outside sponsor. The current rate of 23 percent of total direct costs is being assessed on all corporate-sponsored clinical trials. The working group recommends that the rate remain 23 percent for clinical trials involving corporate sponsorship. For federally funded clinical trials, a rate of 44 percent of modified total direct costs will continue to be assessed. In those rare instances when a clinical trial may have basic research components which utilize wet-lab facilities, the group recommends that the rate remain 23 percent.

It should be noted that the 23 percent rate for corporate clinical trials was established in 1985 with the explanation that it had many of the same attributes as the “off-campus” 23 percent rate. A separate working group is attempting to define the base components from which indirect costs will be calculated in the future. It is likely that the current 23 percent and 44 percent rates will change. A separate report on indirect costs will be forthcoming.

What will happen to residual funds?

In contrast to most other forms of research, the funding of corporate-sponsored clinical trials may result in residual or surplus funds. Universities can retain these funds for any use appropriate to furthering their mission. The generation of these funds through our accounting process is legal, and they should be recognized as an important source of research support for our clinical faculty.

The working group’s third recommendation is that residual funds be transferred to a new account bearing the name of the principal investigator. That account would be established by the Office of Research and Sponsored Programs (ORSP) with a budget statement outlining the intended use of such funds. Assuming that the original funds were exempt from UBIT, and that the appropriate (currently 23 percent) indirect cost rate had been satisfied, then the faculty member responsible for the residual funds could, with chair approval, charge expenses against that account. The same research policies governing administrative oversight and accountability would apply to residual funds.

One additional note. At the time these funds are transferred to an ORSP residual account, the investigator must declare their intended use and submit a corresponding budget. If the intended use is for laboratory-based research, the difference in indirect cost (44 percent less 23 percent) will be charged. In such cases, these funds will be recognized or “credited” to a faculty member’s or department’s tally of extramural, laboratory-based research funds. It is hoped that this policy will assure that appropriate indirect costs are recovered while preserving the incentive for faculty to attract clinical trial studies.

This working group has met on numerous occasions with partners from Coopers and Lybrand to construct their written report. The large national accounting firm has extensive experience in assisting faculty and staff of academic institutions develop Disclosure Statements. The report includes recommendations for adoption by the steering committee as its first meeting on May 27. You are invited to communicate your thoughts on this or any other CAS-related topic.

How can you respond?

The full report is available in paper copy or through MUSC’s web page cited below. Included in these web sites are links to a CAS-specific on-line web discussion group where you may view responses from others and/or provide your own response. I will collect and collate your responses for presentation to the chair of this working group and to the steering committee.

Clinical Trials Committee

Chair: Patrick Mauldin, Ph.D. (Biometry) Pat Arford, Ph.D. (Nursing) Sandi Finanger-Larson (HCC) Gerry Garza (Medicine) Robert Merenbloom (Medicine) Randy Sallee, M.D., Ph.D. (Psychiatry) Pam Thompson (Psychiatry) Ron Turner M.D. (Pediatrics) Ed Conradi, M.D. (Pharmacology) Julia Foxworth (Psychiatry) Velma Graham (Grants Accounting) Marilee Rose (Biometry) Janet Scarborough (ORSP) Marie Townsend (ORSP)

Any questions, opinions or ideas?

Call 792-4333 or e-mail <higerdtb@musc.edu>

To obtain: Paper copy of full report call David Welch, 792-2850

Web site of full report <http://www.musc.edu/research/cas/toc.htm>

Web site for The Catalyst <http://www.musc.edu/catalyst/>

Web site for responding <http://www.musc.edu/research/cas/response/>