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Thursday, 06 September, 2018

Ted's Take: A product no one wants to buy

Escalation of overhead or indirect costs seems to be constant. This occurs both in health care and also in the research community. Let’s begin by looking at what overhead or indirect costs actually are, why are these functions are necessary and how they contribute to the organization and the public at large?


In a hospital, overhead or indirect costs are generally composed of functions like housekeeping, laundry, central supply (for medical and surgical supplies), managerial levels, accounting, billing, collections, medical records, information systems, etc. Administrative costs are also included, this can be an amorphous term that has no concrete definition as to what is included.


Additionally, organizational structures have become increasingly tall as opposed to flat. This means more levels of management and infrastructure. It seems as soon as a function is added, it has to have management tiers. Management usually gets in the way. Most organization’s employees are “over” managed rather than “under” managed. The greater the number of levels between the work being done and the Board of Directors, the more cumbersome the reporting infrastructure.  Too many organizational layers can just breed more meetings and reports and increase the potential for organizational disruption or drag.


Hospitals are not alone, organizations and institutions that perform research are also loaded with overhead costs.  They also typically add fundraising or “advancement” costs for cover. Federal agencies like the National Institutes of Health (NIH) and grant making foundations dole out overhead in making their research grants. Many, actually most, research institutions are perpetual grant receivers and use the funds to keep their laboratories a float. For example, NIH only funds about 10% of the grants that are requested. The NIH allows organizations overhead rates of over 50% which are common and they can get as high as 100%. Many grants are recurring and awardees ask for and receive these 50-100% add-ons for overhead or indirect cost.


Now, try to get your head around the fact that in some instances the indirect costs are as much as the direct costs – the cost for actually doing the research. Something to think about… By comparison, the JKTG Foundation allows a maximum indirect cost add-on of no greater than 11.0%. Many of JKTG grants have zero indirect costs.


Many of these research organizations are tax exempt and have very large endowments. This becomes a problem because many institutions have now come to expect that a large amount of overhead be allowed on top of the direct cost to be allowed them.


This escalation of overhead and indirect costs needs to be reined in. No one should want to “fund” overhead, they should be “funding” actual research and a specific research work product, not merely paying the indirect operating expenses (in additional to direct expenses) of a laboratory. This practice makes it difficult for some funders to demonstrate that their grant “investment” correlated to any real results or research.


Neither private funders nor our government should willingly to invest in funding overhead. Some overhead is needed; most is not. Our research dollars would be much more impactful and could accomplish more if they were invested in specific research projects and cover mostly direct costs. Funding organizations must ask, “What did our funds accomplish?”


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