On 23 September, the National Institutes of Health (NIH) requested public comment on a series of draft Frequently Asked Questions (FAQs) addressing costing issues for core facilities.1 A core facility is "a centralized, shared resource that provides biomedical and behavioral investigators with access to instruments, technologies, and services as well as expert consultation."2 Core facilities are often funded by NIH through a variety of different programs, including Biomedical Technology Research Centers, Clinical and Translational Science Awards, National Primate Research Centers, and Shared and High-End Instrumentation Grants. Such facilities play an important role in the sponsored research enterprise of many universities, academic medical centers, and not-for-profit research institutes.
Core facilities are subject to a series of rules that govern, among other aspects of their operation, the rates the facility may charge for its services and how those rates should be applied to users of the facility's services. Historically, formal detailed guidance addressing core facility costing issues has been relatively sparse. Not surprisingly, the financial administration of core facilities has proven to be one of the more challenging aspects of many institutions' sponsored research compliance programs. Most institutions that have occasion to take a close look at how their core facilities are managed find that there are significant questions regarding the appropriateness of some of the accounting methods used. In some cases – unfortunately not all that uncommon – institutions find core facilities that have operated for years as "profit centers," with the profits being used to fund other unrelated activities or expenditures of the scientists running the facilities. There have been at least two False Claims Act investigations involving mismanagement of core facilities or specialized service centers.
This alert provides a brief summary of the basic core facility costing rules and an overview of the draft NIH FAQs. Although these FAQs have only been proposed by NIH and are not yet final, it is not likely that the final form of the FAQs will differ greatly from their draft form. Research institutions would be well advised to ask their administrators who are responsible for oversight of core facilities how closely those facilities' current accounting and administrative procedures correspond to those set forth in the draft FAQs.
Basic principles of core facility costing
As noted above, a core facility provides an institution's researchers with access to any number of different instruments, technologies, or services. For example, a core facility might offer DNA sequencing, manage the care and use of laboratory animals, or provide MRI services. Core facilities provide services on the basis of rates, or user fees, which must be established at levels that allow the facility to operate in a revenue-neutral manner, i.e., the facility should break even over time. To that end, rates must be adjusted at least once every two years to account for prior period surpluses or deficits. For example, rates should generally decrease if the facility has been generating surpluses and should increase if there have been operating deficits. Finally, core facilities supported by federal funds may not discriminate against federally supported activities by charging such activities higher rates than those charged to non-federally supported activities.
Although these basic costing principles are relatively straightforward, they are quite general in nature and leave many of the practical implementation details open to interpretation. NIH's draft FAQs endeavor to provide additional guidance on some of the more common areas of core facility costing uncertainty.
Specialized service center threshold
The draft FAQs reiterate the fundamental point that a core facility should generally recover the reasonable, allowable, and allocable direct costs of providing its service. It is, however, also generally recognized that core facilities that incur substantial costs on an annual basis, or that for some reason generate a disproportionate share of indirect (or F&A) costs, should be excluded from the institution's indirect cost rate calculation and may recover both direct and indirect costs through user fees. Such facilities are referred to as specialized service facilities. Exactly what constitutes a specialized service facility has, however, been an area open to some question. The draft NIH FAQs clarify that the governing cost principles do not address where to draw the line and point approvingly to guidance promulgated by the DHHS Division of Cost Allocation providing that a core facility with more than $1 million in annual expenses should be deemed a specialized service facility.
Establishing rates or user fees
The draft FAQs clarify that the cost principle guidelines that technically cover only specialized service facilities are generally applicable to all core facilities when it comes to establishing rates or user fees: (a) rates should be set using a documented method; (b) they may not discriminate against federally supported activities of the institution; (c) they must be set so as to cover only the aggregate cost of the services provided; and (d) they must be adjusted at least once every other year.3
Use of estimated costs to establish rates for new services
The draft FAQs state that initial rates for new services "may be developed based on estimates of how actual costing will accrue and apply."4 The draft FAQs also provide some guidance regarding the estimating process. They explain that institutions may group "homogenous costs" when it is impractical to itemize, e.g., institutions may establish an average or estimated consumable supply cost for items such as test tubes. The estimating methodology used must be consistently applied and may not discriminate against any single type of user. The methodology must also be documented so that it is available for review by the sponsoring agency.
Managing different types of institutional users
When a core facility is supported by federal funds, the draft FAQs explain that the principle of a "single specific charge for a defined service or product must be observed."5 In an effort to provide some guidance regarding the "single service for a single cost" principle, the draft FAQs provide the following example: "a senior PI in a tenure track position with external support may be required to pay the list price of the service or material provided by the facility. However, charges to junior faculty might be lower or waived if some other source of funding (e.g., an institutional fund) will make up the difference."6 The draft FAQs conclude by noting that "[i]n all examples, the same cost for each unit of usage must be recovered. It is not allowable to offset lower rates to some users by applying higher rates to other users."7
The draft FAQs are consistent with NIH's general view that research resources should be widely shared, and provide that institutions may make their core facilities available to third-parties. The draft FAQs also acknowledge that institutions may charge external users higher rates than those charged internally. Specifically, NIH notes that rates for external users may include "applicable Facilities and Administrative (F&A) costs and can include a reasonable additional fee in excess of the cost of the service."8 The draft FAQs do, however, make it clear that charges to third-parties are to be treated as program income when the core facility is supported in whole, or in part, by an NIH grant. That is significant because program income must be expended and managed in accordance with certain specific cost accounting rules. The draft FAQs do not, however, specify how program income must be used, or whether the government will have a claim to all third-party revenue even if it provides only part of the core facility's support.
Accumulation of surpluses
Equipment used by core facilities tends to have a limited useful life. Because of the periodic need to refresh, it is not uncommon for institutions to look for ways to finance equipment purchases with core facility operating surpluses. As noted above, however, the draft FAQs state that core facilities are to operate in a revenue-neutral manner. The draft FAQs address this issue. They state that core facilities may neither intentionally generate surpluses to cover future equipment purchases nor use unintentionally generated surpluses for that purpose. Instead, the draft FAQs explain that acceptable methods of acquiring new equipment for a core facility include grant funds (e.g., an instrumentation grant), institutional funding, or the recovery of depreciation costs on existing equipment. Although the draft FAQs use the word "include," it is uncertain whether NIH would find other avenues of financing equipment purchases acceptable.
Institutional contributions to core facilities
The draft FAQs explain that institutional funds contributed to an NIH-supported core facility are deemed to be committed cost sharing. As such, the contributions must be supported by auditable documentation.
Although the draft FAQs are consistent with some generally held views, e.g., core facilities may not intentionally generate surpluses, core facilities may be made available to third-parties, and estimates may be used to establish initial rates, they also leave some issues unresolved. For example, although the draft FAQs assert that revenue from third-parties should be treated as program income, they do not specify how the program income should be managed or accounted for. Likewise, remaining open to interpretation are certain issues relating to equipment acquisition, accounting treatment of F&A costs, and core facilities comprised of multiple instruments and/or services.
As noted at the beginning of this alert, core facilities and specialized service facilities are a potentially significant research compliance problem. The draft FAQs, even though they are not yet in final form, present a good opportunity for research institutions to confirm that their current accounting procedures for such facilities conform to the guidance reflected in the draft FAQs. The fact that the applicable rules are technical, complicated, and (even with the draft FAQs) subject to differences of interpretation makes it all the more important to undertake a compliance inquiry on this subject.
NIH will accept comments on the draft FAQs through 10 December 2010.