NIH Grants: A Risk Area for Fraud

By Sherrie Savett

Background

The National Institutes of Health (“NIH”) awards billions of dollars to support medical and scientific research in the area of health and diseases. NIH invests approximately $32.3 billion each year in research grants to recipient organizations.[1] There are strict requirements for grant approval. Only 7 – 15% of NIH grant applications or resubmissions are successful. Grant funding is for a limited time, typically only lasting for 2 – 4 years.

Grant Application Requirements

Drafting a new federal grant application takes a significant amount of time and effort. For a new grant application, resubmission or renewal (“grant application”), the principal investigator (“PI”), faculty and other research staff (e.g., postdoctoral fellows, staff scientists and research associates) may spend hundreds of hours compiling, drafting, revising and finalizing the information included in the grant application.

The grant application requires a description of the research project, the key personnel who will work on the research, a detailed budget and a specific research plan which explains all the scientific data in detail. It is not uncommon for a grant application to be hundreds of pages. The most labor intensive part of the application is obtaining the scientific data, which involves considerable research into the scientific literature and the design of experiments that support a research hypothesis.

In a grant application, the requested budget includes the compensation for the key personnel who will be working on the grant research. The salaries of the researchers typically make up a significant portion of the costs of the grant. Salaries of researchers are often 60% or more of the grant amount requested. The portion of a researcher’s salary charged to a grant is expressed as a percentage of the researcher’s time and effort he plans to devote to the grant research out of the researcher’s total professional activity.

Total professional activity, which includes new grant applications and research, teaching, and other administrative activities, equals 100% and is not based on a 40 hour work week. For example, if the researcher’s total salary is $100,000 and he plans to spend 6 months (50% effort) working on a particular grant’s research, then the grant application would request $50,000 in grant funding to cover the cost of his salary.

NIH Grant Regulations and Reporting System

Under the law, a grant recipient institution may only charge a federal grant for the percentage of a researcher’s salary commensurate with the time and effort actually expended by the researcher for work on that grant. 2 C.F.R. § 200.430(a)(1); see also NIH Grants Policy Statement, at IIA-84 (Oct. 2017), available at https://grants.nih.gov/grants/policy/nihgps/nihgps.pdf (providing that “[c]ompenstaion costs are allowable to the extent that they are reasonable, conform to the established policy of the organization consistently applied regardless of the source of funds, and reasonably reflect the percentage of time actually devoted to the NIH-funded project”). This ensures that the federal government gets the full benefit of the research commitment for which it is paying..

The recipient institution must follow certain effort reporting procedures and requirements to confirm that each researcher’s time and effort spent on awarded grants is accurately allocated among the grants (if working on multiple grants) and reasonably reflects the individual’s actual work on each grant.

It is the responsibility of each institution to insure compliance with these standards. Generally it is the institution, and not the researchers, that submits the application and ongoing reports to the government. The monthly reporting forms should make very clear the following:

-What time is spent on awarded grants;

-What time is expended on new grant applications or renewals;

-What time is spent on administrative responsibilities (e.g. department chairs) and teaching.

Time spent on #2 and #3 may not be included in the percentage of work efforts attributable to the proposed grant or in the requests for payment. A research organization or university that does not make this clear to its faculty, and who submits requests for payment to the government containing time and effort related to items 2 and 3 above, is committing fraud and filing false claims.

Grant Fraud Damages

Courts have found that the damages for grant fraud are the entire amount of the grant awarded, although given the limited amount of decisions on this issue, it is possible that a court could calculate damages differently under the specific circumstances of a case.[2] A false claim could impair the ability of the institution to obtain future grants. Treble damages and statutory penalties starting at approximately $11,000 per false claim can quickly compound the damages.[3]

In assessing False Claim Act damages, and in attempting to settle such cases, the compromise position could be to develop a “fraud factor,” which is an estimate of how much the government overpaid for the time and effort actually spent compared to what was represented and paid by the government in the NIH grant.

Grant “Cost Principles”

The federal regulations controlling awards of grants are found under 2 C.F.R. Subtitle A, Chapter II, Part 200. These regulations include “Cost Principles” to help assess whether a specific cost can be allocated to a federal grant. 2 C.F.R. §§ 200.400, 200.401.

Specifically, these principles “must be used in determining the allowable costs of work performed by the non-Federal entity under Federal awards.” Id. at § 200.401(a). The grant recipient who receives the award, has the burden of “administering Federal funds in a manner consistent with underlying agreements, program objectives, and the terms and conditions of the Federal award.” Id. at § 200.400(b).

Costs must meet certain minimal conditions “in order to be allowable under Federal awards,” including that the costs must “[b]e necessary and reasonable for the performance of the Federal award.” 2 C.F.R. § 200.403.

Specifically, “[a] cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost.” Id. at § 200.404.

Cost Principles and Employee Compensation

There is a specific section of the cost principles discussing compensation paid, in any form, to employees for performing activities under the award. 2 C.F.R. § 200.430. As a baseline requirement, compensation must be “reasonable for the services rendered and conform[] to the established written policy of the non-Federal entity consistently applied to both Federal and non-Federal activities.” Id. at 200.430(a)(1).

Moreover, the regulations provide that “[c]harges to Federal awards for salaries and wages must be based on records that accurately reflect the work performed,” including adherence to certain minimal documentation standards, including that the records must:

(i) Be supported by a system of internal control which provides reasonable assurance that the charges are accurate, allowable, and properly allocated;

(ii) Be incorporated into the official records of the non-Federal entity;

(iii) Reasonably reflect the total activity for which the employee is compensated by the non-Federal entity, not exceeding 100% of compensated activities . . . ;

(iv) Encompass both federally assisted and all other activities compensated by the non-Federal entity on an integrated basis, but may include the use of subsidiary records as defined in the non-Federal entity’s written policy;

(v) Comply with the established accounting policies and practices of the non-Federal entity (See paragraph (h)(1)(ii) above for treatment of incidental work for IHEs.); and

(vii) Support the distribution of the employee’s salary or wages among specific activities or cost objectives if the employee works on more than one Federal award; a Federal award and non-Federal award; an indirect cost activity and a direct cost activity; two or more indirect activities which are allocated using different allocation bases; or an unallowable activity and a direct or indirect cost activity.

(viii) Budget estimates (i.e., estimates determined before the services are performed) alone do not qualify as support for charges to Federal awards, but may be used for interim accounting purposes [subject to certain requirements.]
Id. at § 200.430(i).[4] If the organizational fails to adhere to these documentation requirements, the Government may require the generation of “personnel activity reports.” Id. at § 200.430(i)(8).

Thus, the cost principles establish certain effort reporting procedures and requirements to ensure that the government is paying for and receiving the amount of time and effort promised by the grant recipient. In general, compensation for a researcher’s time and effort is allowable to the extent it reasonably reflects the actual activity of the researcher for work on the grant.

Just-in-Time Reports

Before the government approves a grant application, the government may request a “Just-in-Time Report” from the applicant. NIH Grants Policy Statement, at I-73 (explaining that “just-in-time” procedures “allow certain elements of an application to be submitted later in the application process, after review when the application is under consideration for funding”).

This report requests additional information including “other support” information concerning both active and pending grant awards for the key personnel in the pending application. This report will show whether the PI, faculty and other research staff have time to perform the work on the new, proposed grant in light of their commitments to work on already-awarded grants.

When NIH asks for other support information, it is “requested for all individuals designated in an application as senior/key personnel – those devoting measurable effort to a project.” Id. The government will review this information to ensure that “[s]ufficient levels of effort are committed to the project.” Id. Applicants are responsible for verifying that the information submitted in the Just-in-Time Reports are accurate. Id.

Conclusion

NIH Grant Fraud has been identified as a risk area for fraud by the HHS Office of Inspector General (“OIG”). The OIG has identified effort reporting as a particular risk area for fraud in connection with federal research grants.

They view it as a critical risk area because “many researchers have multiple responsibilities . . . that must be accurately measured and monitored” and that throughout the researcher’s workday, it may be hard to keep track of the time and effort spent on activities. Thus, the OIG stresses that “institutions need to be especially vigilant in accurately reporting the percentage of time devoted to projects.” HHS-OIG, “Draft OIG Compliance Program Guidance for Recipients of PHS Research Awards” 70 Fed. Reg. 71312 (Nov. 28, 2005).

[1] National Institutes of Health, Budget, available at https://www.nih.gov/about-nih/what-we-do/budget (“The NIH invests nearly $32.3 . . . billion annually in medical research for the American people.”); National Institutes of Health, Impact of NIH Research, available at https://www.nih.gov/about-nih/what-we-do/impact-nih-research (“NIH is the largest public funder of biomedical research in the world, investing more than $30 billion in taxpayer dollars to achieve its mission to enhance health, lengthen life, and reduce illness and disability.”).

[2] See e.g. U.S. ex rel. Feldman v. van Gorp, 697 F.3d 78 (2d Cir. 2012) (“This approach rests on the notion that the government receives nothing of measurable value when the third-party to whom the benefits of a governmental grant flow uses the grant for activities other than those for which funding was approved. In other words, when a third-party successfully uses a false claim regarding how a grant will be used in order to obtain the grant, the government has entirely lost its opportunity to award the grant money to a recipient who would have used the money as the government intended.”); United States v. Karron, 750 F. Supp. 2d 480, 492 (S.D.N.Y. 2011) (“The courts that have directly addressed this issue have reasoned that when a grant is provided to a disqualified participant, the government loses all benefit of its bargain.”).

[3] Pursuant to the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended by the Debt Collection Improvement Act of 1996, 28 U.S.C. § 2461 and 64 Fed. Reg. 47099, 47103 (1999), the civil monetary penalties under the FCA are $5,500 to $11,000 for violations occurring on or after September 29, 1999 but before November 2, 2015. See 28 C.F.R. § 85.3. . Pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 and 81 Fed. Reg. 42491 (2016), the civil monetary penalties under the FCA were adjusted to $10,781 to $21,563 for violations occurring on or after November 2, 2015. See 28 C.F.R. § 85.5.

[4] See also U.S. Department of Health and Human Services, NIH, NIH Grants Policy Statement, Oct. 1, 2013 (stating that salaries of research personnel are only allowable to the extent that they “reasonably reflect the percentage of time actually devoted to the NIH-funded project.”).

If you have discovered evidence of fraud committed against the government, you may be entitled to a substantial reward and the legal protections afforded to whistleblowers under state and federal laws. The attorneys at Berger Montague are nationally recognized for their work in Whistleblower/Qui Tam actions. For more information or to schedule your confidential consultation, contact us online or call us at (844) 781-3088.