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Funding for Health Sciences Research The United States is widely recognized as the world's greatest investor in health sciences research. Of the estimated $132 billion invested in all research and development (R&D) in the United States in 1989, $20.6 billion was health related (Figure 2-1~.~2 In this country health research is funded by three autonomous yet interlocking sectors: (1) federal, state, and local governments; (2) industry; and (3) private nonprofit organizations. In 1988 the federal, state, and local governments supported slightly more than half (51 percent) of all health-related R&D in the United States. Of the remainder, industry supported about 45 percent, and private nonprofit organizations supported about 4 to 5 percent (Figure 2-1~. This ratio has changed slightly over the past decade, while the nation's investment in health research has tripled in current dollars (Figure 2-2~. In inflation- adjusted dollars the investment has grown by 65 percent during this time (Figure 2-3~. Before World War II, however, the federal government did not invest heavily in life sciences R&D. Most federal support for biological research was sponsored by the Department of Agriculture through block grants to the land-grant colleges. Projects sponsored by these funds were targeted toward the applied life sciences of agriculture and forestry, with few provisions for basic biological research. Additionally, geographical criteria were employed as the primary means to disburse these funds. During this same period, health research was sponsored primarily by industry, academic institutions, and private individuals.3 In fact, of the ~,, ~. 32

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RESEARCH FUNDING Other R&D $111 - _Health R&D $21 Nonprofit 4% llndustrv 45% Total U.S. R&D Source of U.S. Health $132 Billion R&D Funding FIGURE 2-1 Estimated U.S. research and development expenditures for 1989.~2 100% 80% 60% 40% 20% 0% 77 78 79 33 80 81 82 83 84 as YEAR NIT ~ Other Public ~ Industry 86 87 88 89 F......... ~ 1 Nonprofit FIGURE 2-2 Source of U.S. support for health research and development from 1977 to 1989.2 estimated $45 million spent on biomedical research in 1940, industry con- tributed 55 percent or about $25 million. Approximately 26 percent ($17 million) came from philanthropy, either through earnings on institutional endowments or grants from foundations. The federal government's invest- ment that year totaled $3 million-about 15 percent of the total, most of which was spent in its own laboratories. Some university-based inves- tigators eschewed governmental support, fearing the loss of intellectual freedom and undue influence on their research.4 During World War II, basic research in the sciences made significant contributions to the success of the war effort. In 1945 Vannevar Bush, then

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34 25 20 1 5 10 5 _ O 1 1 77 78 79 - - FUNDING HEALTH SCIENCES RESEARCH DOLLARS (Billions) F - 80 81 82 ~+~ Current $ 83 84 85 86 YEAR Constant 1988 $ 87 88 89 FIGURE 2-3 Total U.S. support for health research and development from 1977 to 1989. (Appendix Able A-1) head of the Office of Scientific Research and Development (OSRD), formu- lated a set of proposals intended to sustain the nation's war-time research momentum and direct it toward civilian goals. His report to the President, entitled "Science, the Endless Frontier," proposed a coordinated federal policy of investing in research and training new researchers.5 The policy was to be driven by scientific merit rather than by political or geographical interest. Subsequently, Bush and his colleagues in OSRD established a system by which grants and contracts were awarded to institutions based on scientific merit, and this approach became the cornerstone of the peer- reviewed, academically based system now in place for federally sponsored, competitive extramural research grant programs. In the two decades following the war, several pieces of legislation changed the organization and conduct of scientific research in the United States. The federal government became the largest single sponsor of health research and about three fifths of these funds now come from programs in the Department of Health and Human Services (DHHS), namely those in the Public Health Service (PHS).2 Within the PHS the National Institutes of Health (NIH) and the Alcohol, Drug Abuse, and Mental Health Ad- ministration (ADAM HA) allocate the largest percentage of federal funds for health-related research (Figure 2-4~. Research funds in DHHS also are allocated to the Centers for Disease Control; the Health Care Financing

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RESEARCH FUNDING 35 Other 19% \\\\\\\: ADAMHA-5-%- ~ Other HHS 3/O $9.2 Billion Other 5.5 NSF 1.2 DOE 2.4 IVA 27 FIGURE 2-4 Source of federal support for health research and development for 1989. (AppendLx Able A-1) Hicher Education 54% State and Local 1% Foreign 1% Other Nonprofit 13% Industry 5% Federal Laboratories 26% FIGURE 2-5 Distnbution of federal health research funds for 1989.2 Administration; the Health Resources and Services Administration; the Food and Drug Administration; the Office of Health Research, Statistics, and Technology; and the Once of the Assistant Secretary for Health in the PHS. Other federal departments and agencies have budgets for health sciences research as well most notably, the Departments of Defense, En- ergy, and Veterans Affairs, and the National Science Foundation (NSF) (Figure 2-4~. Unlike most other countries where government-sponsored research is conducted in government laboratories, two-thirds of federally sponsored health sciences research in the United States is conducted in institutions of higher education (colleges and universities), research organizations, and hospitals, and approximately one-quarter is performed in federal labora- tories (Figure 2-5~. Whereas the majority of industrial health sciences research is performed within corporate facilities, only a small fraction of federally sponsored research is performed in private industrial laboratories.2 The broad array of research sponsors and the decentralized nature of

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36 FUNDING HEALTH SCIENCES RESEARCH research efforts by thousands of individual health researchers are recognized widely as the key advantages to the U.S. approach to health research and as the means by which it has flourished over the past four decades. In this type of system the individual scientist is recognized as the most important element in determining scientific priorities. This has been accomplished primarily by scientists by serving on merit review panels and advisory groups. Currently, there are more than 2,000 nonfederal scientists serving on peer review study sections and advisory groups in the NIH alone.6 Whereas the federal government along with other sponsors of research has been highly supportive of these peer review mechanisms and has provided financial resources for performing the research, many of the benefits of health research could not have been realized without a well-trained cadre of scientists. Despite the success of the health research enterprise, the system has become stressed increasingly in recent years for many reasons. Most significant is the concern over growing federal debt and recent legislation attempting to reduce the huge annual federal budget outlays. Recent attempts to reduce federal deficits have increased the competition for scarce funds for all federally financed programs. Unfortunately, funds from states and private sector sources have been unable to compensate for the slower growth of available federal funds, especially support for fundamental health sciences research. The increasing competition among worthy projects has required making difficult choices, often resulting in concessions to short-term needs rather than longer-term investments. This study committee was created out of a concern that these short- term choices have helped create an imbalance in the support of research projects, personnel, and the facilities and equipment needed for research. The committee examined the allocation policies of the primary sponsors of health research and the contributions to the scientific decision-making process by all concerned parties. This chapter overviews the funding of health research by the various sponsors and reviews policies affecting the allocation of these resources. The subsequent chapters examine more closely the sources and uses of funds for talent development, research projects, facilities and equipment, and processes for matching scientific priorities with political and fiscal realities. FEDERAL SUPPORT FOR HEALTH SCIENCES R&D NIH and ADAMIlA Before World War II nearly all federally sponsored health research was conducted in the government's own laboratories. The precursor to NIH, the Laboratory of Hygiene (later renamed the Hygienic Laboratory), was

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RESEARCH FUNDING 37 established out of the Marine Hospital Service in 1887 and was designated the National Institute of Health in 1930. Its role was expanded over the following decade to include public health advisory functions. The National Cancer Act of 1937 empowered the Surgeon General to administer extramural grants-in-aid for cancer research and provide fellowships to train scientific personnel. The Public Health Service Act of 1944 made NIH a separate entity in the PHS and empowered NIFI to support research on diseases other than cancer through extramural grant and fellowship programs. The NIH Research Grants Office, forerunner of the Division of Research Grants, was created In 1946 to administer a program of extramural awards. In 1953 the PHS was reassigned to the newly created Department of Health, Education, and Welfare, and the scope of NIH's responsibilities began to change.7 In 1956 the National Library of Medicine Act created the National Library of Medicine (NLM) out of the Armed Forces Medical Library, and the Health Research Facilities Act was passed the same year, authorizing a program of matching funds to be administered through NIH for constructing health sciences research facilities. Growing appropriations under this new NIH construction authority were responsible for the major research building projects that expanded the research infrastructure In the United States from the late 1950s to 1970. In response to new scientific opportunities in the health sciences, Congress increased funding for scientific research dramatically between 1945 and 1970, when appropriations for NIH rose from $26 million to $4.8 billion in constant 1988 dollars* (Figure 2-6~.7 Congress also added numerous categorical institutes to NIH during that time, reflecting efforts of special interest groups to target research on specific organ groups and illnesses. However, the rate of growth in funding for health sciences research slowed after 1965 in the wake of increased expenditures for the domestic human service initiatives of the Johnson administration and the Vietnam War.8 Despite this declining rate of budgetary growth, NIH continued to expand its role in the health sciences and underwent various reorgan~ lions during the 1960s and 1970S.7 In 1967 the National Institute of Mental Health (NIMH) was removed from NIH and established as a separate bu- reau within the PHS. Following this, in 1973, the recently created National Institute of Alcohol Abuse and Alcoholism (NIAAA) and the National Institute of Drug Abuse (NIDA) were merged with NIMH to form the *All constant dollar figures in this text use the biomedical R&D price index developed by the Commerce Department for NIH. Although there are minor differences between the deflators for the intramural and extramural indices, only the combined deflator is used for all calculations.

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6 4 2 _ 0-` 45 50 55 60 65 70 YEAR - 38 FUNDING HEALTH SCIENCES RESEARCH DOLLARS (Billions) - ,+ 75 80 85 90 Constant 1988 $ ~+~ Current $ FIGURE 2-6 NIH appropriations from 1945 to 1990. Note: Constant dollars are calculated using the Biomedical Research and Development Price Index (BRDPI). (Appendix Table A-2) ADAMHA. Also, during the 1970s, two institutes were elevated to bureau status within NIH, reflecting congressional emphasis on cancer and heart disease, and the National Institute of Aging was created because of an increasing desire to understand the aging process. Inflationary pressures in the 1970s reduced the purchasing power of research funds, fostering the academic community's perception that the financial base of federal research support was eroding.9 In response, the director of NIH advised Congress to stipulate the minimum number of new and competing research project grants that NIH would be required to support with its annual appropriations. This policy became known as "stabilization." Beginning in fiscal year 1981, NIH and ADAMHA were required to support 5,000 and 569 research project grants, respectively. Increasing target numbers were proposed for subsequent years but were negotiated between the administration and Congress during the annual federal budget process. Nonetheless, the appropriations for NIH grew steadily over the past decade (Figure 2-7~. With the exception of 1982, NIH has realized a growth, after adjustments for inflation, of about 2 percent per year. Appropriations for ADAMHA, although they dropped in the early 1980s, had real growth in the research portion of the budget

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RESEARCH FUNDING 39 throughout the 1980s (Figure 2-8~.~ The research budgets for NIH and ADAMHA are covered in more detail in Chapter 4. Over the past decade a variety of new laws and regulations have been enacted, affecting how federal research agencies carry out their missions and how they interact with industry, universities, and other extramural research institutions. For example, the Stevenson-Wydler Act (P.L. 96-480), passed in 1980, mandated that all agencies with R&D budgets allocate 0.5 percent of their research funds to industry or universities for technology transfer. In 1980 the Small Business Patent and Procedure Act (P.L. 96-517) made it possible to transfer patent rights derived from federally supported research to small businesses, universities, and certain nonprofit organizations. The Small Business Innovation Development Act of 1982 established a program to grant federal research funds to for-profit businesses by all federal agencies with more than $100 million budgets for R&D.7 This legislation called for a phase-in of the program over 4 subsequent fiscal years-from 1983 to 1986. Currently, all federal agencies awarding ex- tramural research funds must allocate 1.25 percent of their annual R&D appropriations through this program. The Federal Technology Transfer Act (P.L. 99-502) of 1986 encouraged additional government-indust~y collaboration. This legislation promotes technology transfer by authorizing government laboratories to enter into 10 9 8 7 6 5 4 3 2 1 DOLLARS (Billions) - .~. 77 78 7980 81 82 83 84 85 86 87 88 89 90 91 YEAR - Constant 1988 $ -I- Current $ FIGURE 2-7 NIH appropriations from 1977 to 1991. Note: Figures for 1991 are derived from the President's proposed 1991 budget. (Appendix Table A-2)

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2000 1 500 1 000 500 40 DOLLARS (Millions) 3000 2500 FUNDING HEALTH SCIENCES RESEARCH . .. .. \ o 77 ,: ~- _, i,/ 7 - ~ . , . 1 1 78 79 80 81 82 83 84 85 86 87 88 89 90 91 YEAR Constant 1988 $ -+-- Current $ * Research Funds FIGURE 2-8 ADAMHA appropriations Tom 1977 to 1991. Note: Figures for 1991 are derived from the President's proposed 1991 budget. (Appendix liable A-2) cooperative research and economic development agreements with other federal agencies, state and local governments, and for-profit and nonprofit organizations. Thus, companies now have unprecedented access to the research results from government laboratories upon which they can obtain exclusive licensing rights for development. Centers for Disease Control The primary mission of the Centers of Disease Control (CDC) is to assist state and local health authorities and other health-related organi- zations in stemming the spread of communicable diseases, protecting the public from other diseases or conditions amenable to reductions, providing protection from certain environmental hazards, and improving occupational safety and health. Additionally, the CDC is responsible for licensing of clin- ical laboratories engaged in interstate commerce, for conducting foreign quarantine activities aimed at preventing the introduction of disease into the United States, and for developing scientific criteria for occupational health hazards. About nine-tenths of CDC's budget is allocated to the nonresearch portion of its mission, predominantly through block grants to states (Figure 2-9~. Of the $982 million appropriated to CDC in fiscal year 1989, only

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RESEARCH FUNDING IP 15% STD 8% PHSBG 9% ED 7% ES 6% NCHS 5% ~--= 1 ~ AIDS 39% i/ NIOSH 7% Percent of CDC Budget 100 80 40 41 FIGURE 2-9 Distribution of budget for the Centers for Dis- ease Control for 1989.~4 (Key: IF = immunization program; STD = sexually transmitted diseases; PHSBG = preventive health ser- vices block grant; ED = environ- mental diseases; ES = epidemic services; NCHS = National Cen- ter for Health Statistics; NIOSH = National Institute for Occupa- tional Safety and Health; AIDS = acquired immune deficiency syn- drome; and ID = infectious dis- eases) CONSTANT 1988 DOLLARS (Thousands) o 84 85 86 87 88 89 YEAR 1 - NIOSH ~ OTHER CDC FIGURE 2-10 Research allocations for the Centers for Disease Control from 1984 to 1989. (Appendix Table A-3) about 10 percent ($100.6 million) was obligated for health research. In constant 1988 dollars, research funds at CDC grew from $56.6 million to $95.5 million between 1984 and 1989 (Figure 2-10~. Increases were greatest in fiscal years 1987 and 1988, when research funds grew by 18.8 and 26.8 percent, respectively, in constant dollars. These increases coincided directly with the increasing national emphasis on research into human immunodeficiency virus (HIV) infection. The National Institute of Occupational Safety and Health (NIOSH) is the primary research arm of the CD C. NIOSH conducts research; develops

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42 FUNDING HEALTH SCIENCES RESEARCH criteria for occupational safety and health standards; and provides techni- cal services to government, labor, and industry, including training in the recognition, avoidance, and prevention of unsafe or unhealthful working conditions and the proper use of adequate safety and health equipment. Through these various mechanisms, NIOSH tries to reduce the high eco- nomic and social costs associated with occupational illness and injury. Obligations for research funded by NIOSH grew only slightly between 1984 and 1987, and declined in the following 2 years (Figure 2-10~. Of the $70.4 million appropriated to NIOSH for fiscal year 1989, $24.7 million was committed for research and about $10.1 million was obligated for training.* The CDC has been a leader in the nation's efforts to prevent and control the spread of HIV infection, managing a comprehensive HIV pre- vention program that includes surveillance; epidemiologic and laboratory studies; and prevention through information, education, and risk reduc- tion. Appropriations for AIDS activities for fiscal year 1989 were $382.3 million 39 percent of the CDC budget. The research portion of this allocation was $44.6 million for epidemiologic and laboratory studies to determine the natural history of the disease and to gain more knowledge about transmission of HIV In fact, research funds allocated to other parts of CDC have grown much faster than those in NIOSH (Figure 2-10~. Another part of the CD C, the National Center for Health Statistics (NCHS), is responsible for collecting, maintaining, analyzing, and dissemi- nating statistics on the health, illness, and disability of the U.S. population and on the impacts of these factors on the economy. Although this function is not classified under research, it is an ancillary service for epidemiological studies utilizing the data base. NCHS also is responsible for collecting nonhealth data on births, deaths, marriages, and divorces. For fiscal year 1989, $49 million dollars was appropriated to NCHS. Office of the Assistant Secretary for Health In the past, appropriations for the Office of Assistant Secretary for Health included funds for the National Center for Health Services Research and Health Care Technology Assessment (NCHSR). The center was the focal point within the federal government for research on the health care delivery system and examined problems in the organization, delivery, and financing of health care services. It was also within the center's purview to coordinate health services research in the PHS and to disseminate the *There is a discrepancy between the NIOSH appropriations for research in the conference re- port from Congress ($60.5 million for fiscal year 1989) and the information received directly from CDC, which reported only $24.7 million.

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RESEARCH FUNDfNG TABLE 2-1 Distribution of U.S. R&D Expenditures for Ethical Pharmaceuticals by Function, 1987 (dollars in millions) 51 Function Amount Percent Clinical evaluation: phases I,II,III Biological screening and pharmacological testing Synthesis and extraction Pharmaceutical dosage formulation and stability testing Toxicology and safety testing Process development for manufacturing and quality control Clinical evaluation: phase IV Regulatory, IND and NDA preparation, submission and processing Bioavailability studies Other TOTAL $1,296.0 24.0 907.2 16.8 556.2 10.3 491.4 448.2 507.6 237.6 194.4 162.0 599.4 5,400.0 9.1 4.4 3.6 3.0 11.1 100.0 Reprinted with permission. Pharmaceutical Manufacturers Association. 1989. Annual Survey Report of the U.S. Pharmaceutical Industry, 1987-1989. Washington, D.C. recent understanding of genetics, recombinant DNA, cell fusion, and novel bioprocessing techniques have become known as "new biotechnology." Although the demarcation between old and new is somewhat cloudy, the committee focused only on the latter. (It also should be noted that not all biotechnology is in the realm of biomedical science.) The federal government is the primary source of R&D funds for biotechnology; most funds come from NIH. NIH reported that nearly 22 percent or $1.02 billion of its 1988 R&D budget was allocated to research on developing biotechnology techniques or employing the technology. The size of the NIH investment in biotechnology reflects the importance of molecular genetics in biomedicine. The OTA conducted two surveys of biotechnology firms in 1987. Of the 296 dedicated biotechnology firms contacted in the first survey, 63 (21 percent) were involved with human therapeutics and 52 (18 percent) were conducting R&D in diagnostics. In the second survey of 53 large, diver- sified companies investing in biotechnology, 20 were performing R&D in human therapeutics and diagnostics. Overall, OTA estimated that, as of

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52 FUNDING HEALTH SCIENCES RESEARCH January 1988, 403 dedicated biotechnology firms and more than 70 major corporations were investing in biotechnology. OTA estimated further that the total investment by industry was between $1.5 and $2.0 billion per year. The NSF surveyed corporations engaged in biotechnology research as a pilot study for future investigation of industrial R&D in emerging technologies.20 In 1986 and 1987 the NSF sent questionnaires to firms expected to spend at least $1 million annually on biotechnology R&D. A total of 54 firms responded to both surveys a total estimated to account for half of all industrial investment in biotechnology R&D.2i These 54 companies increased their R&D investments by 20 percent In 1985 but by only 16 and 12 percent, respectively, in 1986 and 1987. Although these firms showed a slowing rate of growth for R&D investment, their expenditures as a percent of sales continued to surpass those of industry overall. The NSF estimated that industry invested $1.4 billion in biotechnology R&D in 1987. General fiends From 1985 through 1987, Business Week reported both sales and R&D expenditures for 38 health care companies in its R&D scoreboard. These firms have continued to increase their rate of investment in R&D from 12 percent in 1986 to 16 percent in 1987. These rates exceeded industrial averages by 2 percent in 1986 and 9 percent in 1987. In addition, the health care firms' ratio of R&D investment to sales surpassed the average industrial ratio by more than 4 percent. The NSF survey estimated that the biotechnology industry spent $1.4 billion on R&D in 1987 and that pharmaceutical manufacturers invested nearly $5.4 billion in the same year. This suggests that industries contribu- tion to biomedical R&D is comparable to the total NIH budget. NIH staff members have estimated that industry is the most rapidly growing sector of health R&D and that the aggregate industrial investment in biomedical R&D has exceeded the NIH budget since 1982. In fact, the PMA has reported that the combined total R&D expenditures of its member firms exceeded the NIH budget in 1989.~8 Recently, it appears that the growth of industrial investment in R&D has begun to level off. This slower growth has been attributed to mergers that force corporations to cut costs, to economic troubles in some indus- tries' and to other pressures to show short-term profits.~4 Additionally, a reduction in tax credits for incremental increases in R&D investment may have caused some firms to trim their R&D expenditures. The NSF and PMA surveys suggest that growth of industrial investment in biomedical R&D has plateaued. This could indicate that the field of biotechnology

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RESEARCH FUNDING 53 has begun to mature or that firms engaged in biomedical R&D are not immune to the economic pressures facing all U.S. corporations. Legislation Affecting Corporate R&D In the past decade the federal government helped industry strengthen its associations with universities. For example, the NSF developed special research centers to foster collaboration between universities and corpora- tions.~i In addition, the antitrust law was relaxed so as to permit companies within the same industry to form nonprofit research consortia, such as Sematech. The 1981 Economic Recovery Fix Act provided a tax credit for in- cremental increases in R&D spending to foster additional investment and stimulate technology transfer. In a recent report, the General Accounting Office estimates that the tax credit stimulated between $1 billion and $2.5 billion of additional R&D between 1981 and 1985. However, the cost was estimated to be $7 billion in foregone tax revenues.22 While these costs seem high, the societal benefits derived from the research may be much higher. The law expired in 1985 but was renewed in 1986. However, the renewal trimmed the tax credit from 25 to 20 percent of investment and added restrictions to the types of research that qualified for the credit. Also, the 1986 renewal included a 20 percent credit for industry-supported research conducted at universities and other academic institutions. The credits, set to expire in 1988, again were extended through 1989 and although companies still could receive a 20 percent tax credit, they had to reduce the R&D expenses they deducted on their tax returns by an amount equal to half of the earned credit.23 New bills introduced into the House and Senate continue this provision. President Bush, who favors making the tax credit permanent, is supporting a provision for companies to subtract 100 percent of the tax credit value from their declared R&D expenses. The administration also would like to allow start-up companies to carry earned credits forward 15 years, for these companies generally do not earn taxable profits in their early years and therefore cannot benefit from the present law. The Technology Transfer Act of 1986 was intended to facilitate more ac- tive collaboration between industry and federal agencies involved in R&D. Although this legislation was intended in part to respond to the steadily rising costs of health care, the legislation actually dampened enthusiasm for these collaborations between some corporations and NIH. Pharmaceutical firms are displeased particularly because of the government's insistence on imposing price controls for 10 years after development on new drugs developed cooperatively.

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54 FUNDING HEALTH SCIENCES RESEARCH University-Industry Cooperation In 1986 industry contributed approximately 5 percent to overall support for academic research. Despite increasing academic research funding from industry since then, industry investment is not expected to exceed 7 to 8 percent of university research budgets. The mechanisms of this industrial support for academic research span the spectrum, from small, unrestricted gifts and contract research to highly organized cooperative ventures. Many issues are involved when cooperative ventures between uni- versities (or government) and industry are established. Differences exist between the cultures of corporations and universities, the most notable being freedom of information. For instance, in-house corporate research is proprietary information, but similar secrecy and publication constraints in a university setting can threaten the very essence of university freedom. Despite these differences, however, a number of cooperative ventures have succeeded in the past decade. Reconciliation between the goals and ex- pectations of industry and academe has been and remains crucial to their success. When successful, these cooperatives provide a unique technol- ogy transfer mechanism, one of the federal government's key policies for increasing U.S. economic competitiveness. An example of successful industrial support of university research is the Monsanto Corporation's collaborative research effort with Washington University on the peptides and proteins that regulate cellular function and communication. Monsanto initiated the arrangement in 1982 to support research in an area in which it did not have in-house expertise. The firm provides a pool of funds for grants to Washington University faculty, with 30 percent allocated to basic research and 70 percent to projects that may result eventually in the development of commercial products. Research results are made public, and Washington University holds patents on products created by the research. Monsanto reserves both the right to view results for 30 days before submission for publication and the right of first refusal for exclusive licensing to develop products. Under this arrangement, Monsanto is expected to have provided the university with $62 million for research by 1990.~6 NONPROFIT ORGANIZATIONS During the nineteenth and the first half of the twentieth centuries, pri- vate nonprofit foundations constituted a primary source of funds for health sciences research. Many early foundations were established to benefit par- ticular institutions or to address specific social or health problems. These foundations' assets were derived generally from an individual's or family's gifts. During the twentieth century, voluntary health agencies, which are

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RESEARCH FUNDING 55 referred to also as operating foundations, have proliferated. Additionally, a special type of nonprofit organization the medical research organization has developed, such as the Howard Hughes Medical Institute. Each of these types of organizations differs in its mission, governance, and mechanisms of support. Although these organizations comprise a limited portion of health sciences research support, they are vital to the nation's research enterprise because of their flexibility and their dedication to curing human disease and suffering. The NIH estimated that private nonprofit organizations contributed about $700 million (or about 4.3 per- cent of the total), to health R&D in 1988.2 However, this figure probably underestimates the role of philanthropy in health sciences research by ex- cluding endowed professorships and donations for facilities and equipment. Another estimate has placed philanthropy at nearly one-quarter of a typical institution's budget for biomedical R&D.4 Foundations In the early l900s the philosophy of foundation philanthropy began to change, becoming less restrictive as broad charters were given to the boards of directors of such newly formed foundations as the Rockefeller and Rus- sell Sage Foundations and the Carnegie Corporation of New YorL4 These charters allowed the directors to focus their foundation's philanthropy in ways they believed would provide the greatest social benefit rather than at specific problems. At the same time, community foundations were be- ginning to form in cities around the United States. Unlike independent foundations, these community foundations relied (and continue to rely) on charitable contributions. Fix law changes in the mid 1930s allowed corporations to deduct char- itable contributions and fostered the formation of corporate foundations to serve as the primary philanthropic arm of companies. Presently, there are more than 400 company-sponsored foundations actively involved in grant support, and they provide more than $2 billion per year to all scientific areas, including the health sciences. Since World War II, federal investment in health sciences research has eclipsed that of foundations, but foundations still play a vital role in the research enterprise, augmenting federal funding for health sciences research. However, some foundations that support health-related activities may not support research directly; rather, they support talent development or facilities. Also, some foundations that previously supported research no longer do so. Nonetheless, foundations, in general, have provided crucial support in filling gaps in the research agenda that have not been addressed appropriately or profitably by government or industry.

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56 FUNDING HEALTH SCIENCES RESEARCH Currently, private foundations provide a great variety of support mech- anisms for health sciences research. Few of these foundations conduct in-house research, most believing that extramural research provides the most efficient use of funds. Common types of foundation support include individual research project grants, predoctoral and postdoctoral fellowships, equipment grants, publication expenses, special library collections grants, and sponsorship of conferences or workshops. Large, independent founda- tions contributing to health sciences research include but are not limited to the following: the Lucille P. Markey Must, the Pew Charitable [lusts, the Duke Endowment, the Commonwealth Fund, the Alfred P. Sloan Founda- tion, the John ~ Hartford Foundation, the Henry J. Kaiser Family Foun- dation, the Robert Wood Johnson Foundation, the John D. and Catherine T. MacArthur Foundation, and the Andrew W. Mellon Foundation.4 The mechanisms for priority setting vary among foundations-company sponsored as well as independent. In some instances, funding decisions are made through personal contacts or because of interest in a specific disorder. Large, independent foundations may form advisory committees to deter- mine areas of emphasis; proposals also may be subjected to a peer review process similar to that used by NIH. Smaller foundations may not plan pro- gram initiatives but rather may fund the best unsolicited proposals received in a given time period. The extent of foundation support for health sci- ences research varies from year to year, depending on the relative timing of costly initiatives. Also, company-sponsored foundations frequently restrict support in communities in which the company has operations and in pro- grams that may affect its employees directly. Several committee members believe that corporate charity is becoming more closely tied to individual employee charitable giving, with corporate donations often matching the employee's contributions. This diminishes the size of corporate gifts to academic institutions for research purposes. Tax laws and the economic environment affect foundation contributions to all areas, including the health sciences. Until 1969 there were few specific federal regulations pertaining to foundations. Modifications to the Internal Revenue Code in that year, however, changed the rules regarding organizations classified as private foundations by federal tax law. Included in the changes were restrictions on self-dealing and limitations on business ownership. Now, all foundations with assets exceeding $s,oCo must file an annual report with the IRS, listing all of the principal officers of the foundation, its total assets and investments, and every grant made in that year. Prior to the Ax Reform Act of 1976, a foundation's annual giving requirements were based on whichever was greater: adjusted net income or a variable percentage of the market value of investment assets. The 1976 act fixed the giving requirements at 5 percent of market value assets or net

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RESEARCH FUNDING 57 income, and it eliminated the variable percentage method. Private foun- dations were being charged a 4 percent excise tax on their net investment until 1978, when the law reduced the tax rate to 2 percent. The Economic Recovery Tax Act of 1981 changed the giving requirements again to equal a flat 5 percent of market value of assets per year. These tax law changes have contributed to the growth of foundation giving in recent years. Since giving requirements are tied directly to the market value of foundation assets, the economy has a significant effect on total giving. In periods of high inflation, such as that experienced in the late 1970s, founda- tions actually lost assets when measured in constant dollars. However, the bull markets and low inflation rates of the 1980s helped increase the value of foundation assets and subsequently increased contributions to health research. Voluntary Health Agencies Voluntary health agencies (often referred to as operating foundations) are private charities supported primarily by public donations. There are now perhaps as many as 200 national and regional organizations actively supporting health research. Many of these organizations were founded by the families and friends of individuals suffering from a particular disease. These voluntary health agencies, such as the American Cancer So- ciety and the American Heart Association, play critically important roles in advancing their areas of interest. With activities that include public awareness and education, patient referrals, continuing education for health professionals, grants for research and training, and lobbying to increase federal funding for disease-specific research. However, it should be noted that not all disease-specific organizations support research, and of those that do, most do not conduct in-house research. The six largest voluntary health agencies (in terms of revenues) are, in descending order, the American Cancer Society, the American Heart Association, the March of Dimes-Birth Defects Foundation, the Muscular Dystrophy Association, the National Easter Seal Society, and the American Lung Association. These six organizations reported combined expenditures for disease-related research of more than $250 million in 1988.* Since these organizations rely on voluntary contributions, they are not able to make long-term commitments to research efforts. However, they are effective in responding rapidly to new research initiatives and in providing resources to scientists to develop new lines of investigation. The voluntary health agencies also can play a very critical role in the * Figures were obtained from 1988 annual reports.

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58 FUNDING HEALTH SCIENCES RESEARCH early stages of many individuals' scientific career development. Through funding mechanisms such as fellowships and career development awards, these organizations attract young researchers to a specific field and provide them with research funding before they are able to compete successfully for federal support. Grant awards from these organizations commonly range between $20,000 and $50,000. Voluntary health agencies also act as lobbyists for increases in disease- specific funds for NIH. These organizations increase public awareness of the need to fight particular diseases and solicit grass-roots support for more federal research funds, and they also have been very influential in establishing new institutes at NIH. Medical Research Organizations Medical research organizations (MRO), such as the Howard Hughes Medical Institute (HHMI) and the J. David Gladstone Foundation Labora- tories for Cardiovascular Disease, conduct medical research in conjunction with hospitals. By law, these types of organizations must spend 3.5 per- cent of their endowments on medical research annually. The Gladstone Foundation is a relatively small medical research organization with assets estimated at $118 million and is affiliated with the University of California at San Francisco. On the other extreme, the largest MRO is HHMI with assets in excess of $6 billion. In recent years HHMI has become the largest single private nonprofit contributor to biomedical research. Currently, HHMI's total investment in biomedical research is comparable to the budget of a small institute within NIH, with expenditures totaling $238.4 million in 1989. The trustees have designed the institute's program to complement NIH activities within a few selected areas of research: cell biology and regulation, genetics, immunology, neuroscience, and structural biology. A 10 member medical advisory board has ultimate responsibility for the quality of the research program, whereas scientific review boards composed of scientists in each of the five areas oversee work in their respective fields. Although the institute is sufficiently large to make a major contribution, it does not seek to replace the central role of NIH in any field. HHMI traditionally has established large laboratories with a core group of investigators in universities and hospitals around the United States to facilitate interaction with the larger research community. Investigators are appointed for fixed terms of 3 to 7 years, with full funding provided for faculty and technician salaries as well as research expenses. Investigator productivity is evaluated through research conferences, annual progress reports, and site visits. By mid 1988 HHMI employed approximately 180 investigators and a

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RESEARCH FUNDING 59 1,350-member support staff in 30 sites. In order to expand the number of host institutions, HHMI recently began to support individual investigators rather than multi-investigator laboratories. The institute plans to support approximately 250 investigators and 2,000 support staff in at least 40 sites within a few years. HHMI has undertaken a broad program to strengthen science educa- tion from the precollege to the postdoctoral stages. The Institute is funding a study by the Commission of Life Sciences of the National Academy of Sciences that is examining the curricula and teaching of high school biology. The new HHMI Undergraduate Science Education Program awards grants to strengthen science education and research in private undergraduate col- leges. Begun in 198%, the program is intended to increase the number of students, especially minorities and women, pursuing careers in the biomedi- cal sciences. In 1988 HHMI awarded $30.4 million to 44 colleges, including 10 historically black colleges. Expansion of this program in 1989 granted $61 million to 51 undergraduate colleges affiliated with research universities and other doctorate-granting institutions. The graduate science education program funds several levels of gradu- ate training. For instance, doctoral fellowships in the biological sciences (60 per year) provide predoctoral students with a stipend and cost-of-education allowance for 3 to 5 years; medical Student Research Training Fellowships (up to 60 per year) are modeled after HHMI's Research Scholars Program, supporting students for a year of research training at any U.S. academic or research institution. The Research Resources Program funds development of institutional infrastructures related to graduate research and education. The resources program may provide support in the following areas: courses and symposia concerned directly with HHMI areas of interest, replenish- ment of biological stocks and materials, and genetic analysis projects that complement the HHMI human genome data base. SUMMARY AND CONCLUSIONS The committee concluded that health research is supported by a di- verse, yet interlocking network of federal agencies, industry, and private nonprofit organizations. Of these, the federal government is the single largest sponsor of health research in the U.S. Of the $71 billion the federal government will invest in R&D during fiscal year 1991, nearly $10 billion will be health related. Contributions by health-oriented corporations are roughly equal in magnitude, but devoted largely to product application de- velopments rather than fundamental discovery research. Contributions by private nonprofit sponsors favor fundamental discovery research, generally in somewhat restricted fields of interest, but represent only about 4 to 5 percent of the total U.S. investment in health research.

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60 FUNDING HEALTH SCIENCES RESEARCH In light of this investment and the continuing budget limitations, the scientific community must reexamine its resource base to improve its effec- tiveness and efficiency. Federally sponsored health research by the various agencies is generally mission oriented. NIH and ADAMHA are the pri- ma~y agencies that disburse federal health research funds for investigation into fundamental biological discovery, but the committee emphasizes that all health research expands the boundaries of knowledge. Although industry has been playing an increasingly important role in health research, focusing primarily on product development, it relies heavily on university research programs for basic scientific knowledge and talent. Cooperative ventures between universities (or government) and industry provide a unique mechanism for sharing knowledge and technology transfer, a central policy of the federal government for increasing U.S. economic competitiveness. Foundations, voluntary health agencies, and other nonprofit organiza- tions have played a very important role in sponsoring health research. The committee believes that these organizations have been particularly helpful in providing crucial support in filling gaps in the nation's research agenda and sponsoring new initiatives. Although the federal government rapidly eclipsed the investment by these organizations following World War II, they have continued to supply a steady stream of research dollars. These funds are used for individual research projects, supporting career development awards in specific research fields, equipment, facilities, and various pro- grams of knowledge dissemination. The committee anticipates that these organizations will continue to provide support for the health sciences. REFERENCES 3. 1. National Science Foundation. 1989. Science and Technology Resources: Funding and Personnel. Publication No. 89-300. Washington, D.C. U.S. Department of Health and Human Services; Public Health Service. 1989. NIH Data Book 1989. Publication No. 89-1261. Bethesda, Md.: National Institutes of Health. Ginzberg, E. and JOB. Dutka. 1989. The Financing of Biomedical Research. Baltimore: The Johns Hopkins University Press. 4. Boniface, Z.E. and R.W. Rimel. 1987. U.S. Funding of Biomedical Research. Philadelphia: The Pew Charitable Trusts. Bush, V. 1945. Science-The Endless Frontier, A Report to the President on a Program for Postwar Scientific Research. Washington, D.~: Office of Scientific Research and Development. (Reprinted lay the National Science Foundation, May 1980.) U.S. Department of Health and Human Services; Public Health Service. 1986. DRG Peer Review [Lends; Member Characteristics: DGR Study Sections, Institute Review Groups, Advisory Councils and Boards, 1976-1986. Bethesda, Md.: National Institutes of Health. U.S. Department of Health and Human Services; Public Health Service. 1989 NIH Abnanac. Publication No. 89-5. Bethesda, Md.: National Institutes of Health.

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RESEARCH FUNDING 61 8. Strickland, S.P. 1972. Politics, Science, and Dread Disease: A Short History of United States Medical Research Policy. Cambridge, Mass.: Harvard University Press. 9. Seggel, R. Lo 1985. Stabilizing the Funding of NIH and ADAMHA Research Project Grants. Washington, D.C.: National Academy Press. 10. U.S. Department of Health and Human Seances; Public Health Service. 1989. ADAMHA Data Source Book 1988. Rockville, Md.: Alcohol, Drug Abuse, and Mental Health Administration. 11. U.S. Congress; Office of Technology Assessment. 1988. New Developments in Biotech nology: U.S. Investment in Biotechnolog~Special Report. OlA-BA-360. Washington, D.C.: U.S. Government Printing Office. 12. Institute of Medicine. 1989. Government and Industry Collaboration in Biomedical Research and Education. Washington, D.C.: National Academy Press. National Science Foundation. 1987. Report on Funding [lends and Balance of Activities: National Science Foundation 1951-1988. NSF 88-3. Washington, D.C. 14. U.S. House of Representatives. 1989. Report of the House of Representatives Appro priations Subcommittee for the Departments of Labor, Health and Human Services, and Education, and Related Agencies Appropriations Bill, 1989, Report No. 100-689. Washington, D.C. Boniface, ~E. U.S. Funding for Biomedical Research: An Update. Background paper prepared for this study committee. 16. National Academy of Sciences; Government-University-Indust~y Research Roundtable. 1986. New Alliances and Partnerships in American Science and Engineering. Wash ington, D.C.: National Academy Press. National Science Foundation. 1988. The Science and Technology Resources of Japan: A Comparison with the United States. NSF 8~318. Washington, D.C 18. Pharmaceutical Manufacturem Association. 1989. Annual Survey Report of the U.S. Pharmaceutical Industry, 1987-89. Washington, D.C. 19. U.S. Congress; Office of Technology Assessment. 1984. Commercial Biotechnology: An International Analysis. OTA-BA-218. Washington, D.C. 20. National Science Foundation. 1987. Biotechnology Research and Development Activi ties in Industry. 1984 and 1985. NSF 87-311. Washington, D.C. 21. National Science Foundation. 1988. Science Resource Highlights: Industrial Biotech nology R&D Increased an Estimated 12 Percent in 1987 to $1.4 Billion. NSF 88-306. Washington, D.C. 22. U.S. General Accounting Office. 1989. The Research lax Credit Has Stimulated Some Additional Research Spending. Report number GAO/GGD-89-114. Washington, D.C. 23. Science. 1989. Fate of R&D tax credit uncertain. Vol. 243, March 31, P. 1659.