Recommended Reading, “Regulating Conflicts of Interest in Research: The Paper Tiger Needs Real Teeth”

Tiger, Woodcut on Paper, Franz Marc (1912)

Jesse Goldner’s Regulating Conflicts of Interest in Research:  The Paper Tiger Needs Real Teeth, 53 St. Louis U. L.J. 1211 (2009), is a must-read for anyone who has anything to do with oversight of researchers’ conflicts of interest.  The article reflects an insider’s understanding of academic physicians’ perspectives on this still-contentious topic, provides a terrific survey of the literature, and proposes regulatory fixes by the feds that HHS will hopefully seriously consider.  The article’s timing is perfect, given that HHS is receiving comments until August 19, 2010 on proposed changes to its conflict of interest regulations.  See http://grants.nih.gov/grants/policy/coi/. Even in the short time since the publication of Goldner’s article, HHS OIG has issued yet another report on conflicts of interest management, entitled “How Grantees Manage Financial Conflicts of Interest in Research Funded by the National Institutes of Health,” (Nov. 2009), available at http://oig.hhs.gov/oei/reports/oei-03-07-00700.pdf.  Based upon an in-depth audit of 41 grantee institutions that reported conflicts in FY 2006, the OIG found that equity interests represent the most pervasive form of financial conflict of interest. The most popular tool employed by entities managing conflicts is disclosure to publications or at academic presentations; entities only rarely required the reduction or elimination of conflicts.  As important, and unsurprising based upon AAMC surveys, is the unreliability of the conflict reporting mechanisms used by most academic institutions.

The OIG report emphasizes the need for increased oversight of conflicts of interest.  Academic medical centers have had plenty of time and forewarning to address the issue but, as demonstrated by a vignette described by Goldner about his own efforts to accomplish this through the IRB which he chaired, faculty resistance is significant.  Consequently, Goldner is exactly right in calling upon HHS to issue aggressive regulations that accomplish the necessary reforms.  He would require the establishment of conflict of interest committees at every research institution, comprised primarily of independent members, to which faculty would report all financial relationships that create conflicts of interest. Resolution of such conflicts would be a condition precedent to proceeding with proposed research, and violations would result in significant penalties, including debarment from research.

As shall be discussed in a forthcoming Seton Hall White Paper entitled The Limits of Disclosure as a Response to Conflicts of Interest in Clinical Research, I do not have confidence in benefits accruing from requiring disclosure of conflicts to research participants in consent forms, although research participants do have a right to know of such conflicts.  This is a minor quibble.  Goldner’s article is a great contribution to the literature. 

Private Equity in Health Care

As lawmakers squabble over the “carried interest” tax rate, it’s nice to find a big picture overview of some of the economic activity they’re discussing. I recently read Josh Kosman’s book The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis, and I highly recommend it to our readers. Kosman painstakingly describes the byzantine financial maneuvers behind marquee private equity firms which bought “more than three thousand American companies from 2000-2008.” He describes in detail how they resist transparency (164) and “hurt their businesses competitively, limit their growth, cut jobs without reinvesting the savings, and generate mediocre returns” (195). The recipe for high earnings is simple: the firms “get large fees up front and are largely divorced from their results if their transactions fail” (195).

Like Kwak and Johnson’s account in 13 Bankers, Kosman offers a political economy account of private equity’s favored treatment by government. As he notes,

[F]our of the past eight Treasury Secretaries joined the PE industry . . . . and they have significant influence in Washington. President Bill Clinton, and both President Bushes, have also advised PE firms or worked for their companies. . . . KKR retained former Democratic House majority leader Richard Gephardt as a lobbyist and hired former RNC chairman Kenneth Mehlman as head of global public affairs. (196)

Having analyzed a wide array of buyouts, Kosman concludes that “PE firms manage their businesses to satisfy short-term greed, not for long-term survival” (51). This is a particularly dangerous attitude in health care, an industry too long dominated by short-run thinking. There can also be a troubling trade-off between care and profit in health care, as the nursing home industry demonstrates.

It’s precisely this mentality that FDIC Chair Sheila Bair indicted in her testimony before the FCIC:

[W]hile the establishment of emergency backstops to contain financial crises can help to limit damage to the wider economy in the short-run, without needed reforms these policies will promote financial activity and risk-taking at the expense of other sectors of the economy. Corporate sector practices [have] had the effect of distorting of decision-making away from long-term profitability and stability and toward short-term gains with insufficient regard for risk. . . .Meaningful reform of these practices will be essential to promote better long-term decision-making in the U.S. corporate sector.

We can only hope that members of Congress keep both Bair’s and Kosman’s insights in mind. Congratulations to Kosman for authoring a compelling and well-researched analysis of one of the most troubling engines of inequality in the US.

Cross Posted at Concurring Opinions

Recommended Reading: Nonprofit & Tax Law

James J. Fishman’s Stealth Preemption:  The I.R.S.’s Nonprofit Corporate Governance Initiative, recently posted on SSRN, joins the growing chorus of critics of the IRS’s preemption of state nonprofit corporate law via the addition of an entire “governance section” to Forms 1023 and 990.  The underlying hypothesis is, of course, that by virtue of asking particularized questions regarding governance, the IRS will affect changes to facilitate the provision of the “right” answers on the respective forms; the IRS specifically acknowledges that no federal tax law addresses most of the issues about which it inquires.  The article is a great survey of the bases of criticism of the IRS foray into governance reform, particularly as it applies to the medium to small nonprofit.  It also catalogues examples of applicants being denied 501(c) (3) exemption as a result of concerns about, for example, conflicts of interest which, Fishman explains, the IRS appears to believe are per se bad, without an acknowledgement of why they may be necessary and appropriate for the small nonprofit, and can be managed, as is required by state law, to avoid foreseeable evils.  An important theme of Fishman’s article is the lack of empirical data showing that the IRS’s structural governance preferences actually have a positive substantive impact on the operation of nfps.

John D. Columbo’s The NCAA, Tax Exemption, and College Athletics, 2010 U.Ill. L. Rev. 109 is simply fun for those academics who enjoy complaining about the outrageous salaries of coaches, or who flinch at the reference to the “scholar athlete.”  More relevantly, however, Columbo’s article comprehensively outlines the doctrine relevant to analyzing the sparse legal guidance available regarding the assessment of the reasonableness of executive compensation, and whether it violates the prohibition on inurement or excess private benefit. This analysis is timely as well: the IRS may be on the verge of  delving into the salaries of coaches as part of its college audits. The article also makes incredibly accessible UBIT analysis, also of importance in teaching health law.  Like most of Columbo’s work, he makes hard concepts seem easy. As the IRS may be taking a closer look at coaches’ salaries.

Recommended Reading: Nonprofit & Tax Law

James R. Hines, Jill Horwitz & Austin Nichols’ The Attack on Nonprofit Status: A Charitable Assessment, just posted on SSRN, forthcoming in 108 Mich L. Rev. 1179 responds to the literature advocating for tax benefits to any entity, including the for-profit, that engages in charitable activity, regardless of organizational status.  Ultimately, the authors argue for the exclusive retention of tax exemption for the nonprofit firm, employing economic analysis and extant though limited empirical data to suggest the superior efficiency, higher quality and lower costs of nonprofits for at least some charitable activities.  The article is rich with empirical data about the demographic differences between the for-profit and non-profit employee, from which it suggests employees of the two sectors may be differently motivated –  by altruism as opposed to monetary incentives — thereby reducing costs and arguably increasing efficiency and quality.  Professor Horwitz’s work always makes an important contribution to the literature, and she doesn’t disappoint in this article either.

Lloyd Hitoshi Mayer and Brendan M. Wilson’s Regulating Charities in the 21^st Century: An Institutional Choice Analysis, available on SSRN, forthcoming in Chicago-Kent Law Review, invokes institutional choice theory to determine the best locus for the regulation of the charitable sector.  The article concludes that charity governance, comprising rulemaking and enforcement, best resides in a state agency independent of but related to the attorney general.  This outcome respects the historic role of the state in regulating charities, takes advantage of the state’s expertise in nonprofit oversight, and enables the state to be nimble in its regulatory approach.  The provision of sufficient funding remains a concern with this choice. Also of concern is inter-state consistency in regulating the multi-state nonprofit charity; inconsistency can foster regulatory arbitrage.

Recommended Reading: Nonprofit & Tax Law

Miranda Perry Fleischer’s Theorizing the Charitable Tax Subsidies:  The Role of Distributive Justice, just published at 877 Wash. U.L. Rev. 505 is a must-read for anyone asking what justifies hospitals’ tax-exemption in a post-reform world.  The least that can be said for this incredibly thoughtful article, which is apparently the first in a series on the topic, is that it provides a superb overview of tax-exemption theory for those who do not regularly read this literature.  It is perfect background reading for the non-tax teacher who introduces students to the topic in her health survey class, or the person who just wants a quick overview of the extant theoretical justifications for the charitable tax exemption.  Fleischer makes two primary points.  First, she chides tax theorists for their failure to acknowledge that tax exemptions for charities, and the attendant deductibility of charitable contributions, are redistributive. Second, she seeks a clearer justification for the determination for the charitable exemption, and convincingly enumerates disparate examples that prove the lack of coherence of current IRS policy, particularly with respect to the question as to whether charities are expected to serve the poor.  Unsurprisingly, hospitals are but one example.  She urges the adoption of a moral theory to facilitate the development of a coherent system of tax exemption, and starts the process of describing potential outcomes if we subscribed to a utilitarian, maximin, egalitarian or capabilities approach to defining charity.  Apparently, this project will be further developed in future articles, which is just in time, at least for the health care sector.

Jessica  Berg’s Putting the Community  Back into the “Community Benefit” Standard, just published at 44 Ga. L. Rev. 375, represents one of the first articles of what can be expected to be a flurry of post-PPACA proposals to reform the criteria for hospitals’ tax-exempt status when  charity care begins to decrease, at least in some markets (undocumented aliens will continue to be a significant burden in several states).  Professor Berg seeks to shift the focus from the provision of individual charity care as a means to satisfy the community benefit standard, to the provision of population health care benefits, which can be measured by local, state and federal authorities to justify their respective tax exemptions.  Berg seeks to avoid adopting a method for quantifying the value of the hospital’s community benefit that encourages hospitals to expend resources for the purpose of earning the tax exemption, rather than promotion of population health.  Consequently, she proposes that tax authorities measure the value of the effect or outcome of the hospital’s population health programs, by analyzing participation, mind states, behavior, health status, sickness care utilization, sickness care expenditures, and community value, which can be accomplished by looking at statistical lives saved, lack of pain and suffering, gains in productivity, and risk reductions.  Berg also proposes the administrative mechanism, which would include community participation, for identifying appropriate programs for hospitals’ implementation.  As is generally the case with Professor Berg’s scholarship, this article proposes on-the-ground solutions to pressing problems of the day worthy of serious consideration.

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