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RxTrials welcomes CenterWatch as a guest blogger who wrote the below post:
The following is excerpted from the article “Sponsors question variations in overhead rates: More push-back means sites may have to justify how much they charge” by Karyn Korieth, which appears in The CenterWatch Monthly, July 2011 issue.
Few issues provoke more interest in clinical trial grant negotiations than overhead rates.
The range in rates charged among investigative sites can leave sponsors baffled; while some independent physician-run sites ask for no overhead at all; a few top academic institutions request up to 70%.
Historically, sponsors have paid requested overhead without question. Yet as sponsors look for ways to better manage their site study grants, and many have exhausted their ability to trim other budget areas, attention increasingly has turned to the overhead line item. Sponsors are questioning the variability in rates, how they are determined and how much they can push back.
What exactly is overhead?
The definition of overhead, and what it covers, has shifted at many organizations. Most sponsors consider it a best practice to pay overhead only on procedural items and not for salaries, administrative fees or patient stipends. Yet some large academic centers require overhead be paid on the entire contract. Sometimes, site start-up fees include items that used to be categorized as overhead, such as costs for a monitor to review data or set up the pharmacy, and sponsors may be asked to pay overhead on those separate line items.
"It’s important for sponsors to understand what is covered under that overhead. It used to be things like the archiving of documents or use of certain refrigerators and was site-specific. Today, the overhead may cover different things,” said Lori Shields, vice president of data operations at Medidata Solutions, which tracks site overhead rates as part of its Grants Manager clinical trial planning and management tool. "So it’s important for sponsors to get an understanding of what is already covered before they even start preparing a budget for that site.”
Rates vary greatly
Actual negotiated overhead rates for non-academic sites in the U.S.range from 8% to 46%, according to TTC, a data company with headquarters in Philadelphia and London that provides cost benchmarking tools and analyses for the drug development industry. Sites, which include physician groups that conduct trials part-time and research-only facilities, tend to set overhead rates of up to 20%. Some small physician-run sites don’t ask for any overhead, because either they are new to clinical research and unaware of the practice, they fear losing a grant opportunity or they build overhead costs into their individual line items.
Meanwhile, hospitals’ and healthcare facilities’ overhead rates generally exceed 20% for industry-funded research, with facilities that conduct oncology studies commonly demanding closer to 30%. Data from TTC shows AMCs charge up to 40%; top university medical centers have requested more than 70%.
Rates differ from site to site because most organizations don’t understand what overhead actually costs or how these costs should be allocated, said Andrew Synder, director of cardiovascular research at Minnesota-based HealthEast Heart Care Clinic and a consultant and lecturer on best practices for sites. Many sites set a standard rate based on what sponsors paid previously. Other sites increase their rates when they anticipate losing money based on the grant amount. Said Synder, “Few can accurately calculate what the budget should be. Instead, they take the easiest course of action, which is to say they need 35% overhead when really they don’t. They need 25% overhead and they need to do a better job of asking for the money to support study visits and administrative fees. But overhead is the single easiest method of getting more money per patient. It’s a short-cut to accurate budgeting.”
Highest rates at AMCs
AMCs historically charge the highest overhead rates, typically stating that overhead fees cover indirect costs for on-campus clinical space, repair and insurance of specialized equipment, maintenance, utilities and general administrative costs not budgeted as direct costs for a research project. Many justify their rates stating that as nonprofits, they cannot subsidize private industry-sponsored research and must be reimbursed for the full cost, including direct and indirect costs.
Some AMCs base their overhead on federal overhead or indirect cost rates negotiated for NIH research grants and other government-funded contracts. These rates tend to run higher than industry averages; a recent survey by the Council on Government Relations estimated the average rate at 51%. According to university web sites, Harvard Medical Schoolhas set a 69.5% on-campus research rate for all federally-funded grants;Cornell University’s medical college has a 69% on-campus overhead rate for federal grants and contracts. The Columbia University College of Physicians and Surgeons has a published 60.3% overhead rate for federal grants, but a 33% rate for industry-sponsored research.
Rates also vary significantly from country to country. According to TTC, the median overhead rates are highest in Canada(30%), followed by the U.K.(25%) and the U.S.(23%). Rates are lower in Eastern Europe and China(20%), Western Europe (16%), Latin America (15%) and India(15%).
Looking ahead
Sponsors see overhead rates as a new frontier in their efforts to cut costs, becoming more aggressive in negotiating lower rates and increasingly demanding documentation. The degree to which sites will negotiate overhead rates varies significantly. Increasingly, sites are setting standardized, non-negotiable rates that apply to all industry-funded studies.
But sites, both in academic and community settings, can expect increasing push-back on overhead going forward, as sponsors ask more questions about how they are measured and what they cover. Sites will need to defend their rates, and know how much those charges can be adjusted without losing money on clinical research to successfully compete for study grants in the future.
How do your rates compare with the numbers given here? Do you have guidelines in place for calculating accurate overhead costs?