Thursday, January 3, 2019
Private Benefit at Memorial Sloan Kettering Cancer Center: The Exempt Purpose, Sponsored Research and Tech Transfer
The private benefit doctrine has always been about "when is one person or entity getting too rich from a tax exempt organization?" It is axiomatic that for everyone to benefit generally, somebody must benefit particularly. So, for example, a University has to provide a private benefit to a student if the public is to benefit. Likewise, a hospital has to provide benefits to a patient to achieve public benefit. Technology transfer is perhaps the hardest arena in which to apply the private benefit doctrine. Some research is so expensive that even government funding is insufficient. Yet it is so potentially lucrative that private investment is inevitable even if engaged in by a relatively few very wealthy investors (usually venture capital firms or big pharmacy). Somehow, we are bothered by a few people getting very very rich from an exempt organization's research work product. Without tax exemption, a lot of research would go undone. On the other hand, without the profit potential, "donors" ["philanthropic investors" is probably a better label] might not donate/invest in the otherwise nonprofit research vital to public benefit. Applying private benefit analysis to nonprofit research and technology transfer is so difficult, in fact, that perhaps the only specific direct regulatory application of the private benefit doctrine pertains to sponsored research and technology transfer. Treasury Regulation 1.501(c)(3)-1(d)(5), at least in my judgment, wholly exempts sponsored research and technology transfer from the concerns that somebody is getting way too rich from tax subsidized nonprofit research and technology. 1.501(c)(3)-1(d)(5)(iv)(b) allows a tax exempt research organization to grant a monopoly in its research product "if granting of such exclusive right is the only practicable maner in which the patent, copyright, process, or formula can be utilized to benefit the public . . . Scientific research described in this subdivision will be regarded as carried on in the public interest even though such research is performed pursuant to a contract or agreement under which the sponsor or sponsors of the research have the right to obtain ownership or control of any patents, copyrights, processes, or formulae resulting from such research." Like I said, sometimes somebody's gotta get paid if we want everybody to benefit.
A recent case in point: An identity crisis is brewing at Memorial Sloan Kettering Cancer Center, one of the nation's top nonprofit cancer research centers, according to a series of articles published by ProPublica and the New York Times. The latest article, published December 31, 2018, discusses rank and file stakeholders' increasing anguish regarding the nonprofit's increasing coziness with profit makers seeking to exploit the Center's research and discovered technology:
Hundreds of doctors packed an auditorium at Memorial Sloan Kettering Cancer Center on Oct. 1, deeply angered by revelations that the hospital’s top medical officer and other leaders had cultivated lucrative relationships with for-profit companies. One by one, they stood up to challenge the stewardship of their beloved institution, often to emotional applause. Some speakers accused their leaders of letting the quest to make more money undermine the hospital’s mission. Others bemoaned a rigid, hierarchical management that had left them feeling they had no real voice in the hospital’s direction. “Slowly, I’ve seen more and more of the higher-up meetings happening with people who are dressed up in suits as opposed to white coats,” said Dr. Viviane Tabar, chairwoman of the neurosurgery department. "The corporatization of this institution is clear to many of us who have been here a long time,” said Dr. Carol L. Brown, a gynecologic cancer surgeon, according to an audio recording of the meeting.
. . .
Closer ties between nonprofit research centers like Memorial Sloan Kettering and corporations are being fueled by a rush of potentially breakthrough cancer treatments. Venture capital firms and drug companies have looked to cash in on the scientific discoveries, said Brad Loncar, the founder of an investment fund that focuses on cancer. “Money follows success,” he said, and Memorial Sloan Kettering has been a focus “because they conduct terrific science there.” In recent years, the hospital, like its competitors, has struck increasingly sophisticated deals to commercialize its discoveries, in some cases receiving equity stakes in startups rather than simply collecting royalties.
The "crisis" actually began when ProPublica and the NY Times published an expose, of sorts, that resulted in the Chief Medical Officer's forced resignation due to his failure to disclose millions of dollars in payments from for-profit health care and pharmaceutical companies. Apparently, the CMO wrote almost 200 articles in medical journals touting new drugs and technologies in which for profit drug-makers and biotech start-ups had financial interests. Eighty seven percent of the articles involved topics of interest to profit makers with whom the CMO had financial connections or from whom he had received compensation.
The private benefit concerns cut both ways, incidentally. A private for-profit entity's exclusive rights to commercialize an exempt research organization's work product makes it relevant to ask whether the exempt organization is operating for private benefit. But the more nuanced analysis recognizes that even great wealth generating private benefit is sometimes required to generate the sometimes monumental public benefit from medical and pharmaceutical research:
Even as Memorial Sloan Kettering leaders have promised greater transparency, they have engaged a public affairs firm, SKDKnickerbocker, to manage their message and have aggressively pushed back against the idea that the hospital’s leaders are too close to industry. “I can see how someone might think that business relationships are problematic,” said Dr. Lisa DeAngelis, who has stepped into [the former CMO’s] former position at Memorial Sloan Kettering on an acting basis. “But I’m telling you, as someone who works with patients, and I’ve worked with patients throughout my entire career here, that working with industry has helped me save lives.”
The regulations linked above support this contention. On the other hand, an insider's exploitation of his control over that entity's operations, or his or her implicit or explicit, compensated endorsement, especially when undisclosed, of research favoring the compensating entity's financial interests raises the question whether the insider is operating the entity for his or her own private benefit. The regulation linked above does not condone this occurrence. The latter occurrence ought to be strictly prohibited and that is what seems the problem described by ProPublica and the NY Times.
Darryll K. Jones