Advantage Obtained in Selling a Product Developed With Government Grant Funds

Published by the Government Accountability Office on 1971-01-08.

Below is a raw (and likely hideous) rendition of the original report. (PDF)


 Dear     Mr.    McClory:

         Your letter        of August    19, 1970, referred         for our consideration          a
letter    dated August         10, 1970, from      your constituent,        Mr. Sheldon       I.
Dorenfest,        President      of Compucare,        Inc.     Mr. Dorenfest      expressed      con-
cern about the use of Government                 funds to develop         a shared     computer
system      for hospitals,        which  was subsequently          sold to a private       corn-
pany--a       competitor       of Compucare--        and requested       comments       on the
legality     of the action       and suggestions        concerning     what recourse        his
company        might     have a

         We previously          advised      you that the Department                of Health,       Educa-
tion,   and Welfare       (HEW)        had received        from      Senator      Charles      II. Percy            a
 copy of a similar       letter      from     Mr. Dorenfest            and was investigating            the
matter     for a reply     to Senator         Percy.       HEW 1s investigation            concluded
that a large     part of the computer               system      in question        had been developed
through      tbe use of private          funds and that there             was no reason           to doubt
that the portion      developed          with Government             funds would        be made       avail-
able to all interested          parties      in the immediate             future.     We were in-
formed      that HEW had no plans              for future       action      on this matter,

          Effective        January       1 9 1967, the Public           Health       Service       (PHS) of HEW
awarded         a grant     to the Sisters          of the Third        Order        of St. Francis--a           re-
ligious      group      which     operates       I.1 hospitals       in Illinois,         IQW~,    and Michi-
gan-for         a research         project     entitled      “Demonstration               of a Shared       Hos-
pital   Information           System.”        The grant        was approved             for a period        of
3 years,       from      January       1, 1967, through           December           31, 1969; the project
period      subsequently          was extended,           without      additional        funding,     through
January        31, 1971.        The costs reimbursed                 by HEW during              the 3-year        pe-
riod totaled         about $9.4 million,             subject     to final      settlement         of indirect
costs.      HEW records             showed      that the Third          Order        had made        a cost-
sharing       contribution         of about 25 percent             of the total        project      costs.

         The  purpose       of the project       was to demonstrate              the         shared    use, by
a group    of participating        hospitals,      of a central        computer              system    to pro-
vide communication            between      various    hospital       departments                and between
physicians     and hospitals        and to automate          patient      records             and hospital
procedures      for such operations             as admittance,         laboratory,               and radiology.
.   .

                  HEW” recorde           showed    that the Third         Order     previously       had demon-
        strated      its ability      to operate     an automated         ~ystern      with aszsociated        hos-
        pitals    through       the   e&ablis        ent and operation          of a shared       braslinetsa
        management        comptex~         8ydxsno      whichha~         been    opsrational       since     1964.
        The system       was comectad            by a central        computea:       to some    20 hoqSta.ls
        in the Adidwe~t       and provided          for such functions           as patient    billing,      acm
        countps payable,        payroll,     and financial        reporting.         We were informed             by
        Third     Qrder   officials      that x-10 P         funds had been used to develop                  this

                  Near    the end of the origiraal             project         eriod,     the Third      Order      mxbm
        milteda       proposal        for   a 2-year      renewal        of    he grant       and requested         addi*
        tional     ftuxb     for direct       coslts totaling       about      $2.6 miLlion,       plus an unapec-
        ified     amount      for indirect        costs.     After      review       and consideration           by an
        HEW advisory             group,     the requeslt       was denied          in March       1970.     T$e proj-
        ect period,         however,       VVZLBextended         by         W through        January     31, k97l,
        to permit        the grantee        to complete         certain      analyses       and to iosue        a final
        report       on the gmoject.          IWe have been informed                  that the final     report      is
               ected to be available            in early      1971.

                 Effective         March     1, 1970, the Third               rder      sold its entire     data
        ~proceseing        division      to the McBonmA.1     Aut               atiom. Company,         a division      of
        the    McDomelll         Douglas     Ckrporation.                        crating     employees       were oft
        fered     their     choice     of remaining         tith     the Third        Order    or of accepting
        poEiCons         with McDonnell          Automation;           they al.1 cho~le exnpkoyment              with
        the latter.         McDomePl        Automation           alrso entered         into a long- term        oervice
        contract        with the Third       Order        to provide       all data processing           services
        required         by the hospital       group.

                  The principal           inveotigator,         who wan responsible             for the scientific
        and    technical        direction      of the     grant    project,        is now  an employee       of
        McDomeEl           Automation.            We advined        HEW that the agreermmt               betwaen     the
        Third      Order       and McDonneB1            Automation          s @cifically     excluded     any ppom
        prietary       rights       to the Shared        Was itd        Inibrmation       Syestetil   (SHE)   developed
        with grp.nt funds.              He fdattea, hovmver,             th@14:  the computer programe            used
        in SHIS -wmre dissek.nated                    to McDonnell           Automatiarn     as property       in the
        public     domain.

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clinical      investigation,        and patient        status reporting   applications                  (Phase
IT applications           in the   agreement)         are yet to be developed.

         We were informed           by the principal        investigator        that SHIS was not
marketable        at March     1, 1970, because        it was only partially            developed
and covered        only a portion     of hospital      operations.         He stated      that
McDonnell        Automation      had lost money        on SWIS operations             at the three
pilot  hospitals      and had not been successful              to any extent        in marketing
the system.         He stated    also that McDonnell            Automation        would     probably
invest     up to $500,000     to complete       development          of SHIS and indicated
that the system         would probably      not be marketable             until   1972.

          Our review           of pertinent        Federal        laws and HE’,W regulations                rem
vealed      no provision          covering       the dissemination,               before    publication,        of
information           developed       under    grants        funded      by HEW.         Discussions        with
representatives             of the HEW Office               of the General          Counsel      confirmed
that there          was no such provision,               either      in regulation        or in statute.      /
These       officials      also expressed           the opinion         that this was a relatively
unique      case and that any competitive                       advantage       to McDonnell          Automation
resulting         from    the earlier       availability          of the information           was difficult       to

         Information         provided       to us by Mr. Dorenfest              indicated      that
McDonnell         Automation          also may have gained            some      advantage        over its
competitors          by hiring      the employees         who were associated              with the proj-
ect supported          by the grant        and by using      certain      hospitals       operated      by the
Third     Order      as demonstration           sites    to market      the systems.            As noted
above,     the operating         employees        were offered        their     choice     of remaining
with the Third          Order      or of working       for McDonnell          Automation.            We know
of no restriction          or prohibition        which     would     have prevented           such actions
in this case.

        In the absence      of any provision         relating    to the premature            disclow
sure of information        developed      under    grants     funded       by I-IEVY~ we know of
no b,asis for questioning         the legality     of the actions         of HEW,      the grantee,
or McDonneill     Automation.         Moreover,        the only recourse           that we can
suggest    to Compucare        is to obtain     the grantee’s        final    report     when it is

       B- 170688

       published  and/or to obtain the magnetic       tapes containing               the SHB pro-
       grams developed      to date, which the principal    investigator               and the Third
       Order have agreed to release to anyone requesting            them             before publim
       cation of the report.

                We believe,      however,      that McDonneU. Automation
       tentia1         antage   over   its   corn     titers a~ a result of t
       of the         rd Order’s     data pro          sing d.iviEa ion and tha
       have pPayed some part in the development                      of the capabilities     of that di-
       Vis;iOlL    In our opinion, the benefits obtained from the i
       Federal      funds should be available,             to the matimm          ext

       beneficiaries       on an equal basisl. Therefore               we plan to
       explore the advisability           of establishing        gr      conditions    which would
       prohibit     the premature       disclosure        of valuable     i    rmation   developed    with
       Federal      funds in situations        similar      to the one described       above.

                    W, Third Order,       and McDonnehl Automation              officials have not
       been given     an opportunity      to comment on the matters             di cusirsed in this

                                                            Sincerely     yours,

                                                            of the United      States

       The Honorable     Robert       McClory
       Houli~e of Representatives