Duke University stands to lose hundreds of millions of dollars annually under proposed federal budget cuts. That's according to public policy professor Don Taylor, who calls it a "quadruple whammy."
In a weekly newsletter he writes about public policy in higher education, Taylor estimates changes to federal research funding, Medicaid, Medicare, and the university endowment tax could add up to anywhere from $350-600 million in annual cuts to Duke University.
Taylor recently spoke with WUNC's Brianna Atkinson.
This conversation has been lightly edited for brevity and clarity.
Starting with the first and what you said was the most obvious leg: federal research funding. Duke had quite a scare earlier in the year when it seemed like the National Institutes of Health (NIH) reimbursement funding was going to be severely reduced. That order has since been stayed by a federal judge. What kind of other federal research challenges is the university facing?
"You're talking about the indirect cost recovery, or what universities usually call facilities and administration. So, that looms and sits out here, and that would be a huge one. But even if that ends up not being changed, there have been several things to happen.
One was there has been a profound delay in the routine business of NIH reviewing grants that have been submitted. And the delay has been such that it's almost like Duke and UNC and other NIH receiving universities have missed a funding round. There's basically three times in the year when large amounts of funding goes out, and we kind of missed one of those times. And so a place like Duke has vast numbers of people who are working on what we call 'soft money research,' and if you miss a round, I mean there's tremendous cash flow problems. So that's one issue. Second, Duke, just like other places, have had grants that have been canceled — anything that relates to LGBTQ, to racism, various types of efforts. And Duke has also had some pretty substantial hits to vaccine-related research.
"And then there are topics funding announcements that have been put out — and usually remain in force for several years — that have just been removed or taken away. For example in the summer, I would often write an NIH grant. This year, I'm not doing that because there's so much uncertainty. It's really hard to write a competitive grant, and you could write one and all of a sudden that funding announcement is gone. So, even if the indirect cost recovery issue is worked out in a way that the university finds acceptable or reasonable – NIH, NSF, even some other federal funders like the VA, Department of Defense, Department of Energy, they have all cut research funding, including existing grants, but also future grants. So, it's greatly destabilizing to a research university."
How much would that cost Duke University annually, missing out on these grants?
"The annual estimate that I've seen discussed is about $200 million per year. The number is tricky, because it really depends on exactly what happens.
It could be a lot worse than that. If the indirect cost recovery rate ended up being something like the 15%, which was what was proposed by the Trump administration and as you said, was frozen. And actually Congress, in the spending bill that kept the government open to the end of this fiscal year, reiterated the old indirect cost recovery rate for that period of time. So that's reasonably set to the end of September. But I think we're talking $200 million plus per year. And so it's not just a one time hit. It's like pulling a chunk out of a budget. And so it's a pretty big effect."
Republicans in the US House want to cut Medicaid by about $625 billion in the next decade. How would those cuts affect the work that Duke University's Hospital, Duke Health, is doing?
"If what passed in the House became law, and I think there's some expectation that it might be moderated in the Senate, but let's just say if it did happen. And then if the state of North Carolina responded to the reductions by unexpanding Medicaid, which we did a little over two years ago now. The estimate is that, you're talking about a couple hundred million a year, maybe $200 million, maybe $300 million a year.
It's complicated to estimate exactly, but a hit of that magnitude to the health system? I think on campus there are a lot of faculty who say, 'well, why does that affect us?' The reason it affects us is the health system, for the past 30 years it has generated excess revenue and it has used that money to support the research mission of the university.
If you look back over the last decade or so, about $1.6 billion has been invested from the health system into the university. If all of a sudden that's a loss, you know, in a given year and that turns into a predictable thing – then it's turning off a huge source of internal research investment for the university."
And with hospitals, they can't really rely on the state to fill the gap, because it looks like Republicans in the NC General Assembly want to also make changes to Medicaid that could likely lead to hundreds of thousands of people losing coverage. Some of those proposed changes are requiring people to work at least 80 hours a month, to banning gender transition care. How does this all factor into the federal concerns for Duke, not really having the state to fall back on?
"The (Duke) Health System is both a world-class place that people come from all over the world to seek advanced care, but it's also the primary care provider of Durham County and for lots of central North Carolina. And so when folk are uninsured, who are our neighbors and friends, and they need care – that responsibility doesn't go away for Duke. When North Carolina expanded Medicaid a little over two years ago, it meant that some folk who Duke was treating without being reimbursed now got paid Medicaid. That was a positive financial thing for Duke's health system. Especially on the backside of COVID, which greatly expanded costs of delivering care, but also turned down discretionary care, which is often more lucrative for university hospitals.
So, the Medicaid expansion really helped. And if now that money goes away, those neighbors and friends aren't going to go away, they're still going to need health care. And Duke still has a commitment to provide that care. So when the state is saying, 'well, if the federal government cuts back, we're also going to cut back,' Duke actually doesn't have the ability to cut back our responsibility. So, that then means probably less investment in research than there otherwise would have been."
The federal cuts are estimated to cause about 10% of people covered by Medicaid now to be uninsured by 2034. How much money would that cost Duke per year?
"This one is a tricky calculation, but I think the Medicaid cuts could be on the order of $250 million to $300 million a year. That's a complicated figure to calculate, and it really does depend on the details of what actually becomes federal law, and then how the state responds. But we know for sure, based on past research, that something like 93% of the folks who are on Medicaid in the state of North Carolina do work. So, in one sense we're talking about a relatively small proportion of people. However, in past efforts to bring about work requirements, they're basically just a politically palatable way to have Medicaid cuts."
You also had a theory about how the federal government spending bill could impact another form of federal health insurance, Medicare. You said it was one that hadn't been discussed much. Why do you think cuts are coming to payment rates for this program?
"When Obamacare was passed in 2010, there were some control valves that said if the budget deficit goes up by too much, then automatic cuts to Medicare payments will take effect. And those cuts would be for doctor payments or for payments to hospitals, and they're on the order of 4%. As I read through the bill and looked at the Congressional Budget Office's score of what passed the House, they basically say because we're greatly reducing revenue via tax cuts that are set to expire, the deficit is going to explode. And it's going to explode by an amount that would trigger these automatic Medicare cuts.
I kind of did a back of the envelope (calculation) and said it might hit Duke by about $175 million a year. Now, the history of these Medicare cuts is, the ones to doctors often are not followed through on. Basically, doctors are well organized, people love their doctor, and they manage to avoid the cuts. But the cuts to facilities like hospitals historically have been more likely to be followed through on. So I estimated half of that, like $100 million (loss) a year."
The final leg you focus on are endowments – essentially a pool of donor funds universities invest in a variety of areas, including financial aid, research, professorships. Duke's endowment is about $12 billion and is currently taxed at a 1.4% rate, but the federal government wants to hike up that rate in its new spending bill?
"The tax is on the gain of the endowment. So, you can think of it as how much money the endowment manages to return through its investments in stocks, bonds, and things like that in a given year. And I think the amount of money that Duke paid last year, under the 1.4% that you mentioned, was like $12 million or $13 million. My understanding of what passed the House was that a $12 million or $13 million tax bill would turn into a $75 million tax bill. So, it's smaller than the Medicaid cut, smaller than NIH cuts. But again, I mean we're now talking about dozens of millions of dollars more going out than before, on top of all these others.
And I guess one of the logics – perhaps to the extent there is a logic of cutting back support to the universities – is well, they can use their endowments. But now we're also going to tax the endowment. This would be taking Duke at least a quadrupling, maybe even 5x increase in the tax bill for our endowment. And of course, if we go from $13 million being paid into $75 million, it's gotta come from something."
You wrote your quadruple whammy analysis toward the end of May, but told me earlier that now you think there's a fifth whammy coming into the mix?
"The Secretary of State earlier this week said that they were going to begin to look very closely at every Chinese international who's studying in the United States. And he then talked about moving to ban students who had any affiliation with the Communist Party. Well, I mean, it's a one-party state, so I think maybe just about everybody has some affiliation with the Communist Party. It's just a guess, I'm not sure. And I don't mean to suggest that it's impossible, that there's nobody coming to this country to study with bad intent. I'm sure there is some of that. However, we have a long track record of very productive collaborations with Chinese students. These students come and they pay tuition. Sometimes it is their government that's paying the tuition, sometimes it's other sources. But this would be another source of a whammy, of a reduction in tuition dollars.
And I'll just give you an example. When I previously directed the Social Science Research Institute, there's a data science program and about half of the students were from other nations. I mean, it's a very competitive program. Students get great jobs, and people from all over the world want to come. To me, (putting) up barriers to people coming from other countries to study here is like the United States saying 'we're the leader in World Education, and we really want to set about to give that up to somebody else.' So it's a very bad and difficult situation we find ourselves in. "
You tallied up the quadruple funding cuts to a conservatively estimated $600 million loss for Duke University annually. What is the impact of that recurring budget loss?
"So, that's what would happen if the House bill became law. It's probably not going to become law, it's going to be moderated in the Senate. So I estimate $350 million a year, which is still a huge cut. The thing about that $350 million cut is most of it is going to end up being applied to the university side, because the health system has to keep functioning. Duke's not going to lay off nurses and doctors. I mean we've got to keep going because of our commitments for care delivery. So, the $350 million cuts are mostly going to be experienced on the university side. And again, it's pulling a slice out forever, if this happens and just continues. "
How do you think Duke makes its way out of this? What are some of the real world effects these cuts could have?
"The primary real world effect is going to be losses of jobs. You've probably read in various media reports that Duke has begun a series of voluntary separation programs. This is basically incentivized layoffs, and I suspect more of that type of thing will be coming. I think it's likely that there will be retirement incentives for faculty who have already reached 65. In my school, we're running two or three, or maybe even four or five in some years, searches for new faculty every fall. We're planning none for this coming fall, just because of the uncertainty.
So, I think the primary thing that will happen is there's going to be a reduction in employment. Unfortunately, there's really no other way to make the magnitude of savings that we're talking about, because it's something like 70% of Duke's budget spend goes to employees. Employees are the main asset that the university has. I mean, universities, in the end, are in the talent business. So, we're going to end up losing some talented and beloved colleagues. It's going to be a hard time. It is a hard time for Duke right now and for all universities. We've seen it happen in RTI, we've seen it happen in FHI 360, so it's difficult. "
You've done all of this work on this pending revenue disaster for Duke. You're also a professor there of nearly 30 years. What's the mood? How are faculty reacting to or preparing for these massive changes?
"I am on sabbatical this semester, so I've been a little bit shielded from some of that. However, I did go to the faculty retreat. Most of us already know someone who's basically lost their job, staff. We also know faculty who are on soft money contracts, meaning they have to generate most of their support via either NIH, NSF, or a mixture, who are at grave risk of losing their jobs. And then, when you have a department that is not able to hire – if we're not hiring, it means we're reducing the size of the faculty, because people are going to retire or someone's going to go to another university. So, I think there's a lot of uncertainty, a lot of pensiveness, a lot of anxiety. And so yeah, it's just a difficult time and the mood is somber.
I also think most faculty don't really have a reason to understand how interconnected the budget of Duke University is with the health system. Like somebody might say, 'I'm a professor who doesn't do anything related to health, how in the world could Medicaid cuts affect me?' Well, it affects the university, because when the health system can't invest excess revenue in the university's research enterprise, it means there's less money for everything. So, it really is an interconnected system. And so a lot of faculty are just coming to understand that now through difficult, bad news."
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