Congress and Changes to the Indirect Cost Rate for NIH Grants

The National Institutes of Health (NIH) form the foundation of biomedical research in the United States, and funding from the underlying institutes has played a part in nearly every medical breakthrough for decades. Each dollar spent on the NIH yields $2.46, and by some estimates much more, in US economic activity. With large changes in how the NIH gives grant funding implemented by the Trump administration (and in some cases paused by courts) over the past month, the NIH funding process has been in the news over the past few weeks.

One of the major changes made by the administration is that the NIH set a cap of 15% on what is known as the “indirect cost rate” portion of grants on February 7. With the Congress having a deadline of March 14 to pass a budget, it has the opportunity to assert itself in addressing the question of what the appropriate indirect cost rate for NIH grants is.

What are indirect costs for NIH grants? Indirect costs are the cost of doing the work proposed in grants that go beyond more easily calculable things like salary and benefits for the personnel on the project, equipment, supplies, etc. These are costs such as HR onboarding costs for new hires, IT support, grants administration and legal compliance costs, facilities maintenance costs, rent equivalents for the space where the work is being done, electricity, etc. The indirect cost rate is a lump percentage of the direct costs given to the grant recipient on top of the direct costs. For example, if the indirect cost rate is 50%, then for every dollar of direct costs in the budget, the recipient receives 50 cents for indirect costs and the indirect costs are then 33% of the total budget. In industry, these costs are equivalent to a collection of costs known as “general and administrative (G&A),” “material handling and subcontract administrative rates,” and “overhead.”

How high are indirect cost rates for NIH grants? The average indirect cost rate according to the NIH is approximately 39%. However, this average rate does not tell the whole story because there is a great deal of variability across recipient institutions and some types of grants either cap indirect costs or wrap some of the indirect costs into the direct cost column. The top 10 NIH funded universities and medical schools (and most grant recipients are universities or health systems with medical schools), accounting for nearly 20% of NIH grant funding, have an average negotiated indirect cost rate of 63%. For context, the average rate of the collection of equivalent costs in industry is approximately 53% (13% of G&A, 33% for overhead, 3% for material handling, and 4% for subcontract administration), according to the Grant Thornton annual survey of government contractors. So companies such as Lockheed Martin, SpaceX, etc. receive on average the equivalent of a 50% indirect cost rate.

How high are indirect cost rates determined? Every few years, each university negotiates with the NIH to set an indirect cost rate. These rates are based on audits by the universities and the NIH and estimates of the different facilities and administrative costs that go into the indirect cost rate. These estimates vary based on factors such as geographic factors (e.g. New York City and San Francisco have higher rent equivalents and facilities costs than smaller cities or suburban and rural locations) and other factors particular to different universities. There are some legitimate questions around this variability though, that I will touch upon later.

What action did the Trump administration take? On February 7, the Trump administration, via an NIH announcement, that they were capping indirect costs at 15% for all current and future NIH grants. As a reminder, the average equivalent of indirect costs for industry contracts is 53%.

Is unilaterally cutting the indirect cost rate to 15% legal? The change in the indirect cost rate has been put on hold until the courts rule on the matter. In its annual budget bill, Congress sets the NIH funding rate and for decades has included a clause that states that the negotiated indirect cost rate is the one that will be used for NIH grants. However, that clause also allows for some exceptions for changing the indirect cost rate in particular cases. The administration is arguing that it has the authority to change the indirect cost rate for all grants based on the exceptions allowed. With government appropriations running out on March 14, Congress is currently debating the budget bill for the rest of the fiscal year and therefore can clarify this issue and adjust the wording in the bill to help resolve whether the White House has the power to unilaterally adjust indirect cost rates or not.

What would be the fallout of a 15% indirect cost cap? This large a change in the indirect cost rate would profoundly damage US medical and scientific research. It will delay the research needed to find cures, better diagnostics, and treatments for diseases such as cancer, Alzheimer’s disease, heart disease, etc. The US is by far the world’s leader in medical and biotechnology innovation and crippling this system will also open the door for rivals such as China to take the lead from us. There are legitimate issues with current indirect cost rates, some of which I will discuss below, but average university indirect cost rates are already lower than the industry average and not out of line for the legitimate costs of supporting medical science.

What are some of the issues with the current indirect cost rates? One legitimate issue is that the source of some of the variability across universities does not seem well justified. For example, MIT’s indirect cost rates is 59%, Northeastern University’s is 60%, Boston University’s is 63.5%, Tufts University’s is 65%, and Harvard University’s is 69% despite all being geographically near one another in Boston and Cambridge. Indeed, many of the universities with the largest endowments have the highest indirect cost rates, while state universities and less well funded institutions have lower indirect cost rates. Furthermore, many of the universities receiving the most NIH dollars have the highest indirect cost rates – rather than an efficiency of scale, we are seeing an inefficiency of scale.

Another legitimate issue is that universities have seen well documented “administrative bloat” over the past 20+ years – e.g. the number of administrators has increased far faster than the number of students and faculty. A portion of this issue is related to indirect costs, which have also slowly creeped up over the past few decades. As an example, at the university I am affiliated with, just in the medical school, there is a dean, 6 vice deans, approximately 25 associate deans, and another approximately 25 assistant deans. The indirect cost rate at my university has gone from 55% approximately 10 years ago to 59% today.

Notably, it is common that when the NIH does a forensic audit of a university, that university must pay a substantial penalty for spending NIH dollars in unapproved ways (generally implemented as a large reduction of the indirect cost rates for a few years).
How can we address these legitimate indirect cost rate issues without crippling US medical science? One option for indirect cost rates would be to make regional caps, acknowledging differences in costs based on location, but also preventing large variation across institutions in similar locations. Determining what the cap should be in particular locations could pose a challenge, and may lead to increased indirect cost rates over the status quo in expensive cities, taking money out of the system for funding grants.

The simplest way to address these issues is with a reasonable cap on indirect cost rates. While 15% would cripple US medical science, a cap of around 55% would not change indirect cost rates at most universities, and it would mean a reduction in the indirect cost rates primarily only at high endowment and already well-funded universities. This reduction would also mean that 100s of millions of dollars would be freed to fund additional science, which would spur more scientific innovation, or be returned to the taxpayer. Furthermore, stipulations could be made to universities on how indirect costs are spent to reduce administrative bloat.

Changes towards these goals can be made by Congress in the budget bills it is currently negotiating, bringing clarity to the scientific community regarding future funding and providing needed reform to the indirect cost system.