As part of an AcademyHealth series of semi-regular updates to provide clarity and expert insight amidst the rapidly changing federal environment, this edition of the Situation Report focuses on the National Institutes of Health (NIH)’s funding policy change.
Today’s issue answers the following:
- What happened?
- What are indirect costs?
- What might this mean?
- What questions remain?
What happened?
On Friday, February 7, 2025, the National Institutes of Health (NIH) issued a notice entitled "Supplemental Guidance to the 2024 NIH Grants Policy Statement: Indirect Cost Rates" (Notice Number: NOT-OD-25-068). Effective February 10, 2025, this guidance establishes a standard indirect cost rate of 15 percent for all NIH grants, replacing the previously negotiated rates that varied by institution. The new 15 percent indirect cost rate is intended to apply to both new and existing grants, with the cap effective for expenses incurred from February 10, 2025, onward. NIH has stated that this cap will not be applied retroactively to the initial date of issuance of current grants to institutions of higher education.
This policy change is purportedly to ensure that a greater portion of NIH funding is being used for direct scientific research, aligning with practices observed in private foundations that often provide lower indirect cost rates, such as the Gates Foundation (10 percent cap on indirect cost rates for institutions of higher education) and Robert Wood Johnson Foundation (12 percent cap on indirect cost rates). However, the abrupt nature of the change and the research ecosystem makes this cut a devastating funding decision for research organizations large or small.
What are indirect costs?
In NIH research funding, direct costs and indirect costs are distinct categories used to allocate expenses associated with conducting research. Direct costs refer to the expenses that can be directly attributed to a specific research project. These typically include salaries and wages of project personnel, supplies and materials, project-related travel, and consultants and subcontracts (payments to outside experts / organizations for services directly related to the project). This is the core of university research, and it is also where the bulk of the federal investment is spent.
Alternatively, indirect costs are expenses that are necessary for the overall research environment but cannot be directly attributed to a single project. These are sometimes termed "overhead costs” or “facilities and administrative costs” (F&A costs) and include: administrative salaries for staff who support research but whose time is not directly charged to a single project (information technology, financial accounting, etc.); utilities, such as electricity and water; building maintenance and rent (for maintaining facilities where the research is conducted); library and information resources; and depreciation of equipment. For all of these items, only the proportion of the total, including space, that is directly attributable to organized research, is included in the determination of indirect costs. University athletics spaces, for example, would not be included.
Put simply, a research project may allocate funds for the purchase of a new computer and spectrophotometer to its direct costs, but the electricity to power this technology and the IT support to ensure it is appropriately connected to university networks with university standards for data privacy would be allocated to indirect costs. A research project may allocate funds for staff to run laboratory assays to its direct costs, but the laboratory coats they wear, the gowns participants enrolled in clinical trials wear, and the grants manager ensuring compliance with all federal regulations would be allocated to indirect costs.
An institution’s indirect cost rate is determined by taking the ratio of total indirect costs to total direct costs. Following further negotiation between the institution and the federal government, this rate then gets applied to project-specific budgets to determine indirect costs. If, for example, the total direct cost portion of a budget is $100,000 and the indirect cost rate is 50 percent, then the total project budget is direct cost + (direct cost x indirect cost rate) = $100,000 + $50,000 = $150,000. This example results in indirect costs that equal one-third of the total project budget. Guidance for the calculation of indirect cost rates for institutions of higher education (IHEs) is provided in the Code of Federal Regulations (45 CFR §75.414 and 45 CFR Appendix III to Part 75).
What might this mean?
Indirect cost rates have averaged between 27 percent and 28 percent in recent years, though variation across individual institutions can be substantial, with some as high as 60 percent. Variation can be driven by a number of factors, including:
- Type of research: Universities conducting clinical trials and other medical research in high-tech laboratories may have higher indirect costs than institutions conducting basic geological research using computer models.
- Geography: Some universities in high-cost living areas or with expensive research facilities may have higher rates.
- Type of agreement: Rates may differ depending on whether the grant is from the NIH, Department of Defense, or another agency.
- Institution size: Larger research universities with greater infrastructure may secure higher rates compared to smaller institutions.
If the NIH implements a 15 percent cap on indirect cost rates, which will reportedly cut more than four billion dollars of NIH funding annually, this has the potential to significantly alter the financial landscape for IHEs receiving NIH grants. The most important impact would be a dramatic shift in the institutions able to perform research. Many institutions would no longer be able to afford the costs necessary to perform research, or at least would have to scale back significantly. These effects would not occur uniformly, leading to an even larger amount of research being performed by the currently well-funded and well-resourced institutions than already happens. Impacts will be greater for smaller institutions, less resourced institutions (e.g., HBCUs), and institutions located in specific geographic regions.
This will result in:
- Decreased innovation and discovery of cures for diseases like cancer and Alzheimer’s
- Loss of jobs at many research institutions nationwide
- Shuttering of laboratories
- Reduction in workforce capacity
- Decline in the nation’s capacity to conduct research and compete globally
Reports show that NIH funding has supported 412,041 jobs and 92.89 billion dollars of economic activity in 2024 – cutting indirect costs will severely impact these numbers moving forward. In a lawsuit filed on February 10, 2025, a coalition of 22 states challenged the NIH policy change and provided concrete examples of the impacts the new indirect cost cap would have. One example cited that University of Michigan stands to lose $181 million in funding, which would impact “425 NIH-funded trials currently underway, including 161 trials aimed at saving lives.” Scaled to all IHEs across the nation, this policy change will ultimately result in fewer scientific discoveries, longer wait times for therapeutics and health care delivery advances, and poorer outcomes for patients and families.
What questions remain?
The NIH 15 percent cap on indirect cost rates for certain grants could face several potential legal challenges as IHEs weigh this updated NIH guidance against existing laws, regulations, or contractual agreements. On Monday February 10, Federal District Judge Angel Kelly granted a temporary restraining order to pause the federal funding limit. A hearing to brief this issue has been scheduled for February 21. An additional lawsuit was filed by a group of universities and professional organizations shortly after the state attorney generals’ suit. Both lawsuits have argued that this NIH order unlawfully retroactively modifies existing contracts between the federal government and research institutions, violates the Administrative Procedure Act, and violates a provision in the current government funding law prohibiting changes in the indirect rate.
While these challenges to the order are ongoing, AcademyHealth is communicating with congressional leaders about the potentially devastating implications of this change and will keep our membership up to date. Learn more in our previous Situation Report from earlier this week.