On Friday evening, February 7, the National Institutes of Health (NIH) released guidance that, unless revised, will significantly alter the biomedical research landscape in the US. The NIH announced an immediate cap on the indirect cost rate for all NIH grants, setting the standard rate at 15%. The change is effective for all new awards as of the release of the guidance and also applies to all existing NIH grants to institutions of higher education (IHEs) for expenses from February 10, 2025, and forward. The move is anticipated to result in total federal savings of greater than $4 billion.
While the guidance only pertains to NIH awards, the negotiated federal indirect cost rate for each organization is used by other federal agencies, and similar changes could be made to other grant programs in the future.
What is the Research Indirect Cost Rate?
Research indirect costs are generally broken into two components: facilities and administration (F&A). The facilities component may include:
- Laboratory buildings.
- Shared equipment.
- Capital depreciation.
- Facility operations and maintenance.
Administration generally encompasses:
- Regulatory and compliance personnel.
- Accounting.
- Human subjects protection programs.
- Other personnel necessary for supporting research.
Each research entity calculates its indirect costs as a basis for negotiation of an organization-specific indirect cost or F&A rate. Existing limitations and the negotiation process often result in a lower F&A rate than the actual expenses incurred by academic medical centers (AMCs) and IHEs to conduct biomedical research.
Impact of the 15% Cap
F&A recoveries are cost reimbursements to universities, medical schools, and AMCs. While the average F&A rate is around 27%, many NIH recipients have negotiated F&A rates that exceed 50%, which can be 10% to 20% below their calculated full costs of conducting research. Research-intensive organizations rely on their F&A recovery to support research operations, develop cutting-edge research facilities, and fund core equipment essential to biomedical research. The economic impact of a drastic and immediate change to the indirect cost funding for these organizations will be substantial, with large NIH grant recipients anticipating revenue gaps of over $100 million.
IHEs and AMCs have limited options to replace the lost revenue due to downward pressures on clinical revenue and tuition, given mounting student debt concerns. If the reduced cap on F&A rates stands, research organizations will be faced with the decision to reduce research activities or reduce spending on other programs (e.g., education) and redirect funds to the research enterprise.
Immediate Actions for Research Organization Leaders
Research organizations are scrambling to understand the impact of the 15% F&A rate cap to effectively steer their organizations through the turmoil. We recommend the following immediate actions:
- Develop a contingency plan. With margin pressures and limited options for increasing revenues, research organizations must develop a contingency plan to account for the sizable deficits they are facing. Key actions will include:
- Streamline the research administration infrastructure, creating centralized support structures that replace decentralized, department-based services.
- Optimize industry partnerships. With more research revenue dependent on industry sponsors, it will be critical to ease the contracting process and speed up study initiation timelines.
- Consider technology and AI solutions to backfill workforce reductions.
- Evaluate funding commitments to incoming faculty, PhD candidates, and post-doctoral researchers.
- Consider research rationalization procedures to prioritize the research activities of the organization.
- Revisit strategic and/or recruitment plans to ensure alignment of resources with mission priorities.
- Reevaluate your indirect cost recovery allocation methodology. Allocation of F&A recoveries varies substantially among organizations. Many large research organizations lack a standardized methodology even within their organization. Refining the allocation of F&A recoveries between central administration, departments, and research teams will be necessary to ensure a balanced budget across the organization.
- Evaluate your cost accounting practices. Research administrators should develop or enhance procedures for reconciling grant accounts. This may substantially increase the reconciliation burden and necessitate additional resources.
- Consult your legal counsel and government relations teams. As of Monday, February 10, 22 states have sued the NIH to block the policy change. A federal judge issued a temporary order halting the policy implementation in those states. Research leaders should keep an eye on both the progress of the state-specific lawsuits and a second lawsuit filed on behalf of private universities and hospitals that would block the policy from being implemented nationwide.
