On February 7, the National Institutes of Health (NIH) announced a policy return to historical precedent that would cap allowable “indirect costs” at 15% of the overall NIH research award—saving an estimated $4 billion annually. This action is already facing legal challenges: On February 10, a federal judge issued a temporary restraining order blocking the policy from taking effect. Regardless of the legal parameters, our focus is the wisdom of the policy of capping indirect costs for NIH grants. In our view, capping indirect costs is a sensible step to increase the efficiency of government funding for medical research and minimize universities’ bureaucratic bloat. However, federal policymakers should couple such a cap with less regulation and micromanagement of NIH funding to minimize recipients’ compliance costs.
Capping Indirect Costs
In an attempt to steer federal resources toward science and away from overhead, NIH’s policy change capped indirect costs, which cover general facility and administrative expenses. Unchecked indirect cost reimbursements provide incentives for universities to capture more funding as general revenue, with a questionable connection to the underlying research.
Before this change, if the NIH awarded a $1 million grant to a scientist, and the university claims its indirect cost rate was 50 percent, the NIH would send $1 million to support the scientist’s work directly, and another $500,000 for the university to spend on “administration.” As it stands, NIH spends one-fifth of the current $49 billion budget on indirect costs, implying an average indirect cost rate of around 25 percent.
Universities are the largest recipients of NIH grants. Johns Hopkins University received $843 million in NIH grants in 2023. That same year Yale University received $622 million in NIH grants—the amount they are reimbursed for “indirect costs” is in addition to the grant’s award amount. When publishing this new “indirect cost” policy, the NIH noted that Johns Hopkins’ indirect rate was 63.7 percent and Yale’s was 67.5 percent. In dollar terms, well over half a billion dollars was given to Johns Hopkins for medical research that didn’t actually go towards research. At Yale, two-thirds, or $420 million, of the $622 million given for medical research was not spent on the main purpose of the grant.
Indirect costs are defined by federal regulations as expenses related to “facilities,” which encompass the building and upkeep of facilities, and “administration.” Many critics of current NIH funding argue that the federal government should not be underwriting these costs or that universities should be using their multi-billion dollar endowments for these purposes. While there does seem to be a limiting principle to what can be considered within “facilities,” such limiting principle doesn’t seem to exist for “administration.” Administration is defined “as general administration and general expenses such as the director’s office, accounting, personnel, and all other types of expenditures not listed specifically under one of the subcategories of “facilities.” Notably, since 1991, the “administrative” portion has been limited to a cap of 26 percent of modified total direct costs—despite increasing administration requirements applied to federal research grants.
Once upon a time, government research grants actually capped indirect costs – at 8 percent in 1950, increased to 15 percent in 1958, and then to 20 percent in 1963—the cap was lifted in 1966. According to a 1979 GAO study, immediately following the lift of the caps the government experienced a “rapid increase” in indirect costs for health-related research. A 2016 GAO report revealed that the indirect cost rates set by three primary agencies (Contract Administration Service, NIH-Division of Financial Advisory Services, and Office of Naval Research) on NIH’s behalf had an “increased risk [including] costs that are not allowable, allocable, and reasonable, and may result in wasted federal resources.”
Federal medical research funding may even be a driving force in the explosion of college bureaucracies. From 2003 to 2019, the number of administrators and managers at Yale increased by 45 percent to the point where there were nearly as many administrators as undergraduate students. Large tuition increases are certainly partially to blame for this bureaucratic bloat but policymakers should not ignore the diversion of federal medical research resources to universities’ administrative budgets.
Bureaucratic Requirements on Grant Recipients Also a Problem
The federal government bears some responsibility for increased indirect costs over the past 60 years. Federal regulation and bureaucratic requirements have soared with little return on investment or positive impact on scientific breakthroughs. The cumulative total of regulations and policies affecting federal research has increased 172 percent in the last 10 years (2013-2023) according to a Council on Government Relations study. While capping reimbursements for indirect costs is a welcome policy change, Congress and the Trump administration also should reduce bureaucratic requirements.
A 2018 Federal Demonstration Partnership study of 11,167 federally-funded scientists and principal investigators on federal research grants found that “almost half of their available research time for federal projects had to be allocated to fulfilling requirements instead of focusing on the content of their research projects.” This bureaucratic bloat has a disproportionate effect on small and state-based universities and research institutions that have fewer financial resources to respond to administrative requirements and changes in reimbursement of indirect costs.
Learning from the Private Sector
Some indirect costs are necessary to support the research mission, but spending two-thirds of awards on indirect costs is a gross abuse of government funding. Reputable private foundations already impose reasonable limits on indirect costs. In 2017, the Gates Foundation released a paper detailing its “Indirect Cost Policy” which capped indirect costs at U.S. universities at 10 percent. Whether or not 15 percent is the right cap level for indirect costs, we should demand a clear and responsible limit to ensure the great majority of our tax dollars are spent on the intended purpose of medical research.
Bottom Line
All taxpayer and American investment dollars should be spent as efficiently as possible. Currently, the status quo permits research funding to underwrite the growth of college administration and bureaucracy. Policymakers can debate whether 15 percent is the right target for a necessary and efficient amount of indirect costs to accompany the grant, but without question NIH’s new policy will mean taxpayers pay for more medical research and less subsidization of bloated college bureaucracies. The Trump administration’s bold action should be coupled with actions to reduce bureaucratic paperwork burdens. Scientists save and change lives in labs, not filling out paperwork.
