In a move that has woken the biomedical research community, the National Institutes of Health (NIH) announced on Friday, February 7, 2025, that beginning February 10, 2025 it will cap indirect cost rates at 15% for all grants, both new and existing. This dramatic policy shift represents a significant reduction from the historical average of 27-28% indirect cost rates, with some institutions previously receiving over 60%.
Total Grant Funding
In fiscal year 2023, NIH spent approximately $35 billion on nearly 50,000 competitive grants awarded to more than 300,000 researchers at over 2,500 institutions across the United States.
Indirect Costs (Overhead Payments)
According to a recent Forbes Article, of the total grant funding:
- Approximately $26 billion went to direct costs for research
- About $9 billion was allocated to indirect costs through NIH’s indirect cost rate
- DOGE estimates the new rate will save approximately $4 Billion
Historical Context
The average NIH indirect cost rate has historically been between 27% and 28% of the total grant amount. However, some institutions have negotiated much higher rates for indirect costs:
- Harvard University: 69%
- Yale University: 67.5%
- Johns Hopkins University: 63.7%
In looking at several land grant institutions their negotiated rates for overhead are not that much lower than the top schools:
- University of Iowa: 55.5%
- University of Florida 52.5%
- University of Mississippi 46%
A 2013 Government Accountability Office (GAO) report revealed that the top 50 universities with the largest research programs received over two-thirds of NIH’s total indirect cost reimbursements.
In 2024, a policy change increased the lowest indirect cost rate from 10% to 15% while reducing oversight by removing the requirement to publish these costs publicly and limiting audits.
Bills have been introduced in Congress to Study Indirect Costs
Key Points of the New Policy
- A standard 15% indirect cost rate will now apply across all NIH grants, effective immediately.
- The policy affects both new grants and existing grants for expenses incurred from February 10, 2025 onward.
- NIH cites alignment with private foundation practices as justification, noting that many foundations offer lower indirect cost rates.
What are Indirect Costs
Indirect costs, also known as Facilities and Administrative (F&A) costs, are expenses that cannot be readily identified with a specific research project but are necessary for the general operation of an institution and the conduct of research activities.
For NIH grants, these costs typically include expenses such as building maintenance, utilities, administrative support, and library services. The concept of indirect costs was introduced to ensure that research institutions could recover the full cost of conducting federally funded research, not just the direct expenses associated with a specific project.
Indirect cost rates are negotiated between research institutions and the federal government, usually through the Department of Health and Human Services or the Department of Defense, rather than with NIH directly. These rates are negotiated on an institution-wide basis, not grant-by-grant, to streamline the process and ensure consistency across federal funding agencies. The negotiated rate is then applied to the modified total direct costs (MTDC) of each grant to determine the indirect cost reimbursement.
This system stated aim is to provide a fair and efficient method for institutions to recover the broader costs associated with maintaining a research infrastructure, while allowing researchers to focus on the direct costs of their specific projects. NACUBO has a good video outlining how indirect costs work in addition NIH has a video as well.
What does this look like for a Grant
According to the NIH In Fiscal Year 2023 the average size of a NIH Grant was $609,702.
In doing the math we came up with institutions with a 50% overhead receiving an average grant will receive an average over $210,000 less in payments from an average grant and institutions with 30% overhead will see over $91,000 in less payments from each grant.
Note in Harvard’s case less than 1/3rd is spent on the actual research and a staggering 69% is spent on “overhead”.
Critics argue that such high overhead rates are often poorly defined and may not always be justified. They contend that these costs should be evaluated on a case-by-case basis rather than applied as a blanket percentage.
Objections to High Indirect Cost Rates
Several key objections to high indirect cost rates have been raised:
Lack of Transparency: The 2024 policy change reduced oversight by removing the requirement to publish these costs publicly and limiting audits.
Inconsistent Practices: Universities accept far lower indirect cost rates from private foundations (e.g., 10% from the Gates Foundation, 15% from the Packard Foundation) while claiming higher NIH rates are necessary for research survival.
Concentration of Funds: The 2013 GAO report highlighted that a small number of large research universities received a disproportionate share of indirect cost reimbursements.
Potential for Misuse: As illustrated by the CMS grant example, there are concerns about institutions using high overhead rates as “gravy” rather than for legitimate research support costs.
Impact on Smaller Institutions: High indirect cost rates may disadvantage smaller research institutions that cannot negotiate favorable rates.
More Research Could Be Conducted: An argument can be made that moving forward more resources will be dedicated to direct research costs vs. overhead.
Impact on Research Institutions
The implications of this policy change are potentially far-reaching:
- Financial Strain: Many universities and research institutions are expected to face substantial budget shortfalls, potentially hundreds of millions of dollars annually.
- Research Capacity: There are concerns that institutions may need to scale back research activities or divert funds from other areas to maintain research infrastructure.
- Competitive Landscape: Some experts warn this could lead to a decline in U.S. biomedical research dominance.
Dr. David J. Skorton, President and CEO of the AAMC, and Dr. Elena Fuentes-Afflick, Chief Scientific Officer, stated: “Make no mistake. This announcement will mean less research. Lights in labs nationwide will literally go out. Researchers and staff will lose their jobs.”
Other Government Negotiations
Because these overhead rates are negotiated across governmental agencies, it is unclear what will happen at DOD, DOA or in other HHS entities. Other negotiations may start from a take-it-or-leave-it-type stance as instituted over the weekend, such as drug price negotiations or physician payments.
Basic and Clinical research may move to more affordable places such as Mississippi, New Mexico or Missouri to ensure adequate resources to complete the research.
Looking Ahead
In order for this to work If the federal reporting requirements, micro accounting and regulations requirements need to be reduced or eliminated, As the research community grapples with this seismic shift in funding policy, many questions remain about its long-term effects on U.S. biomedical research capabilities. Institutions will need to rapidly adapt their financial strategies, potentially leading to significant changes in how research is conducted and funded in the United States.
The coming months will likely see intense debate and possibly legal challenges as stakeholders across the research ecosystem respond to this transformative policy change. The focus will likely be on finding a balance between controlling costs and maintaining the robust research infrastructure that has made the U.S. a leader in biomedical innovation.