What is an indirect cost, anyway?

The impact of NIH overhead revenue on research universities and YOU

Last night, due to changes introduced by the Trump administration, the Director of the NIH released an announcement standardizing the indirect cost rate for all existing and new NIH grants to 15%. Now, I have definitely advocated for changes in how research funding works and how that funding is tied to job security and how valuable a researcher is considered to be, but an immediate, unexpected cut of research university budgets is not the way to approach that.

This news is something that might be skipped over by anyone who hasn’t had experience of working in an environment that relies on NIH indirect costs, or overheads. It might not seem to be that big of an issue—more of an administrative thing, a cost-cutting exercise that will save the government money had have little effect on the daily lives of Americans—but, unfortunately, that’s not the case.

So what are indirect costs, and why should you be paying attention?

Researchers bring in grant funding to cover their research activities, and a percentage of that money goes to the university to cover expenses that can’t be tied to a specific grant, such as maintenance, security, lighting, heating, lab space, administrative support, and compliance offices. It’s not possible for research to happen if these are not supported, and the funding for them was already not entirely covered by funding for indirect costs—universities spend a lot more than the income they get from NIH grants, and they rely on this funding to keep functioning. There isn’t another pot of money sitting around that research universities are choosing not to use in favor of taking overheads. Overheads revenue is a central component of how research universities devise their budgets.

Because the needs of each research university differ, indirect costs rates were historically set with negotiations between the government (NIH) and each individual institution. Typically, this rate would be around 30% of the money brought in via NIH grants; however, some institutions negotiated much higher rates—MIT, for example, had a rate of 59%.

Using MIT as an example, let’s say researchers brought in $800 million in NIH funding in one year—the university would have had $472 million in funding for the activities mentioned above. The new 15% cap which, as a reminder, is immediate and affects existing as well as new grants, slashes that funding to $120 million. Making up an unexpected shortfall of $352 million in a budget is likely impossible.

A more typical institution bringing in $250 million with a 30% indirect cost rate would have its $75 million overheads budget cut to $37.5 million. A university like MIT might be able to use some endowment money in the short term, but that’s not a sustainable long-term option as that money will run out.

The NIH paid out approximately $9 billion in overheads last year; the 15% cap creates a US-wide shortfall of ~$4.5 billion that universities will somehow have to address. These costs are budgeted for across multi-year grants and have already been considered in research universities’ budgets for this fiscal year and the money will have been allocated to pay for facilities services, building operations, animal care facilities, health and safety offices, hazardous waste disposal, IT services, and all of the other essential elements that universities need to operate. The effect is immediate. Research universities will have to make changes now.

This isn’t as easy as it could be in a corporation, where changes could quite rapidly be made to service offerings. The overheads money keeps the actual buildings open and operational and essential staff employed. A university can’t simply stop complying with federal regulations or health and safety or providing care to research animals. So they might have to freeze the hiring of staff paid for by overheads—most of which are essential roles—and lay off some of their existing employees who are doing work that’s critical for research to keep going but perhaps not as essential as ensuring regulatory compliance, for example. They might freeze salaries. They might stop performing adequate infrastructure maintenance and stop construction on new research buildings that were necessary for expansion and the development of new treatments.

They might reduce research operations. Lab space could be cut to save on maintenance and utilities costs. The number of researchers could be cut. The number of grants a researcher applies for could be limited if the work they are doing would cost the university substantially more than the 15% allocated from the grant funding. Time will tell if consideration of that will be brought into performance reviews required for tenure and promotion and all of the other academic activities that are currently absolutely contingent on how much money a faculty member can bring in.

All of the options available to universities to help make up the shortfall in research funding cause by this 15% cap are potentially devastating to every research institution.

But what about you?

This change has knock-on effects across the US well beyond the walls of research universities. Researchers value the ability to do work that impacts people. Without that ability, they will leave—either leave the academic research setting or leave the US entirely. Research universities will then lose not only the funding that keeps them able to lead scientific innovation in the US but the people who drive that innovation. A substantial number of US doctors are researchers affiliated with universities, and university hospitals are central to clinical trial research. Cutting the indirect cost rate directly cuts the funding for clinical trials, potentially reducing the number of clinical trials and shifting the focus to those most likely to generate revenue (rather than what’s in the best interest of healthcare and the public). When the researchers at these university hospitals leave… Your healthcare costs will go up. Your waiting times for important diagnoses will increase exponentially. That experimental drug you needed might never be trialed.

Research funding affects everyone, and if this 15% cap is here to stay, it could irreversibly decimate the US research and healthcare systems.