Are we paying too much for biomedical research?

Trump's attack on NIH

Yesterday, in a directive that only a government sleuth could uncover, the National Institutes of Health (NIH) posted on their website a new policy on “indirect cost rates”. Pretty esoteric topic, but one that every citizen might want to pay attention to for a couple of reasons.

First, this NIH directive comes nearly word-for-word from Project 2025, that 922-page bible published in 2023 by the best and brightest minds on the Right who believe that our government is too big, too expensive, and too powerful. Their solution is to shrink it drastically by giving the chief executive of the government even more power …. Huh? That’s right, the only way to “tame the beast” that has perverted our constitution is to circumvent the very checks and balances that the founding fathers built into the constitution itself. But let’s set irony aside for the moment and focus on where this new NIH directive comes from, what it says, what it means for biomedical research, and why it is yet another example of President Trump’s spate of executive orders gone amuck.

Mandate for Leadership 2025: The Conservative Promise (aka Project 2025) was crafted over the past few years by dozens of policy experts, most notably those affiliated with the Heritage Foundation. You may recall that the Heritage Foundation played a key role in influencing many of President Trump’s policy decisions during his first term in office, such as the nominations of Neil Gorsuch, Brett Kavanaugh, and Amy Comey Barrett to the Supreme Court. Project 2025 is quite comprehensive, with 30 chapters on all facets of government organization and public policy, including proposals to return to the gold standard which required U.S. currency to have an equivalent amount of gold in Fort Knox (ramped down in 1933 and eliminated in 1971) and to “rein in” the Environmental Protection Agency, the Occupational Safety and Health Administration, and the Internal Revenue Service. It even has an enticing offer about the upcoming election in November 2024:

“We want you! The 2025 Presidential Transition Project is the conservative movement’s unified effort to be ready for the next conservative Administration to govern at 12:00 noon, January 20, 2025. Welcome to the mission. By opening this book, you are now a part of it. Indeed, one set of eyes reading these passages will be those of the 47th President of the United States.”

OK, so maybe Donald did not read it, but he knows people who did.

Chapter 11 (the irony of this number is not lost on those familiar with bankruptcy law) is all about Education and was written by Lindsey Burke, the Director of the Center for Education Policy at The Heritage Foundation. On page 355 is a short paragraph on indirect costs that reads as follows:

“Currently, the federal government pays a por­tion of the overhead expenses associated with university-based research. Known as “indirect costs,” these reimbursements cross-subsidize leftist agendas and the research of billion-dollar organizations such as Google and the Ford Foundation. Universities also use this influx of cash to pay for Diversity, Equity, and Inclusion (DEI) efforts. To correct course, Congress should cap the indirect cost rate paid to universities so that it does not exceed the lowest rate a university accepts from a private organization to fund research efforts. This market-based reform would help reduce federal taxpayer subsidization of leftist agendas.”

Wow, I wonder what proportion of indirect costs pay for DEI? But first let’s see what yesterday’s NIH directive says:

“The United States should have the best medical research in the world. It is accordingly vital to ensure that as many funds as possible go towards direct scientific research costs rather than administrative overhead. NIH is accordingly imposing a standard indirect cost rate on all grants of 15%.”

Sounds familiar. But it goes further by defining the scope and timeline of implementing this directive as follows: “This policy shall be applied to all current grants from February 10, 2025 forward as well as for all new grants issued.”

Clear enough. But consider this fact. A multiyear research grant from NIH is awarded to an institution of higher education (or medical center) in the form of a legal contract that stipulates the indirect cost rate for the entire duration of that grant. The NIH directive is declaring that this contract is null and void, effective 2 days from now.

But let’s set aside legalities (since they are apparently irrelevant) and dive into just what indirect costs are and whether the new NIH rate of 15% makes sense. Of course, waste-fraud-abuse is the buzz term du jour because who doesn’t think it’s a bad thing? After the NIH directive was published yesterday on the NIH website, NIH posted this on X (formerly Twitter and in no way an official method for communicating with universities or grant-supported scientists):

“Last year, $9B of the $35B that the National Institutes of Health (NIH) granted for research was used for administrative overhead, what is known as “indirect costs.” Today, NIH lowered the maximum indirect cost rate research institutions can charge the government to 15%, above what many major foundations allow and much lower than the 60%+ that some institutions charge the government today. This change will save more than $4B a year effective immediately.” Let’s ignore the fact that the NIH budget is $47.439 Billion and not $35 Billion. I guess they can’t even Google their own budget figures.

Wow, $9 Billion sounds like a lot of money and $4 Billion in savings is not chump change. This reduction seems sensible, especially if as claimed by Project 2025 indirect costs support “leftist agendas”. I know that many of your eyes will glaze over as you learn about what indirect costs are and why we have them, but please bear with me as it’s important to understand why they are a completely straightforward way of managing the two components of any research grant.

Let’s say you are a scientist, like me, who studies how children learn. You have some laboratory space in a building owned by your university where children and their parents come to participate as volunteers. After the parents provide written consent, the child works on a set of tasks on a touch screen and provides data on how well they learn to spell unfamiliar words that they hear for the first time. The child’s brain activity is being recorded by a special device while they are performing this task to determine which neural circuits are responsible for learning letter-sound relations. When the child finishes the task, they receive a small gift and their parents are reimbursed for their transportation costs or parking fees. Nothing nefarious, no DEI, no “leftist agenda”.

One of the two components of an NIH grant that supports any research project consists of what are called direct costs (a small portion of my salary, the salary of the staff in my lab who recruit, test, and analyze the data collected, and the equipment and supplies needed to collect and analyze the data). But recall that this study was conducted in a building that was provided to my lab for this purpose. That building has a cost (a mortgage), utilities (heat, A/C, electricity) and the university has to provide administrative support (a payroll system to pay salaries, a management staff to comply with Federal regulations, a portion of a secretary to answer the phone when a parent calls to set up or cancel an appointment, subscriptions to scientific journals in the university library, etc). These facilities and administrative components are what are called indirect costs, the second component of an NIH grant.

It is important to point out that indirect costs are not “optional”. I can’t do my research in a public space (e.g., on a sidewalk or in a shopping mall). I could rent space from the commercial real-estate market, but universities build big buildings that can accommodate many researchers who have similar space needs, often with special features that you cannot find in your local office building (sound-proof booths, exhaust hoods for chemical fumes, etc). There is an economy of scale that universities provide, and in fact that is why almost the entire research portfolio of NIH is housed in universities rather than in specialized labs funded directly by the government (the exception is the NIH Campus itself in Bethesda, MD).

That geographic dispersal of research facilities was a brilliant decision made by Vannevar Bush, the president of the Carnegie Institution and later appointed by FDR to direct the Office of Scientific Research and Development during World War II. In 1945 Bush published a report entitled “Science - The Endless Frontier” in which he outlined an ambitious path forward to ensure that the U.S. remained as the dominant science and technology power given what had just transpired with the Manhattan Project. A key feature of Bush’s recommendation was that the Federal government should invest heavily in basic and applied research by capitalizing on the infrastructure already present in our universities. That was clearly a success; for example, the Manhattan project leveraged the existence of cyclotrons at the University of Chicago and the University of Rochester to conduct research on plutonium – both its potential as a military device and its biological consequences for those exposed to its radiation.

Bush realized that to build dedicated research institutes from scratch would be hugely expensive and that a more cost-effective alternative would be to pay indirect costs to universities to leverage their already existing (or easily expanded) infrastructure. This also allowed biomedical research to be geographically dispersed throughout the country to allow for easy access to thousands of patients without transporting them to a single location. And to be clear, this university infrastructure is not just bricks and mortar. It is also the presence of scholarly information in libraries, the expertise of faculty unrelated to any given grant such as mathematicians and statisticians, computers and other shared items of equipment, and a highly educated workforce of faculty, staff, and students all of whom are already located in the same place. Other countries opted for a different model, such as France with their CNRS labs and Germany with their Max Planck institutes, which are not directly affiliated with a university. But it took them decades to catch up to the Bush model in the U.S.

So let’s be clear that indirect costs are not fluff. Moreover, they are negotiated with NIH (or the relevant Federal funding agency such as NSF, NASA, Department of Defense, etc) and, importantly, they are audited on a regular basis to make sure that the government is not being overcharged (e.g., as the mortgage on a building is paid off or utility rates go down). It should also be apparent that indirect costs differ by location – the cost of buildings, utilities, and administrative salaries is not the same in Palo Alto as in Iowa City.

Why then, did the NIH directive (based on Project 2025) pick 15% as the new indirect cost rate? Here is what the NIH directive said:

“Most private foundations that fund research provide substantially lower indirect costs than the federal government, and universities readily accept grants from these foundations.”

The NIH directive cites the example of the Bill and Melinda Gates Foundation, which limits indirect cost rates to 10% and the Packard Foundation whose rate is 15%. I have had grants from both of these foundations and indeed their indirect cost rates are lower. But they are lower for two reasons. First, these foundations are not asking the research to be conducted in new space that the university must provide, but rather to use existing space and facilities. They are “leveraging” what is already present at the university, except for modest administrative costs to pay personnel and prepare budget reports. Second, universities must, with accounting practices required by law, make up the shortfall between this lower indirect cost rate and their overall (i.e., actual) indirect cost rate by university resources – that is, by endowment or other non-Federal funds. Most universities are willing to make this contribution because they value the research project and want to support their faculty and students who otherwise would not be able to conduct research supported by private foundation grants, much of which consists of high-risk projects not funded by NIH.

Finally, let’s consider the impact of this cut in indirect cost rates to 15%. The $4 billion in cost savings estimated in the tweet from NIH is a big hit to our nation’s universities and medical centers. A few of them, notably the three private institutions listed in that tweet – Harvard, Yale, and Johns Hopkins – will not go out of business; they have large endowments to cover the shortfall (at least in the near term). But almost all other universities, especially public universities, have much smaller endowments than private universities and would have to seek additional revenues from the states in which they are located – in other words, state taxes. So what the NIH directive has done is to push these expenses from the Federal level to the State level, unless the public universities decide they cannot afford to accept an NIH grant because they cannot balance their budget with a “below costs” indirect rate.

It is not difficult to see how this will have ripple effects at the state level. Here is a chart showing the top-10 states that voted for Trump-Vance in last November’s election and that have the most NIH funding.

As you can see, these so-called Red states who voted overwhelmingly for Trump have over $12 Billion in NIH funding. This figure includes both direct and indirect costs, but a reasonable estimate of the cut in funding if the 15% rate is upheld is $1.5 Billion. Many of the public universities will be forced to terminate research grants because they cannot, especially in the short run, balance their budget by quickly raising state taxes by $1.5 billion. So the ripple effect will not only be layoffs of staff, reducing the more than 150,000 employees supported by these grants, but also how those employees spend their salaries to support the local economy – a significant drop from $31.7 Billion – and the loss in tax revenue from these salaries at the state and federal levels. This chart also highlights the fact that 33 million Trump voters will suffer these “unintended” consequences of this seemingly modest and seemingly well-justified Project 2025 recommendation. It’s difficult to only punish Blue voters in Red states.

But if President Trump and his new NIH Director, Dr. Jay Bhattacharya, who has not yet been confirmed, are determined to keep the indirect rate at 15%, surely we would be justified in asking that the same rate be applied to all government grants and contracts. This would include contracts to for-profit companies like SpaceX. I am not able to find (presumably proprietary) indirect cost rates for defense contracts (although a Rand Corp. study in 2000 confirmed they are higher than rates for universities), but I was able to find one example from a $404 million contract with Northrup-Grumman that spanned 7 years from 2019-2026. One of the differences between government grants (like those to non-profit universities) and contracts (like those to Northrup-Grumman) is that the salaries of the “key executives” who head up these contracts are included as part of indirect costs. The Northrup-Grumman contract listed the salary of their executive as $24 million. Even if this is spread out over 7 years, I can guarantee you that no university researcher is being paid $3.4 million per year by NIH. In fact, NIH has a salary cap of $221,900 per year. I look forward to the DOGE team reporting back to Congress about the indirect cost rate of SpaceX and the salary compensation Elon Musk is charging as part of NASA indirect costs.

The newly confirmed Director of the Office of Management and Budget (OMB), Russell Vought, like his boss, is getting a second chance to implement his “taming of the deep state.” But perhaps he should ask himself whether his goals are worth the negative impact on his red state constituents who were responsible for putting him and his boss back in power. Scientists have a deep appreciation for complexity and nuance. That is why we spend years focused on understanding a problem that has no easy solution. It’s frustrating and slow and often when we think we have the solution we find additional complexity we didn’t anticipate. Several obvious characteristics of President Trump’s recent deluge of Executive Orders is how single-minded they are, how poorly they are written, how little thought is given to their unintended consequences, and how cruel and unnecessary they are. You should never throw away 95% of a good thing that took decades to create in order to eliminate the 5% that you think is bad.