Background

NIH conducts and sponsors biomedical research through its institutes and  centers (IC), each of which is charged with a specific mission. ICs’  missions generally focus on a given disease; a particular organ; or a  stage in development, such as childhood or old age. ICs accomplish their  missions chiefly through intramural and extramural research. Intramural  research entails government scientists working in the ICs’ own  laboratories and clinics, whereas extramural research is conducted at  outside research institutions, primarily universities, by scientists who have  been awarded extramural research grants from an IC through NIH’s  competitive process.$30 billion in fiscal year 2012 was used to support extramural research.  Of this $25.2 billion in extramural research grant funding, NIH provided  about $16.1 billion to universities.

		Components of Direct and Indirect Costs

Extramural research grants reimburse universities for the direct costs of  each research project covered by the grants and a portion of the indirect  costs of maintaining their facilities for research use and covering the  administrative expenses of the university. Direct costs can be specifically  identified with or directly assigned to individual research projects and are  relatively easy to define and measure. They include, for example, the  researcher’s salary, subawards, equipment, and travel. Indirect costs  represent a university’s general support expenses and cannot be  specifically identified with individual research projects or institutional  activities. They include, for example, building utilities, administrative staff  salaries, and library operations. OMB Circular No. A-21 establishes the  principles for determining the types of direct and indirect costs that are  allowed to be claimed and the methods for allocating such costs to  federally funded research at educational institutions, including the  establishment and use of indirect cost rates.
Indirect costs are divided into two main components, facilities costs and  administrative costs. Facilities costs include operations and maintenance expenses, such as for utilities; allowances for depreciation and use of buildings and equipment; interest on debt associated with building and equipment; and  library expenses, such as for the use of the library and library  materials purchased for research use. general administration expenses, such as the costs associated with  executive functions like financial management; departmental administration expenses, including clerical staff and  supplies for academic departments;  sponsored projects’ administration expenses, which are the costs  associated with the office responsible for administering projects and  awards funded by external sources; and  student administration and services expenses, such as the  administration of the student health clinic.

		Calculation of the Indirect Cost Rate

Because indirect costs cannot be specifically attributed to a particular  research grant, they are charged via an indirect cost rate that serves as  the mechanism for determining the proportion of indirect costs that may  be charged to federally funded research awards. OMB Circular No. A-21  outlines the process for establishing an indirect cost rate for universities  performing federally funded research. Each university develops a  proposed indirect cost rate that is based on university cost data from prior  years, which is subsequently negotiated with the federal government to  arrive at a final indirect cost rate, in compliance with the principles of  OMB Circular A-21.
To calculate a university’s indirect cost rate, a percentage of each indirect  cost component is allocated to the university’s research function on the  basis of benefits received from that component by the research function.  For example, a university can measure the square footage of floor space  used for research and use this measure to allocate the amount of costs it  claims for operating and using the space as a component in its indirect  cost rate proposal. Each indirect cost component allocated to research is  applied to a modified set of direct costs referred to as “modified total  direct costs” (MTDC) to obtain an individual rate for each component. MTDC includes the salaries and wages of those conducting the research,  fringe benefits (e.g., pensions), materials and supplies, travel, and the  first $25,000 of each subaward. MTDC excludes costs such as equipment  costs, capital expenditures, tuition remission, equipment or space rental  costs, and the portion of each subaward in excess of $25,000. (See   fig. 1.)
Universities use a standard format, also known as the long form, for submitting their  indirect cost rate proposals to their cognizant rate-setting agency. However, universities  whose total direct costs on federal awards do not exceed $10 million in a fiscal year may  use a simplified method for determining the indirect cost rate applicable to all federal  awards. Whereas universities above the $10 million threshold must use an MTDC base,  universities using the simplified method may use either salaries and wages as their base,  or MTDC. As already noted, this report focuses on those universities that used the  standard format for proposal submission.

		Proposed Changes to OMB Circular No. A-21

In February 2013, OMB issued proposed guidance that includes revisions  to cost principles of OMB Circular No. A-21. The proposed guidance  reflects input from the federal and nonfederal financial community,  including the Interagency Council on Financial Assistance Reform. The  proposed guidance would, among other things, allow more items to be  directly charged rather than included as a component of the indirect cost  rate. As of September 2013, OMB had not issued final guidance.

	From 2002 to 2012, NIH Indirect Cost Reimbursements to Universities Increased Faster than for Direct Costs, with Most Going to a Small Number of Universities

From fiscal year 2002 to fiscal year 2012, NIH reimbursements to  universities for indirect costs associated with NIH-funded extramural  research increased at a slightly faster rate than those for direct costs, and  during some portions of this period indirect cost growth increased notably  faster than direct cost growth. In fiscal year 2012, the 50 universities with  the largest research programs received over two thirds of total indirect  cost reimbursement. Higher indirect cost rates tended to be associated  with universities located in high-cost-of-living areas and privately owned  universities.

		From 2002 to 2012, Reimbursements for Indirect Costs Increased Slightly Faster than Those for Direct Costs, but Increased Notably Faster During Some Periods

Reimbursements for indirect costs from fiscal year 2002 through fiscal  year 2012 increased slightly faster than reimbursements for direct costs,  but increased notably faster during some periods. Over this period, NIH  reimbursements for indirect costs grew by about 28.1 percent, from   $3.6 billion to $4.6 billion. Over the same period, NIH reimbursement for  direct costs grew by about 27.0 percent, from $9 billion to $11.5 billion.  However, because there were large differences between indirect and  direct growth in some years, indirect cost reimbursements increased  notably faster than direct cost reimbursements during some periods. For  example, from fiscal year 2002 to 2003, the first year of this period, there  was a large increase in direct costs that compensated for greater growth  in indirect costs during other years. As a result, from fiscal year 2003 to  2012 indirect costs increased 16.9 percent, from about $3.9 billion to   $4.6 billion, while direct costs increased 11.7 percent, from about   $10.3 billion to $11.5 billion. Furthermore, in 6 of the 10 years,  reimbursements for indirect costs increased relative to those for direct  costs, by either increasing at a faster rate or declining at a slower rate.  After fiscal year 2005, annual changes in reimbursements were generally  small but consistent, with reimbursements for indirect costs increasing  relative to direct costs in 5 of 7 years. (See fig. 2 for more details on the  annual change in costs.)
NIH officials noted that, historically, NIH’s reimbursements for indirect  costs have remained a stable percentage of NIH’s total funding for all NIH  awards overall. Our analysis specifically for university research, which  accounted for almost two-thirds of NIH’s funding for extramural research  in fiscal year 2012, indicates that in 2003 about 27.7 percent of NIH  reimbursement for university research was for indirect costs, and in 2012  this percentage increased slightly to 28.6 percent. This occurred while  NIH’s budget for extramural research conducted at universities—which  needs to cover both the direct and the indirect costs of research—slowed  in the last few years. For example, during the most recent 5 years (fiscal  year 2008 to fiscal year 2012), NIH’s total funding for extramural research  conducted at universities increased about 5 percent, whereas it had  increased about 21 percent in the 5 previous years (fiscal year 2002 to  fiscal year 2007).

		In 2012 the 50 Universities with the Largest Research Programs Received Most of the Indirect Cost Reimbursements

In fiscal year 2012, almost 70 percent of NIH indirect cost reimbursement  to universities was provided to about 10 percent of the universities (50 of  a total of about 500) receiving NIH funding for extramural research.(See app. I for the indirect cost reimbursements for these top 50  universities.) These top 50 universities had the largest research  programs, as defined by the largest amount of reimbursement for direct  costs and a relatively large number of research grants.
Indirect cost rates for 5 universities out of the top 50 were not available from DCA. adjustment.the highest indirect cost rates among the 50 universities receiving the  highest amounts of indirect cost reimbursement in fiscal year 2012.  Among the 10 universities in the table, those with the highest indirect cost  rates were Mount Sinai Medical School and New York University School  of Medicine; Johns Hopkins University and Yale University had the largest  research programs as measured by the number of NIH grants awarded.

	Stakeholders Identified Factors Related to Facilities and Administrative Costs That May Increase Reimbursements for Indirect Costs, but NIH Has Not Assessed Their Potential Impact

Stakeholders—university officials, DCA officials, and others—whom we  interviewed identified several key factors that may lead to increases in  reimbursements for indirect costs provided to universities. Some factors  are related to the facilities costs, and others are related to administrative  costs. NIH has not assessed the potential impact of future increases in  indirect costs on its research mission, including planning for how to deal  with these potential increases.

		Uncapped Facilities Component of the Indirect Cost Rate Provides Few, If Any, Incentives to Control Costs

Some stakeholders underscored the importance to the research effort of  providing funding for the costs of facilities. They explained that  reimbursements for the facilities component of indirect costs—such as the  amount of reimbursable square footage, operations and maintenance,  building depreciation, and interest costs—help to support research  innovation by providing funding for the development and maintenance of  state-of-the-art research facilities. Some university officials we  interviewed noted that these research facilities are necessary for  conducting innovative biomedical research, such as research devoted to  the role of genetic mutation for breast cancer that uses advanced lab  space and equipment. They also noted that costs for these facilities have  increased over time as biomedical research has become increasingly  sophisticated. For example, a university’s officials stated that from fiscal  year 2002 to fiscal year 2009, the cost of its facilities to support  research—including those used to support advancement in data and  computing—has grown from about $88 million to about $145 million.
DCA officials stated that the uncapped facilities component of the indirect  cost rate provides universities few, if any, incentives for controlling these  potentially increasing costs. For example, DCA officials noted that there is  no limit on reimbursement for interest costs under the facilities  component. DCA officials stated that while reimbursements for interest  costs may allow universities to support needed renovations or  construction of new facilities, the fact that these reimbursements are not  capped may also encourage universities to borrow money to build new  facilities, which could lead to the building of more new space than is  necessary for research needs. Officials also noted that these interest  costs are out of DCA’s control and may vary. For example, at the time of  our work, interest rates—which are used to determine interest costs— were very low, but they could increase over time, which could increase  costs for ongoing building projects or buildings that have already been  completed, regardless of future building decisions by universities.  Because of this factor, the indirect cost rate could be expected to  increase, resulting in a potential increase in the amount of indirect cost  reimbursements provided by NIH.
In addition, some stakeholders noted that, at the time of our work, 65 of  about 500 universities receiving reimbursement for indirect costs in fiscal  year 2012 were eligible for a rate increase of 1.3 percent to account for  the higher cost of utilities. DCA officials added that OMB’s proposed  revisions to Circular No. A-21 would allow all universities to receive some  reimbursement for utility costs based on a revised formula. As a result,  NIH reimbursements for indirect costs could be expected to increase as  more universities would be eligible to include this cost in their indirect cost  rates.

		Administrative Cap Controls Potential Increases in Cost Reimbursement due to Growth in Administrative Costs Incurred by Universities

Some stakeholders noted that while the cap on the reimbursement rate  for administrative costs—26 percent—helps to control reimbursements for  indirect costs, it does not account for the recent increases in  administrative costs reportedly incurred by universities. For example,  university officials explained that their administrative costs have increased  in order to comply with recent changes in regulatory reporting  requirements, such as those related to reporting conflicts of interest.  Some university officials explained that they have hired additional full-time  staff to review and manage various reporting requirements as well as  invested in additional information technology (IT) to support new software  related to regulatory requirements. Additionally, some stakeholders noted  that administrative costs also have increased due to trends in the way  biomedical research is conducted, such as an increase in collaboration  between universities in research studies and an increased use of IT for  biomedical research. For example, some university officials explained that  many biomedical research projects now use advanced technology—such  as high-sequencing technology or imaging—that requires greater  investment in computing resources by the university. Additionally, one  university’s officials noted that the advancements in IT provide support for  interconnectivity, complex data security and data privacy requirements,  and requirements for long-term storage and maintenance of electronic  data. According to university officials at another university, in some  instances they may charge some advanced computing equipment as a  direct cost because it is specifically related to research; however, in most  instances these computing resources are included in the administrative  component of the indirect cost rate.
According to DCA officials, if costs that are part of the capped  administrative component increase significantly, indirect cost  reimbursements overall could increase if universities begin to categorize  some of the costs as part of the uncapped facilities component.  Specifically, DCA officials explained that currently there is a provision in  Circular No. A-21 that advises certain limits on changing the  categorization of certain costs—such as those costs incurred by a  university that are associated with increased use of information  technology—from the administrative to the facilities component. However,  they noted that the proposed revisions to Circular No. A-21 did not  include such a provision. DCA officials stated that they may be limited in  their ability to control increases in reimbursements associated with these  categorization changes if this provision is removed and if university  administrative costs continue to increase.

		NIH Has Not Assessed the Potential Impact of Increases in Indirect Costs on Its Mission

NIH has not assessed the potential impact of future increases in indirect  costs on its research mission, including planning for how to deal with  potential future increases of these costs. As we previously reported, NIH  has a program to periodically identify, analyze, and manage significant  risks to its objectives, strategy and mission. NIH officials noted that they  assess risks related to all extramural research funding as part of this  program, and that this assessment does not specifically focus on indirect  costs for universities. According to NIH officials, NIH has not conducted  such planning because overall indirect costs have remained around 27  percent of NIH’s total budget for all extramural research, and, in their  opinion, future cost increases are unlikely to change this figure  significantly in spite of factors that may contribute to increased indirect  costs.
Therefore, NIH officials stated that they do not anticipate the need to  consider adjusting reimbursements for indirect costs for most grants  below the amount determined by a university’s negotiated indirect cost  rate, which would require a change in law or regulation. However, NIH  officials told us that should indirect costs rise significantly, they may need  to reduce the number of research projects, which have already been  reduced in part because of budget limitations and increases in the direct  costs of research. NIH noted that the reduced budget in fiscal year 2013  resulted in 700 fewer individual research grants. Even at current levels,  indirect costs constitute a significant portion of NIH’s budget at about 20  percent. Therefore, over time, increases in indirect costs could cause  further reductions in the number of research projects that NIH could  support.

	Conclusions

NIH has indicated that NIH funding for both the indirect and the direct  costs of university research provides critical support for biomedical  research, covering the indirect costs of operating a research institution  and the direct costs of specific research projects. NIH faces uncertainty  related to the potential impact of increasing indirect costs on its funding of  future research. Among research grants to universities specifically, NIH’s  indirect costs are increasing at a faster rate than direct costs. While  changes in recent years have generally been small, annual changes in  reimbursement for indirect costs have consistently increased relative to  those for direct costs, by either increasing at a faster rate or declining at a  slower rate. Further, this has occurred while the growth in NIH’s budget  for extramural research has slowed in recent years, putting pressure on  NIH to find ways to continue to maximize its support of innovative  biomedical research. Several factors are expected to contribute to future  growth in indirect costs for NIH. These factors include that NIH’s current  system of reimbursing indirect costs—through indirect cost rates for each  university calculated according to OMB guidance—provides few, if any,  incentives for universities to control facilities costs. At the same time, the  cost of university facilities to support biomedical research is increasing  over time, as cutting-edge research requires more advanced labs and  equipment.
NIH has not made plans for options that might address these trends—in  part because it views increases in indirect costs as having been modest.  However, indirect costs already represent one-fifth of NIH’s overall budget  and about one-quarter of NIH’s budget for extramural research. NIH has  experienced small but consistent increases in indirect costs, and factors  suggest that indirect costs could increase more quickly over time in the  future. If so, such increases could have an effect over the long term on  the number and size of research grants that could be funded, thus posing  a risk to scientific discoveries and knowledge.

	Recommendation

To help address the uncertainty NIH faces related to the potential impact  of increasing indirect costs on its funding of future research, we  recommend that the Director of NIH assess the impact of growth in  indirect costs on its research mission, including, as necessary, planning  for how to deal with potential future increases in indirect costs that could  limit the amount of funding available for total research, including the direct  costs of research projects.

	Agency Comments and Our Evaluation

We provided a draft of this report to HHS, and HHS provided written  comments (reprinted in app. II). HHS also provided technical comments,  which we incorporated as appropriate.
HHS indicated that it agreed with our recommendation and that NIH had  already taken steps to implement it, but HHS disagreed with a number of  our conclusions. Specifically, HHS stated that NIH assesses the impact of  indirect costs through its annual budget projections, through planning and  congressional justifications, and as part of its risk management program.  The draft report acknowledged NIH’s efforts in assessing risk facing its  extramural research program. However, NIH has not indicated how these  actions would address our recommendation by assessing the potential  ongoing impact of indirect costs for universities on its funding of future  research. Moreover, NIH has not developed a plan for how to deal with  potential continuing increases in indirect costs for universities. Instead,  HHS indicated that, in past years, increases in indirect costs have been  proportionally consistent with increases in direct costs, and therefore,  there is not an immediate risk to NIH’s research portfolio. While the draft  report acknowledged that indirect costs have remained a stable  percentage of NIH’s overall research costs, it also noted that, for  universities—which received almost two-thirds of NIH’s funding for  extramural research—indirect costs increased notably faster than direct  costs during some recent periods. Further, as indicated in the draft report,  there are multiple indications that, for universities, indirect costs are likely  to increase at a faster rate in the future, so past stability may not be  sustained in future years. We remain convinced that increases in indirect  costs could have an effect over the long term on the number and size of  research grants that could be funded, thus posing a risk to scientific  discoveries and knowledge.
In addition, in its comments, HHS included an analysis of indirect costs  over the past decade for its overall extramural research portfolio. This  analysis was different from our analysis because it focused generally on  extramural research rather than specifically on university research. As  noted in the draft report, our research questions were focused specifically  on universities. Moreover, as institutions of higher education, universities  generally have a broader focus on education than research institutions.  Further, as noted in the draft report, universities are subject to OMB  Circular No. A-21 and their administrative costs are capped, unlike other  research institutions. Because of the unique issues that universities face,  our analysis of indirect costs excluded nonuniversity research institutions  to avoid the possibility of data from these other NIH grantees masking  trends for universities, which are the recipients of the largest portion of  NIH’s grant funding.
Finally, HHS stated that we did not provide an opportunity for the  department to provide input on our review of NIH’s assessment of the  potential impact of indirect costs on NIH’s research mission. We disagree  with this characterization. NIH provided input on this issue to us during  three separate meetings. For all three meetings, we provided discussion  questions in advance. During one of the meetings, we and NIH officials  discussed the key facts that were to be included in the draft report,  including this issue. In addition, we offered NIH officials the opportunity to  provide additional information in writing, as appropriate.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  Secretary of the Department of Health and Human Services, the Director  of the National Institutes of Health, and other interested parties. In  addition, the report will be available at no charge on GAO’s website at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-7114 or at kohnl@gao.gov. Contact points for our Office  of Congressional Relations and Office of Public Affairs can be found on  the last page of this report. Other major contributors to this report are  listed in appendix III.

Appendix I: Indirect Costs and Rates for the Top 50 National Institutes of Health—Funded Universities, Fiscal Year 2012

Weill Medical College of Cornell University  Indiana University—Purdue University at Indianapolis  n/a = not available: this institution does not negotiate its indirect cost rate with DCA.

Appendix II: Comments from the Department of Health and Human Services

Appendix III: GAO Contact and Staff Acknowledgments

	GAO Contact

	Acknowledgments

In addition to the contact named above, Will Simerl, Assistant Director;   N. Rotimi Adebonojo; George Bogart; Amy Leone; and Roseanne Price  made key contributions to this report.

Summary:
Why GAO Did This Study

NIH reimburses universities for both the direct and indirect costs of conducting research. Indirect costs cover general facility and administrative expenses, and are paid as a percentage, or rate, of certain direct costs of awarded grants. GAO was asked to look at the indirect costs of NIH-funded research. This report (1) identifies changes in reimbursements by NIH to universities for indirect costs of NIH-funded research; and (2) examines key factors affecting NIH reimbursement to universities for indirect costs and what assessment NIH has done to address any impact of these costs on NIH's research mission. GAO analyzed NIH data and interviewed officials at NIH, six universities, and other stakeholders. Universities were selected based on the number of grants and amount of funding received from NIH and their negotiated indirect cost rates.

What GAO Found

From fiscal year 2002 to fiscal year 2012, indirect cost reimbursements from the National Institutes of Health (NIH) to universities increased slightly faster than those for direct costs, but increased notably faster during some periods. Specifically, from fiscal years 2002 to 2012, indirect costs increased 28.1 percent while direct costs increased 27.0 percent. However, for the fiscal years 2003 to 2012, indirect costs increased notably faster than direct costs, at 16.9 percent and 11.7 percent, respectively. In more recent years, annual changes were generally small but consistent. This increase occurred during a time when growth in NIH's budget for extramural research slowed to 5 percent from fiscal years 2008 to 2012, compared to about 21 percent from fiscal years 2002 to 2007. In fiscal year 2012, about 10 percent of the universities (50 out of about 500) receiving NIH extramural research funding received almost 70 percent of all indirect cost reimbursement provided to universities. Higher indirect cost rates tended to be associated with universities located in high-cost-of-living areas and privately owned universities.
Stakeholders--university officials, Department of Health and Human Services (HHS) officials, and others--whom GAO interviewed identified several key factors that may lead to increases in reimbursements for indirect costs provided to universities. Some stakeholders reported that reimbursements for one part of indirect costs--the facilities component--help to support research innovation by providing funding for the development and maintenance of state-of-the-art research facilities. However, officials in HHS's Division of Cost Allocation, which is responsible for determining indirect cost rates, stated that the uncapped facilities component of the indirect cost rate provides universities with few, if any, incentives for controlling these costs. For example, these officials noted that there is no limit on reimbursement for interest costs under the facilities component. This may encourage universities to borrow money to build new facilities, which could lead to building more new space than is necessary for research. Some stakeholders also noted that a 26 percent cap on the reimbursement rate for administrative costs--a second component of indirect costs--helps to control reimbursements for those costs; however, they reported it does not account for the recent increases in costs, such as those for regulatory reporting requirements and changing research needs that require advanced medical and information technologies that are considered administrative.
The combination of these trends and factors results in indirect costs growing at a faster rate than direct costs. Indirect costs are one-fifth of NIH's total budget--or $6.2 billion in fiscal year 2012--but NIH officials reported that they have not taken steps to assess the significance of future indirect cost growth for universities, or planned for options that might address these trends or factors--in part because they view increases in indirect costs as having been modest. However, factors suggest that indirect costs could increase more quickly in the future. Over the long term, they could lead to a reduction in the number of research grants that could be funded, thus potentially affecting scientific discoveries and knowledge.

What GAO Recommends

GAO recommends that NIH assess the impact of growth in indirect costs on its mission, including, as necessary, planning for how to deal with potential future increases in indirect costs that could limit the amount of funding available for total research. HHS agreed with GAO's recommendation but disagreed with a number of GAO's conclusions, stating that risk to NIH's mission is low because indirect costs remain a stable percentage of NIH's budget. Due to indications that indirect costs for universities may increase in the future, GAO believes that continually assessing and planning for the impact of growth over the long term is important.