Biomedical Research: NIH Should Assess the Impact of Growth in Indirect Costs on Its Mission
Released: 2013-10-31T00:00:00

Letter

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.