NIH 15% cap cuts costs, but potentially threatens cutting-edge research

The National Institutes of Health (NIH), which is part of the Department of Health and Human Services, supports important medical research "in the causes, diagnosis, prevention, and cure of human diseases." Most of its nearly $50 billion annual budget supports some 50,000 competitive grants to institutions of higher education (IHEs).

The typical NIH grant provides for two types of cost recovery: direct costs and indirect costs. Direct costs include those attributable to the specific research project, such as specialized staff, equipment, and materials. Indirect costs include institutional overhead for the facilities and administration. They traditionally have been separately negotiated as a percentage of each funded grant. For example, if the federal research grant is $100,000 and the negotiated indirect cost rate is 20%, the total grant award would be $120,000. Once the agreed indirect cost is negotiated, it becomes binding.

This process was abruptly changed on Feb. 7. The NIH Office of the Director issued a three-page "Rate Change Notice" that has shaken the medical research community. It replaces the negotiated process for the treatment of indirect costs with a 15% cap for "new" and "existing grant awards." The stated reason for the change: "Most private foundations that fund research provide substantially lower indirect costs than the federal government, and universities readily accept grants from these foundations."   

The potential impact on future IHE research is significant. For the fiscal year 2023, for example, approximately $26 billion in NIH funding went to direct costs and $9 billion to indirect costs. The NIH now estimates potential savings of at least $4 billion for the government.

But the Notice doesn't address the cost side of the equation. Ongoing critical medical research is at stake - everything from Alzheimer's to Systemic Scleroderma research. Without the benefit of indirect cost negotiation, critical research may be abandoned resulting in layoffs, suspension of clinical trials, disruption of ongoing research, and laboratory closures. These possibilities were never considered.

Twenty-two states, including California, are challenging the legality of the cap (Commonwealth of Massachusetts, et al. v. National Institutes of Health, et al., D. Mass. 1-25-cv-10338). On Feb. 21, the federal district court extended its temporary restraining order against the NIH's capping indirect costs to more carefully consider the arguments for granting a preliminary injunction.

The AGs make three legal arguments based on the predicate that those appointed to implement President Trump's policies cannot conveniently toss legal constraints out the window. First, they claim the Notice is "arbitrary and capricious" and violates the Administrative Procedure Act (APA). The underlying policy judgment, reasoning, and factual basis for the 15% cap is not explained other than the reference to the way private foundations treat indirect costs. But the federal regulations are clear that indirect costs must be negotiated and agreed upon based on actual costs. In addition, the Notice fails to consider the substantial budgetary reliance interests that the grant recipients have in the established negotiated rate process and the potential harm to public health research in deviating from it.

Second, the AGs maintain that the cap exceeds NIH's statutory authority. In the Consolidated Appropriations Act, 2024, Congress expressly limited the NIH from reducing or modifying the negotiated process for administering indirect costs. The relevant congressional appropriations language for the NIH funding arguably prohibits the 15% cap.  

Third, the AGs also assert that the rate change policy violates the notice-and-comment regulatory requirement before imposing new obligations. The APA generally requires that before a federal agency adopts a "new rule" it must first publish the rule in the Federal Register to provide interested parties with the opportunity to comment on it. Past indirect cost recovery changes proposed by the NIH followed this practice.

IHEs are apt to see dramatic impacts on their research budgets should the 15% cap survive as written. In what appears to be a chilling warning to grantees, the Notice states: "We will not be applying this cap retroactively back to the initial date of issuance of current grants to IHEs, although we believe we would have the authority to do so."   

A separate lawsuit by a group of AGs is pending against the federal government for its improperly freezing and failing to properly restore federal funding despite the court's order (State of New York, et al. v. Donald Trump, et al. (No.1:25-cv-00039 (D.R.I.).

The AGs are not just fighting to uphold the rule of law. They are also fighting to protect medical research and the well-being of the Nation.