Liner Note 15: The Real Crisis in Research Costs, or Why the NIH Cuts are so wrong (Updated Feb 11)

Bosphorous from Boğaziçi University on February 5, 2010

I've written two dozen posts on this blog about indirect cost recovery (ICR), going back at least to 2009. But this is my first when the topic has made national news, unfortunately as part of Trump's total war on professional knowledge (that series started here). 

ICR seems like a boring, technical budget subject.  In reality, it is a major source of the long-running budget crises of public research universities. Misinformation about ICR has also confused everyone about the university's public benefits.  

These paired problems--concealed shortfalls and midirection--didn't cause the ICR cuts being implemented by Trump's man at NIH,  one Matthew J. Memoli, M.D. But they are the basis of Memoli's rationale. 

Trump's people will sustain these cuts unless academics can create an honest counter-narrative that inspires wider opposition.   I'll sketch a counter-narrative towards the end of this post. 

The sudden policy change is that the NIH is to cap indirect cost recovery at 15% of the direct costs of a grant. This will apply to all grants to all institutions, regardless of the existing negotiated rate for each.  Memoli's Notice has a narrative that is wrong but internally coherent and plausible.

It starts with three claims about the $9 billion of the overall $35 billion budget that goes to indirect costs: 

• Indirect cost allocations are in zero-sum competition with direct costs, therefore reducing the total amount of direct research.
• Indirect costs are "difficult for NIH to oversee" because they aren't entirely entailed by a specific grant.
• "Private foundations" cap overhead changes at 10-15% of direct costs and all but a handful of universities accept those grants.

Memoli offers a solution:  

• Define a "market rate" for indirect costs as that allowed by private foundations (Gates, Chan-Zuckerberg, some others). He then claims that 
• this foundation-set market rate is equal to the share of indirect costs that are valid. The foundations' rate "discovers"  real indirect costs rather than inflated or wishful costs that universities skim to pad out bloated administrations. (Many scientists share this latter view: see UCSF's Vinay Prasad's points 3 & 4.)
• On this analytical basis, currently-wasted indirect costs will be reallocated to useful direct costs, thus increasing rather than decreasing scientific research. 

There's a logic here that needs to be confronted.  How are we doing so far? 

The current strategy is to focus on outcomes rather than on the logic of the claims or the underlying budgetary reality of STEM research in the United States.  This continues a longtime, standard response to cuts (these are by no means the first)--to call the new ICR rate cap an attack on US scientific leadership and on public benefits to U.S. taxpayers (childhood cancer treatments that will save lives, etc.).  Most current coverage feature these arguments  (Science, NYTimes, WaPo, APLU). 

For example, one scientist wrote, "The NIH cap on indirect costs will kneecap biomedical research in the US." "It will mean shuttering labs across the country, layoffs in red and blue states, & derailing lifesaving research on everything from cancer to opioid addiction," wrote Sen. Patty Murray.  The University of Washington biologist Carl Bergstrom put together a good BlueSky thread: 

This is all good stuff.  The next step is to file lawsuits claiming illegality and seek a court injunction.  

And yet these claims don't refute the NIH logic. Nor do they get at the hidden budget reality of academic science. 

 

On the logic: NIH-Memoli's first two points as stated above misdescribe indirect costs. They aren't in competition with direct costs because direct and indirect costs pay for different categories of research ingredients.   

Direct costs apply to the individual grant: chemicals, graduate student labor, waste disposal, that are only consumed by that particular grant.

Indirect costs support "infrastructure" used by everybody in a department, discipline, division, school, or university.  Infrastructure is the library that spends tens of thousands of dollars a year to subscribe to just one important journal that is consulted by hundreds or thousands of members of that campus community annually. Infrastructure is the accounting staff that writes budgets for dozens and dozens of grant applications from across a department or schools. Infrastructure is the building, new or old, that houses multiple laboratories: if it's new, the campus is still paying it off; if it's old, the campus is spending lots of money keeping it running.  These things are the tip of the iceberg of the indirect costs of contemporary STEM research.

In response to the NIH's social media announcement of its indirect costs rate cut, Bertha Madras has a good starter list of what indirects involve. 

Good list! Then there are people who track all these materials, reorder them, run the daily accounting and payroll, etc etc.--honestly people who aren't directly involved in STEM research have a very hard time grasping its size and complexity, and therefore its cost.  (Memoli is a NIH lab director and surely knows this.) 

As part of refuting the first claim--that NIH can just not pay for this and therefore pay for more research--the black box of research needs to be opened up, Bertha Madras-style, and properly narrated as a collaborative (and exciting) activity.

This matter of human activity gets us to the second NIH-Memoli claim, which involves toting up the processes, structures, systems, and people that make up research infrastructure and adding up their costs.  The alleged problem is that it is "difficult to oversee."  

Very true, but difficult things can and often must be done, and that is what happens with indirect costs. Every university every year compiles indirect costs as a condition of receiving research grants.  Specialized staff (more indirect costs!)  use a large amount of accounting data to sum up these costs, and use expensive information technology to do this to the correct standard. (They do routinely the very thing Elon Musk and DOGE claim to be bringing for the first time to the federal government, which is advanced IT applied to complex systems.) University staff then negotiate with federal agencies for a rate that addresses their particular university's actual indirect costs.  These rates are set for a time, then renegotiated at regular intervals to reflect changing costs or infrastructural needs.  

The fact that this process is "difficult" doesn't mean that there's anything wrong with it. This claim shouldn't stand--unless and until NIH identifies flaws would need to be identified. As stated, the NIH- Memoli claim that overhead cuts will increase science is easily falsifiable.  (And we can say this while still advocating for reducing overhead costs, including ever-rising compliance costs imposed by federal research agencies. But we would do this by reducing the mandated costs, not the cap.)

The third statement --that private foundations allow only 10-15% rates of indirect cost recovery--doesn't mean anything in itself.  Perhaps Gates et al. have the definitive analysis of true indirect costs that they have yet to share with humanity. Perhaps Gates et al. believe that the federal taxpayer should fund the university infrastructure that they are entitled to use at a massive discount. Perhaps Gates et al. use their wealth and prestige to leverage a better deal for themselves at the expense of the university just because they can.  Which of these interpretations is correct?  NIH-Memoli assume the first but don't actually show that the private foundation rate is the true rate.  (In reality, the second explanation is the best.)

However, the cuts to 15% depend entirely on the private status of these foundations insuring that 15% is the true and valid ICR rate. Since they don't and  it isn't, the solution of 15% isn't right either (the second set of bullets above).  

This kind of critique is worth doing, and it can be expanded. The NIH view reflects right-wing public-choice economics that treat teachers, scientists et al. as simple gain maximizers producing private not public goods. This means that their negotiations with federal agencies will reflect their self-interest, while in contrast the "market rate" is objectively valid. (See Nancy McLean's book on James Buchanan, etc.) However, critique is only half the story.

The other half is the budget reality of large losses on sponsored research, all incurred as a public service to knowledge and society. 

Take that NIH image above. It makes no logical sense to put the endowments of three very untypical universities next to their ICR rates: they aren't connected. It makes political narrative sense, however: the narrative is that fat-cat universities are making a profit on research at regular taxpayers' expense, and getting even fatter. 

The only way to deal with this very effective, very entrenched Republican story is to come clean on the losses that universities incur.  The reality is that existing rates of ICR recovery do not cover actual indirect costs, but require subsidy from the university that performs the research.  ICR is not icing on the budget cake that universities can do without. ICR buys only portion of the indirect costs cake, and the rest is purchased by each university's own "institutional funds."  

For example, here are the top 16 recipients of NIH funds (under HHS- Heath and Human Services). The second largest is UC San Francisco, winning $795.6 million in grants in 2023. (The Higher Education Research and Development (HERD) Survey tables for FY 2023 are here.)

UCSF's negotiated indirect cost recovery rate is 64%. This means that it has shown HHS and other agencies detailed evidence that it has real indirect costs in something like this amount (more on "something like" in a minute).  It means that HHS et al. have accepted that UCSF evidence of their real indirect costs as valid.

If the total of UCSF's HHS $795.6 million is received with a 64% ICR rate, this means that every $1.64 of grant fund has $0.64 in indirect funds and one dollar in direct.  The math-- x=(795.6/1.64)0.64 -- estimates that UCSF receives about $310 million of its HHS funds in the from of ICR.

Now, the new NIH directive cuts UCSF from 64% to 15%. That's a reduction of about 77%. Reduce $310 million by that proportion and you have UCSF keeping $71.3 million of its ICR, or losing $238 million in one fell swoop. 

There's no mechanism in the directive for shifting that into the direct costings of UCSF grants, so let's assume a full loss of $238 million.  That's over 10% of UCSF's research budget.

In Memoli's narrative, this $238 million is the Reaganite's "waste, fraud, and abuse." The remaining $71 million is legitimate overheads as measured (wrongly) by what Gates et al have managed to force universities to accept in exchange for the funding of their researchers's direct costs.  (To repeat, this is quasi-free riding on the federal government by private foundations, not a measure of real vs. fake indirect costs. We do need to make this critique.)

But the actual situation is even worse than this.  It's not that UCSF now will lose $238 million on their NIH research.  In reality, even at (allegedly fat-cat) 64% ICR rates, they were already losing tons of money. Here's another table from the HERD survey.

There's UCSF in the No. 2 national position again, a major research powerhouse.  It spends over $2 billion a year on research.  However, moving across the columns from left to right, you see federal government, state and local government, and then this category "Institution Funds." As with most of these big research universities, this is a huge number.  UCSF reports to the NSF that it spends over $500 million a year of its own internal funds on research.  

The reason? Extramurally sponsored research, almost all in science and engineering, loses massive amounts of money even at current recovery rates, day after day, year in year out. This is not because anyone is doing anything wrong.  It is because the infrastructure of contemporary science is very expensive. 

Here's where we need to build a full counter-narrative to the existing one. The existing one, shared by university administrations and Trumpers alike, posits the fiction that universities break even on research.  UCSF states, "The University requires full F&A cost recovery."  This is actually a regulative ideal that has never been achieved.  

The reality is this:

For every million dollars in research expenditures at UCSF, the university spends $250,000 of its own money. That adds up to half a billion dollars of its own funding spend to support its $2 billion in research.  That money comes from the state, from tuition, from clinical revenues, and some, less than you'd think, from private donors and corporate sponsors.  If NIH's cuts go through, UCSF's internal losses on research--the money it has to make up--suddenly jump from an already-high $505 million to $743 million in the current year.  This is a complete disaster for the UCSF budget. It will massively hit research, students, the campuses's state employees, everything.

The current strategy of chronicling the damage from cuts is good: the best MSM coverage so far is Kaleem & Watanabe.  But it isn't enough. We also need the critique of NIH and this true story of the already existing negative research budget reality.  I'm pleased to see the American Association of Universities, a group of high-end research universities, stating plainly that "colleges and universities pay for 25 percent of total academic R&D expenditures from their own funds. This university contribution amounted to $27.7 billion in FY23, including $6.8 billion in unreimbursed F&A costs." All university administrations need to shift to this kind of candor.

Unless the new NIH cuts are put in the context of continuous and severe losses on university research, the public, politicians, journalists, et al. cannot possibly understand the severity of the new crisis.  And it will get lost in the blizzard of a thousand Trump-created crises, one of which is affecting pretty much every single person in the country.

Finally, our full counter-narrative needs a third element: showing that systemic fiscal losses on research are in fact good, marvelous, a true public service. A loss on a public good is not a bad and embarrassing fact.  Research is supposed to lose money: the university loses money on science so that society gets a long-term gain from it.  Science has negative return on investment for the university that conducts it, so that there is a massively positive ROI for society, of both the monetary and non-monetary kind. Add up the eduction, the discoveries, the health, social, political and cultural benefits: the university courts its own endless fiscal precarity so that society benefits.

We should also remind everyone that the only people who make money on science are in business. And even there ROI can take years or decades. Commercial R&D, with a focus on product development and sales, also runs losses.  Think of "AI": Microsoft alone is spending $80 billion on it in 2025, on top of $50 billion in 2024, with no obviously strong revenues yet in sight.  This is a huge amount of risky investment, --it compares to $60 billion for federal 2023 R&D expenditures on all topics in all disciplines.  I'm an AI skeptic, but appreciate Microsoft's reminder that new knowledge means taking losses and plenty of them.

These up-front losses generate much greater future value of non-monetary as well as monetary kinds. We can remind people of these abundant future benefits as we insist that they confront the size of these research losses (here, here, here, here Stage 2). Look at Penn, Madison, Ann Arbor, Harvard, Pitt in Table 22 above. The sector spent nearly $28 billion of its own money generously subsidizing sponsors' research, including subsidizing the federal government itself. 

There's much more to say about the long-term social compact behind this--how the actual "private sector" gets 100% ICR or significantly more, how state cuts have screwed up the university's lower rate, how student tuition now subsidizes more of STEM research than is fair, how research losses have been a denied driver of tuition increases. There's more to say about the long-term decline of public universities as research centers that, when properly funded, allow knowledge creation to be distributed widely in the society. (See this 2011 post on UCSD losing a major research team to Rice University, when one of the departing scientists broke the silence on the role of public cuts in his departure.)

But my point here is that opening the books on large everyday research loses, especially biomedical losses of the kind NIH creates, is the only way that journalists, politicians, and the wider public will see through Memoli's Trumpian lie about these "no problem" ICR "efficiencies." It's also the only way to move towards the full cost recovery that universities deserve and that research needs. 

UPDATE FEBRUARY 11: (Washington Post)

'Judge Angel Kelley, in federal district court in Massachusetts, ordered the National Institutes of Health not to implement a funding change the agency had announced Friday night, which would dramatically reduce funding to universities and other research organizations for indirect costs related to research.

'Twenty-two Democratic attorneys general sued the Trump administration, the Department of Health and Human Services, and the National Institutes of Health on Monday, charging that the action is in violation of the Administrative Procedure Act.

'In their complaint, the attorneys general said the impact would be immediate and result in layoffs, suspension of clinical trials, disruption of research and laboratory closures. It sought the temporary restraining order only in the 22 states that brought the action, Andrea Joy Campbell, the attorney general of Massachusetts, said in a news conference Monday. The cuts affect everyone in the country, but only Democratic attorneys general stepped up, she said.

'Later Monday, three higher-education associations representing colleges and universities nationally — the Association of American Universities, the Association of Public and Land-grant Universities, and the American Council on Education — also sued in federal district court in Massachusetts.'