Cap Purports to Apply to All Current and Future NIH Grants
The Trump Administration's recent efforts to apply stricter controls to grant funding took another step forward on Friday night, when the U.S. National Institutes of Health ("NIH")—the nation's top funder of biomedical research—issued a notice stating it would immediately lower the maximum indirect cost rate that all NIH grantees can charge the government.
Late on February 7, NIH issued Notice Number NOT-OD-25-068, entitled "Supplemental Guidance to the 2024 NIH Grants Policy Statement: Indirect Cost Rates." The Notice imposes a standard indirect rate of 15 percent across all NIH grants for indirect costs, in lieu of a separately negotiated rate for indirect costs in every grant. For any new NIH grant issued, and for all existing grants to institutions of higher education ("IHEs"), award recipients are subject to the 15 percent indirect cost rate.
The cap begins immediately—as of February 10, 2025.
Authority of NIH to Cap Indirect Costs is Legally Questionable
NIH's applying the 15 percent cap to existing IHE awards, on one-day's notice, where a much higher indirect cost rate has already been negotiated and is in effect during the pendency of the award, is fraught with legal risk. In fact, twenty-two states promptly sued HHS and NIH on Monday, February 10. The complaint, filed in federal district court in Massachusetts, seeks to enjoin NIH from implementing the new cap, charging that the action violates the Administrative Procedure Act to the extent it "fail[ed] to articulate the bases for the categorical rate cap of 15 percent, its failure to consider the grant recipients' reliance on their negotiated rates, and its disregard for the factual findings that formed the bases for the currently operative negotiated indirect cost rates." See Commonwealth of Massachusetts et al v. National Institutes of Health, et al, No. 25-cv-10338 (D. Mass. Feb. 10, 2025), ¶ 9 at 5.
Grant regulations in the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards ("Uniform Guidance"), 2 C.F.R. Part 200, set forth a "carefully regulated process," id. at 3, governing negotiation of indirect cost rates. Appendix III to Part 200 addresses adjustment of rates on existing federal awards to IHEs instructing: "Federal agencies must use the negotiated rates in effect at the time of the initial award throughout the life of the Federal award. Award levels for Federal awards may not be adjusted in future years as a result of changes in negotiated rates." See 2 C.F.R. Part 200, Appendix III(C)(7) ("Fixed Rates for the Life of the Sponsored Agreement"). Similarly, the Uniform Guidance ("UG"), provides, with respect to impacts upon rates based on recent UG changes, that "[e]xisting negotiated indirect cost rates will remain in place until they expire. The effective date of changes to indirect cost rates must be based upon the date a newly re-negotiated rate goes into effect for the recipient's or subrecipient's fiscal year." 2 C.F.R. § 200.110(b).
These provisions, as well as principles from various U.S. Supreme Court cases holding that award terms must be set at the time of an award, complicate the government's attempt to impose a new, 15 percent indirect rate cap on an immediate basis to current NIH grants without any negotiation with grantees. The unprecedented nature of this Notice means that its ultimate legal validity should be closely watched by all federal grantees, not just research institutions.
Anticipated Reallocation of Indirect Costs
For many NIH grantees, this unilaterally-imposed cap will represent a significant decrease in the rate NIH pays toward administration and overhead costs, and will create substantial budget deficits. Research institutions' indirect cost rates often range from 25 percent to 60 percent based upon real costs of administration inherent in their complex activities.
Looking simply to the expected impacts of such a cap on existing awards, NIH grantees will face a choice of either (i) adjusting their cost allocation methodology to reduce the costs they treat as indirects or (ii) simply forgoing substantial portions of actual indirect costs on their NIH awards. For those entities that are primarily NIH-funded, we would anticipate research entities may choose to allocate their facilities costs directly, increasing short-term administrative burden in establishing compliant cost allocation plans, but softening the impact of the 15 percent cap on operations.
Of course, despite the asserted immediate effect of this new cap, we are not certain, given the text of the Notice, what guidance, if any, will NIH issue for grantees to adjust their accounting methodologies on existing grants.
Given some of the uncertainty as indicated above, we expect that NIH grantees will have many questions—and attempt to seek further clarity—as to the details of this significant change and the impact that such a revenue loss could have on scientific research
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