The National Institutes of Health’s announcement that it would slash funding that covers overhead costs in research to a 15% maximum poses a grave risk to basic medical research in the United States.

This policy, effective immediately, puts at risk public and private organizations engaged in pioneering scientific research, including cutting-edge fields like synthetic biology, which have the potential to create new industries of scale and drive economic growth.

Ironically, this decision could increase the overall cost of administering research grants, making it more expensive in contrast to retaining historical indirect cost reimbursement rates.

In the end, this policy choice will increase costs and inherently reduce the amount of money available for actual research.

Research institutions receiving funding from the NIH could lose nearly $4 billion; the NIH’s announcement on Feb. 7 indicated it would slash the indirect cost rate allocation to 15%.

Read more of RSM’s insights on the life sciences and biotechnology industries.

In fiscal year 2023, the NIH awarded $35 billion in research grants, with $9 billion allocated to indirect costs, representing an average between 27% to 28% over time of total funds awarded.

The new policy reduces the indirect cost rate for new grants and is retroactively applied to the date of the policy issuance for any current grants that have been awarded to institutions of higher education (IHE).

Research institutions have depended on this funding to cover essential overhead costs, such as building and facility maintenance, debt service interest, medical equipment and back-office support.

These functions enable the United States to contribute to advancements in medical, scientific and other fields on a global scale.

Over the past 10 years, the total funding has increased by $11 billion. For every dollar invested in NIH-funded research, it generates nearly two and a half times in economic activity, according to United for Medical Research’s latest annual report.

These cuts could have broader implications for the economies where research is occurring.

Contribution revenue constitutes the majority (51.6%) of revenue for over 12,000 IRS-designated research organizations, with 36%, or nearly $30 billion, of their revenue originating from government funding, according to the latest publicly available IRS Form 990 data.

The NIH reported that most private foundations funding research impose a 0% overhead cost charge, which influenced the rationale for reducing its own indirect cost allocation rate.

These funding sources are unlikely to absorb the unfunded overhead costs previously covered by the NIH. Most program revenue reported on Form 990 stems from membership fees, offering limited scope for these organizations to increase fees to offset the shortfall in administrative funding.

These institutions—and the critical research functions they perform—are constrained by the charity of donors and the government support.

Source: CauseIQ, RSM

Rethinking the path forward

Shifting overhead expenses to existing alternative funding sources could prove challenging.

Beyond cutting personnel or implementing other cost-reduction measures, alternative approaches may be necessary. Amid the uncertainty, research institutions should consider:

• Taking stock of grants subject to significant exposure.
• Determine where cross-functional collaboration within internal departments or with key partners can assist in reallocating assets and efforts relevant to the progress of awards.
• Evaluate cost accounting methodologies and implement enhanced technology to optimize cost tracking strategies.
• Prioritize existing research projects with the highest impact and potential for future funding and implement systems to create efficient resource management.
• Evaluate opportunities to apply for additional grants from alternative resources such as private foundations and philanthropic organizations.
• Explore commercialization and licensing key processes and technologies.

The takeaway

Endeavors like the NIH cuts, though well intentioned at reducing waste, are inherently self-defeating and could undermine the significant advantage of the United State scientific community.

By inadvertently disincentivizing institutions from investing in world-class facilities, these efforts may hinder researchers from fostering fundamental discoveries and enhancements that have historically driven medical innovations and life-enhancing breakthroughs, which are the foundation of economic development.

Organizations must become more agile and disciplined to advance the NIH’s mission of seeking fundamental knowledge about living systems and applying that knowledge to enhance health, lengthen life, and reduce illness and disability.