University-Facility Costs Rise Faster Than Grants, NIH Is Warned

Overhead payments to universities conducting federally sponsored medical research have been increasing faster than grant values, cutting the efficiency of taxpayer support for scientific discovery, Congressional auditors warned last week.

The payments by the National Institutes of Health for so-called indirect costs—meaning facility and administrative expenses—rose 16.9 percent from 2003 to 2012, the U.S. Government Accountability Office said in a report. But average grant payments to scientists rose only 11.7 percent during that period, the report said.

That widening gap, driven almost exclusively by rising spending on infrastructure at universities, “could lead to a reduction in the number of research grants that could be funded, thus potentially affecting scientific discoveries and knowledge,” the audit agency said.

The GAO analysis was requested by a Republican senator, Jeff Sessions of Alabama, his party’s top-ranking member on the Senate Budget Committee, as part of his general search through the federal budget for places to cut spending.

“We ought to be doing our best to make sure that the core function of the agency is being met, as opposed to noncore functions,” said the senator’s spokesman, Andrew Logan, referring to indirect-cost payments by the NIH. “Every dollar that’s spent on that diverts money away from the direct research functions.”

The NIH challenged some of the report’s central conclusions, saying that indirect-cost payments were integral to the research enterprise, not separate from it, and that the agency had a good overall handle on cost containment. Both the NIH and universities have become accustomed, over the years, to periodic criticism by lawmakers of indirect costs, which involve a complicated set of considerations and negotiations with scientific institutions, said Sally J. Rockey, the NIH’s deputy director for extramural research.

“They’re often an easy target because people don’t understand them,” she said.

Costs Have Remained Steady

The NIH has an annual budget of about $30-billion, most of which it uses to finance medical research by outside scientists, primarily at universities. As with other federal agencies, its grants consist of a “direct” portion, meaning the money the scientist uses for salaries and equipment in the lab, and an “indirect” supplement that the host institution uses to cover general infrastructure and administrative costs.

Indirect costs at the NIH typically total about half as much as direct portions. In its report, provided in late September to Mr. Sessions and publicly released last week, the GAO warned that continued growth in indirect costs could limit the NIH’s ability to finance research.

In its response to the GAO, the NIH largely dismissed the concern, saying that it has a rigorous system for verifying what universities claim as indirect charges, and that the proportion of overall NIH spending on indirect costs has remained steady for 25 to 30 years. “The process is very appropriate for establishing these rates,” Ms. Rockey said.

The GAO said, however, that it based the report’s calculations only on payments to universities—the single largest group of NIH grant recipients—and that it saw factors unique to academic settings that could be driving up indirect-cost payments.

Those factors include the government’s mandatory ceiling on administrative expenses, which leaves only building and facility charges as an avenue for universities to claim higher indirect-cost reimbursements, and a general push by universities for newer and expanded research facilities, encouraged by historically low interest rates.

Interest rates “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,” the report said. “Because of this factor, the indirect-cost rate could be expected to increase.”

‘A Very Good Deal’

Such alarms may draw attention on Capitol Hill, though tackling the issue of indirect costs at the NIH isn’t likely to stand out among all the other pressing demands facing lawmakers these days, said Tobin L. Smith, vice president for policy at the Association of American Universities, which represents top research institutions.

“We’re always concerned when there are issues raised,” he said. “Not because we think there are real problems, but because explaining how this all works, and the history, and why it actually is a system that makes sense, starting with just the rates, is challenging.”

Under the system used by the NIH and other federal agencies, each university negotiates every few years with a government body to determine the specific percentage, based on local costs and other factors, for its amount of indirect-cost payment.

Leading Universities in Indirect Costs

Following are the 10 universities with the highest indirect-cost rates among the 50 institutions that received the most indirect-cost payments from the National Institutes of Health in the 2012 fiscal year.

As part of its report, the GAO identified the 50 universities that collected the most indirect-cost reimbursement from NIH in the 2012 fiscal year, and listed the 10 among those with the highest negotiated percentages. The top four were all in New York City, and the other six were all in major metropolitan areas, mostly on the East Coast.

Leading the list was the Mount Sinai School of Medicine, with an indirect-cost reimbursement rate of 69.5 percent. The school received 380 NIH grants in the 2012 cycle and $55.3-million in indirect-cost payments.

Such numbers are reasonable in a city with enormous real estate and construction costs, said Stephen T. Harvey, Mount Sinai’s senior vice president for finance. The school’s latest building, the Hess Center for Science and Medicine, cost $1,000 per square foot to build, Mr. Harvey said. And buildings typically take five years to fill, he said, meaning the institution has to cover the formidable costs of a partly empty facility during that time.

“We eat the difference here,” Mr. Harvey said. “The government’s getting a very good deal.”

‘Quick Action’ Not Likely

Senator Sessions is still evaluating the situation, said Mr. Logan, his spokesman, and isn’t likely to take any quick action based on the GAO findings. “We just want to make sure we’re guarding every taxpayer dollar as best we can,” he said.

More immediately, the White House’s Office of Management and Budget is close to concluding more than two years of study of possible revisions in its “circulars,” the documents that set the key operating guidelines for federal-grant reimbursement. An announcement of the new circular policy is expected next month, said the AAU’s Mr. Smith.

As part of their review process, OMB officials had considered replacing the system of negotiated indirect rates with flat rates. That idea—opposed by universities—was set aside, the AAU said in a recent report to its members, while universities remain hopeful for other changes, including letting grant recipients count some administrative costs as direct charges and allowing higher indirect rates for public institutions that face declining state support.