1.) From 2002 to 2012, NIH Indirect Cost Reimbursements to Universities Increased Faster than for Direct Costs, with Most Going to a Small Number of Universities

From fiscal year 2002 to fiscal year 2012, NIH reimbursements to  universities for indirect costs associated with NIH-funded extramural  research increased at a slightly faster rate than those for direct costs, and  during some portions of this period indirect cost growth increased notably  faster than direct cost growth. Higher indirect cost rates tended to be associated  with universities located in high-cost-of-living areas and privately owned  universities. As a result, from fiscal year 2003 to  2012 indirect costs increased 16.9 percent, from about $3.9 billion to   $4.6 billion, while direct costs increased 11.7 percent, from about   $10.3 billion to $11.5 billion. 2 for more details on the  annual change in costs.) For example, during the most recent 5 years (fiscal  year 2008 to fiscal year 2012), NIH’s total funding for extramural research  conducted at universities increased about 5 percent, whereas it had  increased about 21 percent in the 5 previous years (fiscal year 2002 to  fiscal year 2007). In 2012 the 50 Universities with the Largest Research Programs Received Most of the Indirect Cost Reimbursements

In fiscal year 2012, almost 70 percent of NIH indirect cost reimbursement  to universities was provided to about 10 percent of the universities (50 of  a total of about 500) receiving NIH funding for extramural research. Stakeholders Identified Factors Related to Facilities and Administrative Costs That May Increase Reimbursements for Indirect Costs, but NIH Has Not Assessed Their Potential Impact

Stakeholders—university officials, DCA officials, and others—whom we  interviewed identified several key factors that may lead to increases in  reimbursements for indirect costs provided to universities. They explained that  reimbursements for the facilities component of indirect costs—such as the  amount of reimbursable square footage, operations and maintenance,  building depreciation, and interest costs—help to support research  innovation by providing funding for the development and maintenance of  state-of-the-art research facilities. DCA officials stated that the uncapped facilities component of the indirect  cost rate provides universities few, if any, incentives for controlling these  potentially increasing costs. For example, DCA officials noted that there is  no limit on reimbursement for interest costs under the facilities  component. DCA officials stated that while reimbursements for interest  costs may allow universities to support needed renovations or  construction of new facilities, the fact that these reimbursements are not  capped may also encourage universities to borrow money to build new  facilities, which could lead to the building of more new space than is  necessary for research needs. Administrative Cap Controls Potential Increases in Cost Reimbursement due to Growth in Administrative Costs Incurred by Universities

Some stakeholders noted that while the cap on the reimbursement rate  for administrative costs—26 percent—helps to control reimbursements for  indirect costs, it does not account for the recent increases in  administrative costs reportedly incurred by universities. Among research grants to universities specifically, NIH’s  indirect costs are increasing at a faster rate than direct costs. NIH has not made plans for options that might address these trends—in  part because it views increases in indirect costs as having been modest. However, indirect costs already represent one-fifth of NIH’s overall budget  and about one-quarter of NIH’s budget for extramural research. NIH has  experienced small but consistent increases in indirect costs, and factors  suggest that indirect costs could increase more quickly over time in the  future. Recommendation

To help address the uncertainty NIH faces related to the potential impact  of increasing indirect costs on its funding of future research, we  recommend that the Director of NIH assess the impact of growth in  indirect costs on its research mission, including, as necessary, planning  for how to deal with potential future increases in indirect costs that could  limit the amount of funding available for total research, including the direct  costs of research projects. HHS indicated that it agreed with our recommendation and that NIH had  already taken steps to implement it, but HHS disagreed with a number of  our conclusions. While the draft  report acknowledged that indirect costs have remained a stable  percentage of NIH’s overall research costs, it also noted that, for  universities—which received almost two-thirds of NIH’s funding for  extramural research—indirect costs increased notably faster than direct  costs during some recent periods. We remain convinced that increases in indirect  costs could have an effect over the long term on the number and size of  research grants that could be funded, thus posing a risk to scientific  discoveries and knowledge. At that time, we will send copies of this report to the  Secretary of the Department of Health and Human Services, the Director  of the National Institutes of Health, and other interested parties.
Why GAO Did This Study

NIH reimburses universities for both the direct and indirect costs of conducting research. Indirect costs cover general facility and administrative expenses, and are paid as a percentage, or rate, of certain direct costs of awarded grants. GAO was asked to look at the indirect costs of NIH-funded research. This report (1) identifies changes in reimbursements by NIH to universities for indirect costs of NIH-funded research; and (2) examines key factors affecting NIH reimbursement to universities for indirect costs and what assessment NIH has done to address any impact of these costs on NIH's research mission. GAO analyzed NIH data and interviewed officials at NIH, six universities, and other stakeholders. Universities were selected based on the number of grants and amount of funding received from NIH and their negotiated indirect cost rates.

What GAO Found

From fiscal year 2002 to fiscal year 2012, indirect cost reimbursements from the National Institutes of Health (NIH) to universities increased slightly faster than those for direct costs, but increased notably faster during some periods. Specifically, from fiscal years 2002 to 2012, indirect costs increased 28.1 percent while direct costs increased 27.0 percent. However, for the fiscal years 2003 to 2012, indirect costs increased notably faster than direct costs, at 16.9 percent and 11.7 percent, respectively. In more recent years, annual changes were generally small but consistent. This increase occurred during a time when growth in NIH's budget for extramural research slowed to 5 percent from fiscal years 2008 to 2012, compared to about 21 percent from fiscal years 2002 to 2007. In fiscal year 2012, about 10 percent of the universities (50 out of about 500) receiving NIH extramural research funding received almost 70 percent of all indirect cost reimbursement provided to universities. Higher indirect cost rates tended to be associated with universities located in high-cost-of-living areas and privately owned universities.
Stakeholders--university officials, Department of Health and Human Services (HHS) officials, and others--whom GAO interviewed identified several key factors that may lead to increases in reimbursements for indirect costs provided to universities. Some stakeholders reported that reimbursements for one part of indirect costs--the facilities component--help to support research innovation by providing funding for the development and maintenance of state-of-the-art research facilities. However, officials in HHS's Division of Cost Allocation, which is responsible for determining indirect cost rates, stated that the uncapped facilities component of the indirect cost rate provides universities with few, if any, incentives for controlling these costs. For example, these officials noted that there is no limit on reimbursement for interest costs under the facilities component. This may encourage universities to borrow money to build new facilities, which could lead to building more new space than is necessary for research. Some stakeholders also noted that a 26 percent cap on the reimbursement rate for administrative costs--a second component of indirect costs--helps to control reimbursements for those costs; however, they reported it does not account for the recent increases in costs, such as those for regulatory reporting requirements and changing research needs that require advanced medical and information technologies that are considered administrative.
The combination of these trends and factors results in indirect costs growing at a faster rate than direct costs. Indirect costs are one-fifth of NIH's total budget--or $6.2 billion in fiscal year 2012--but NIH officials reported that they have not taken steps to assess the significance of future indirect cost growth for universities, or planned for options that might address these trends or factors--in part because they view increases in indirect costs as having been modest. However, factors suggest that indirect costs could increase more quickly in the future. Over the long term, they could lead to a reduction in the number of research grants that could be funded, thus potentially affecting scientific discoveries and knowledge.

What GAO Recommends

GAO recommends that NIH assess the impact of growth in indirect costs on its mission, including, as necessary, planning for how to deal with potential future increases in indirect costs that could limit the amount of funding available for total research. HHS agreed with GAO's recommendation but disagreed with a number of GAO's conclusions, stating that risk to NIH's mission is low because indirect costs remain a stable percentage of NIH's budget. Due to indications that indirect costs for universities may increase in the future, GAO believes that continually assessing and planning for the impact of growth over the long term is important.