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United States Government Accountability Office: 
GAO: 

Report to the Ranking Member, Committee on the Budget, U.S. Senate: 

September 2013: 

Biomedical Research: 

NIH Should Assess the Impact of Growth in Indirect Costs on Its 
Mission: 

GAO-13-760: 

GAO Highlights: 

Highlights of GAO-13-760, a report to the Ranking Member, Committee on 
the Budget, U.S. Senate. 

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. 

View [hyperlink, http://www.gao.gov/products/GAO-13-760]. For more 
information, contact Linda T. Kohn at (202) 512-7114 or kohnl@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

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: 

Stakeholders Identified Factors Related to Facilities and 
Administrative Costs That May Increase Reimbursements for Indirect 
Costs, but NIH Has Not Assessed Their Potential Impact: 

Conclusions: 

Recommendation: 

Agency Comments and Our Evaluation: 

Appendix I: Indirect Costs and Rates for the Top 50 National 
Institutes of Health--Funded Universities, Fiscal Year 2012: 

Appendix II: Comments from the Department of Health and Human Services: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Table: 

Table 1: Characteristics of the 10 Universities with the Highest 
Indirect Cost Rates among the 50 Universities Receiving the Highest 
Amounts of Indirect Cost Reimbursement, Fiscal Year 2012: 

Figures: 

Figure 1: Total Direct Costs and Modified Total Direct Costs: 

Figure 2: Percent Change from the Prior Year in Reimbursement for 
Direct and Indirect Costs, Fiscal Year 2003 to Fiscal Year 2012: 

Abbreviations: 

DCA: Division of Cost Allocation: 

DOD: Department of Defense: 

HHS: Department of Health and Human Services: 

IC: institutes and centers: 

IT: information technology: 

MTDC: modified total direct costs: 

NIH: National Institutes of Health: 

OMB: Office of Management and Budget: 

ONR: Office of Naval Research: 

[End of section] 

GAO:
United States Government Accountability Office: 
441 G St. N.W. 
Washington, DC 20548: 

September 24, 2013: 

The Honorable Jeff Sessions: 
Ranking Member: 
Committee on the Budget: 
United States Senate: 

Dear Senator Sessions: 

The federal government has recognized that research conducted at 
universities contributes to American competitiveness and leadership in 
science and has committed to sponsoring a share of the research costs. 
[Footnote 1] The Department of Health and Human Services' (HHS) 
National Institutes of Health (NIH) is the nation's leader in 
conducting and sponsoring biomedical research. A large portion of this 
research is extramural research conducted at universities nationwide, 
which is an essential part of how NIH fulfills its mission--to 
understand the nature and behavior of living systems and to improve 
health. In fiscal year 2012, $25.2 billion--or over 80 percent of 
NIH's budget of $30.8 billion--was used to support extramural 
research. NIH reimburses universities for both the direct and the 
indirect costs of conducting biomedical research. Direct costs can be 
specifically attributed to research projects sponsored by NIH grants, 
including costs for labor and materials used solely to carry out 
sponsored research. Indirect costs are not directly attributable to a 
specific project and include various facility and administrative 
expenses incurred by the universities for the shared support of such 
research. Indirect costs represented approximately $6.2 billion in 
fiscal year 2012, or 20 percent of NIH's budget. 

To be reimbursed for direct and indirect costs, universities must 
properly identify and claim reimbursement for these costs in 
accordance with applicable federal guidance. Office of Management and 
Budget (OMB) Circular No. A-21 establishes the principles for 
determining the types of direct and indirect costs that are allowed to 
be claimed and the methods for allocating such costs to federally 
funded research at educational institutions.[Footnote 2] Because 
indirect costs cannot be specifically attributed to a particular 
research grant, they are charged via an indirect cost rate that is 
applied to certain direct costs for each awarded grant.[Footnote 3] 
Each university negotiates an indirect cost rate, based on information 
such as the amount of physical space used for conducting research. 
Most universities negotiate their indirect cost rate with HHS's 
Division of Cost Allocation (DCA).[Footnote 4] Generally, the rate 
stays in effect for 2 to 4 years, at which time a new proposal is 
developed and the rate is renegotiated. Once a university's indirect 
cost rate has been established, a federal agency will generally apply 
that rate to all grants issued to that university.[Footnote 5] 

All federal agencies, including NIH, are responsible for implementing 
internal controls to, among other things, provide reasonable assurance 
that the agency is achieving its goals by operating in an effective 
and efficient manner.[Footnote 6] A key element of internal control is 
risk assessment, which is the identification and analysis of relevant 
risks associated with achieving the agency's objectives. As we 
previously reported, NIH has a program to periodically identify, 
analyze, and manage significant risks to its objectives, strategy and 
mission.[Footnote 7] Since NIH achieves its mission largely through 
extramural research, the indirect and the direct costs of extramural 
research have the potential to affect NIH's ability to achieve its 
objectives and mission. 

We have previously reported that indirect costs can change over time 
and that indirect cost rates at universities varied widely.[Footnote 
8] Furthermore, we have noted that there has been debate over what 
portion of indirect costs is the responsibility of the government and 
what portion is the responsibility of the university.[Footnote 9] 
Given our past work, you requested that we provide information on the 
indirect costs for NIH-funded extramural research. In this report, we: 

1. identify changes in the reimbursements paid by NIH to universities 
to support indirect costs of NIH-funded research and examine the 
characteristics of the top recipients of this funding, such as the 
type of institution and the geographic location; and: 

2. examine the key factors affecting reimbursement to universities for 
the indirect costs of NIH-funded research and what assessment NIH has 
done to address any impact of these costs on NIH's research mission. 

To identify changes in the reimbursements paid by NIH to universities 
to support the indirect costs of NIH-funded research and examine the 
characteristics of the top recipients of this funding, we obtained 
information from NIH on the total amounts of direct and indirect costs 
paid to universities for NIH research grants over the past decade 
(from fiscal year 2002 through fiscal year 2012).[Footnote 10] We 
analyzed the data provided by NIH and identified the top universities--
those receiving the most NIH indirect cost funding--as well as the 
various characteristics associated with these universities. We also 
obtained and reviewed data from HHS's DCA on the indirect cost rates 
for almost 300 universities that received NIH research grant funding 
from fiscal year 2002 through fiscal year 2012.[Footnote 11] We 
reviewed the indirect cost rates among the top universities and 
identified various characteristics--such as the local cost of living 
index, the type of institution, and the geographic location--
associated with those universities. 

To assess the reliability of NIH's grant funding data (including the 
data on direct and indirect cost funding), we reviewed our prior work 
using these data and obtained information from agency officials 
knowledgeable about the reliability of the data. We performed data 
quality checks to assess the reliability of the data received from 
both NIH and DCA. These data quality checks involved an assessment to 
identify missing or incorrect entries or outliers. Based on the 
information we obtained and analyses we conducted, we determined that 
the data we used were sufficiently reliable for the purposes of this 
report. 

In addition, we interviewed stakeholders--including officials with (1) 
NIH, (2) DCA, (3) the Council on Governmental Relations, an 
association of academic research institutions, (4) the Association of 
American Universities, and (5) 6 selected universities--about the 
amount of funding and key characteristics of the 50 universities 
receiving the highest reimbursements for indirect costs. We selected 
the 6 universities from among the top 50 recipients of NIH indirect 
cost funding to include universities that varied in terms of their (1) 
amount of indirect cost funding received; (2) current negotiated 
indirect cost rate; (3) number of grants received; (4) local cost of 
living; and (5) type of university (public versus privately funded). 
[Footnote 12] We focused on the top 50 universities because they are 
responsible for about two thirds of NIH research conducted at 
universities.[Footnote 13] 

To examine the key factors affecting reimbursement to universities for 
the indirect costs of NIH-funded research and what assessment NIH has 
done to address any impact of these costs on NIH's research mission, 
we reviewed relevant laws, policies, and guidance, and interviewed 
relevant officials. Documents we reviewed included OMB Circular No. A-
21--which establishes principles on how the federal government 
reimburses universities for the costs of federally funded research--
and HHS and NIH guidance related to the process for reviewing and 
negotiating indirect cost rate and providing reimbursement of direct 
and indirect costs. We also reviewed proposed revisions to current 
policies for reimbursement of indirect costs issued by OMB and 
literature from stakeholders that include potential changes to address 
reported disadvantages of current policies, and alternative approaches 
to current policies for providing reimbursement for indirect costs. In 
addition, we interviewed officials from HHS's DCA and NIH about how 
they implement policies on indirect costs, how reported key factors 
could affect NIH's funding of future research, and what assessment NIH 
has done to address trends in indirect costs. We also conducted 
interviews with private grant-making foundations that support 
biomedical research to determine their policies on reimbursement of 
indirect costs. 

We conducted this performance audit from February 2013 to September 
2013, in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

Background: 

NIH conducts and sponsors biomedical research through its institutes 
and centers (IC), each of which is charged with a specific mission. 
ICs' missions generally focus on a given disease; a particular organ; 
or a stage in development, such as childhood or old age. ICs 
accomplish their missions chiefly through intramural and extramural 
research. Intramural research entails government scientists working in 
the ICs' own laboratories and clinics, whereas extramural research is 
conducted at outside research institutions, primarily universities, by 
scientists who have been awarded extramural research grants from an IC 
through NIH's competitive process.[Footnote 14] More than 80 percent 
of NIH's total budget of over $30 billion in fiscal year 2012 was used 
to support extramural research. Of this $25.2 billion in extramural 
research grant funding, NIH provided about $16.1 billion to 
universities. 

Components of Direct and Indirect Costs: 

Extramural research grants reimburse universities for the direct costs 
of each research project covered by the grants and a portion of the 
indirect costs of maintaining their facilities for research use and 
covering the administrative expenses of the university. Direct costs 
can be specifically identified with or directly assigned to individual 
research projects and are relatively easy to define and measure. 
[Footnote 15] They include, for example, the researcher's salary, 
subawards,[Footnote 16] equipment, and travel.[Footnote 17] Indirect 
costs represent a university's general support expenses and cannot be 
specifically identified with individual research projects or 
institutional activities. They include, for example, building 
utilities, administrative staff salaries, and library operations. OMB 
Circular No. A-21 establishes the principles for determining the types 
of direct and indirect costs that are allowed to be claimed and the 
methods for allocating such costs to federally funded research at 
educational institutions, including the establishment and use of 
indirect cost rates.[Footnote 18] 

Indirect costs are divided into two main components, facilities costs 
and administrative costs. Facilities costs include: 

* operations and maintenance expenses, such as for utilities;[Footnote 
19] 

* allowances for depreciation and use of buildings and equipment; 

* interest on debt associated with building and equipment; and: 

* library expenses, such as for the use of the library and library 
materials purchased for research use. 

Administrative costs include: 

* general administration expenses, such as the costs associated with 
executive functions like financial management; 

* departmental administration expenses, including clerical staff and 
supplies for academic departments; 

* sponsored projects' administration expenses, which are the costs 
associated with the office responsible for administering projects and 
awards funded by external sources; and: 

* student administration and services expenses, such as the 
administration of the student health clinic. 

Calculation of the Indirect Cost Rate: 

Because indirect costs cannot be specifically attributed to a 
particular research grant, they are charged via an indirect cost rate 
that serves as the mechanism for determining the proportion of 
indirect costs that may be charged to federally funded research 
awards. OMB Circular No. A-21 outlines the process for establishing an 
indirect cost rate for universities performing federally funded 
research. Each university develops a proposed indirect cost rate that 
is based on university cost data from prior years, which is 
subsequently negotiated with the federal government to arrive at a 
final indirect cost rate, in compliance with the principles of OMB 
Circular A-21.[Footnote 20] 

To calculate a university's indirect cost rate, a percentage of each 
indirect cost component is allocated to the university's research 
function on the basis of benefits received from that component by the 
research function. For example, a university can measure the square 
footage of floor space used for research and use this measure to 
allocate the amount of costs it claims for operating and using the 
space as a component in its indirect cost rate proposal. Each indirect 
cost component allocated to research is applied to a modified set of 
direct costs referred to as "modified total direct costs" (MTDC) to 
obtain an individual rate for each component.[Footnote 21] MTDC 
includes the salaries and wages of those conducting the research, 
fringe benefits (e.g., pensions), materials and supplies, travel, and 
the first $25,000 of each subaward. MTDC excludes costs such as 
equipment costs, capital expenditures, tuition remission,[Footnote 22] 
equipment or space rental costs, and the portion of each subaward in 
excess of $25,000.[Footnote 23] (See figure 1.) 

Figure 1: Total Direct Costs and Modified Total Direct Costs: 

[Refer to PDF for image: illustration] 

Total direct costs (TDC) = Sum of direct costs specifically identified 
with particular projects or activities: 
Subawards; 
Equipment; 
Researcher salary. 

For MTDC, certain direct costs or portions of direct costs are 
excluded from TDC: 
Examples of exclusions: 
* Equipment; 
* Portion of subawards in excess of $25,000. 

MTDC = TDC - Exclusions. 

Source: GAO analysis of OMB Circular A-21. 

[End of figure] 

The indirect cost rate is developed as follows: 

* Each portion of the facilities costs (i.e., building use, 
depreciation, operations and maintenance) is divided by MTDC and then 
added together to derive the facilities component of the rate. 

* Similarly, each portion of the administrative costs (i.e., general 
administration, sponsored administration) is divided by MTDC and then 
added together to derive the administrative component of the rate--
which is capped at 26 percent. 

* These individual rates--the facilities and administrative--are then 
summed to obtain the university's indirect cost rate for research. 

In 1991, OMB revised Circular No. A-21 to impose a cap of 26 percent 
on the administrative component of the indirect cost rate. This cap 
was established to curb growth in the amount of indirect costs 
reimbursed to universities.[Footnote 24] This limitation only applies 
to higher education institutions, as stated in OMB Circular No. A-21. 

A university submits a proposal to the federal agency responsible for 
negotiating a final rate--typically DCA. DCA reviews the submitted 
proposal and negotiates a final indirect cost rate with each 
university. DCA is responsible for providing technical assistance and 
guidance to the grantee community in developing indirect cost rate 
proposals, reviewing cost accounting practice disclosure statements, 
and negotiating and approving university indirect cost rates. 

Proposed Changes to OMB Circular No. A-21: 

In February 2013, OMB issued proposed guidance that includes revisions 
to cost principles of OMB Circular No. A-21.[Footnote 25] The proposed 
guidance reflects input from the federal and nonfederal financial 
community, including the Interagency Council on Financial Assistance 
Reform.[Footnote 26] The proposed guidance would, among other things, 
allow more items to be directly charged rather than included as a 
component of the indirect cost rate.[Footnote 27] As of September 
2013, OMB had not issued final guidance. 

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. In fiscal year 2012, 
the 50 universities with the largest research programs received over 
two thirds of total indirect cost reimbursement. Higher indirect cost 
rates tended to be associated with universities located in high-cost-
of-living areas and privately owned universities. 

From 2002 to 2012, Reimbursements for Indirect Costs Increased 
Slightly Faster than Those for Direct Costs, but Increased Notably 
Faster During Some Periods: 

Reimbursements for indirect costs from fiscal year 2002 through fiscal 
year 2012 increased slightly faster than reimbursements for direct 
costs, but increased notably faster during some periods. Over this 
period, NIH reimbursements for indirect costs grew by about 28.1 
percent, from $3.6 billion to $4.6 billion.[Footnote 28] Over the same 
period, NIH reimbursement for direct costs grew by about 27.0 percent, 
from $9 billion to $11.5 billion. However, because there were large 
differences between indirect and direct growth in some years, indirect 
cost reimbursements increased notably faster than direct cost 
reimbursements during some periods. For example, from fiscal year 2002 
to 2003, the first year of this period, there was a large increase in 
direct costs that compensated for greater growth in indirect costs 
during other years. 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. Furthermore, in 6 of the 10 years, 
reimbursements for indirect costs increased relative to those for 
direct costs, by either increasing at a faster rate or declining at a 
slower rate. After fiscal year 2005, annual changes in reimbursements 
were generally small but consistent, with reimbursements for indirect 
costs increasing relative to direct costs in 5 of 7 years. (See figure 
2 for more details on the annual change in costs.) 

Figure 2: Percent Change from the Prior Year in Reimbursement for 
Direct and Indirect Costs, Fiscal Year 2003 to Fiscal Year 2012: 

[Refer to PDF for image: vertical bar graph] 

Fiscal year: 2003; 
Direct costs: 13.7%; 
Indirect costs: 9.5. 

Fiscal year: 2004[A]; 
Direct costs: 1.6%; 
Indirect costs: 6.5. 

Fiscal year: 2005; 
Direct costs: 5%; 
Indirect costs: 2.4. 

Fiscal year: 2006[A]; 
Direct costs: -1.5%; 
Indirect costs: -0.6. 

Fiscal year: 2007[A]; 
Direct costs: 1.7%; 
Indirect costs: 2.1. 

Fiscal year: 2008[A]; 
Direct costs: -0.3%; 
Indirect costs: 0.4. 

Fiscal year: 2009; 
Direct costs: 3%; 
Indirect costs: 2.5. 

Fiscal year: 2010[A]; 
Direct costs: 2.4%; 
Indirect costs: 3.1. 

Fiscal year: 2011[A]; 
Direct costs: -1.4%; 
Indirect costs: -0.5. 

Fiscal year: 2012; 
Direct costs: 0.8%; 
Indirect costs: 0.1. 

[A] Indicates the years for which indirect costs increased relative to 
direct costs. 

[End of figure] 

NIH officials noted that, historically, NIH's reimbursements for 
indirect costs have remained a stable percentage of NIH's total 
funding for all NIH awards overall. Our analysis specifically for 
university research, which accounted for almost two-thirds of NIH's 
funding for extramural research in fiscal year 2012, indicates that in 
2003 about 27.7 percent of NIH reimbursement for university research 
was for indirect costs, and in 2012 this percentage increased slightly 
to 28.6 percent. This occurred while NIH's budget for extramural 
research conducted at universities--which needs to cover both the 
direct and the indirect costs of research--slowed in the last few 
years. 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).[Footnote 29] 

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.[Footnote 30] (See app. I for the indirect cost 
reimbursements for these top 50 universities.) These top 50 
universities had the largest research programs, as defined by the 
largest amount of reimbursement for direct costs and a relatively 
large number of research grants. 

Indirect cost rates varied among these top 50 universities with the 
largest research programs, and the highest indirect cost rates were 
for privately owned universities and those located in high-cost-of-
living areas. The indirect cost rates among the 50 universities ranged 
from 46.5 percent to 69.5 percent.[Footnote 31] For the top 50 
universities, higher indirect cost rates tended to be associated with 
universities in high-cost-of-living areas[Footnote 32] and privately 
owned universities. For example, 8 of the 10 universities with the 
highest indirect cost rates were in areas with above-average costs of 
living, and 9 of the 10 universities with the highest rates were 
private. Some stakeholders reported several other factors that may be 
associated with variation of indirect cost rates among the top 
universities, including whether a university had a medical school or 
was receiving a utility cost adjustment.[Footnote 33] Table 1 shows 
the characteristics of the 10 universities with the highest indirect 
cost rates among the 50 universities receiving the highest amounts of 
indirect cost reimbursement in fiscal year 2012. Among the 10 
universities in the table, those with the highest indirect cost rates 
were Mount Sinai Medical School and New York University School of 
Medicine; Johns Hopkins University and Yale University had the largest 
research programs as measured by the number of NIH grants awarded. 

Table 1: Characteristics of the 10 Universities with the Highest 
Indirect Cost Rates among the 50 Universities Receiving the Highest 
Amounts of Indirect Cost Reimbursement, Fiscal Year 2012: 

University: Mount Sinai School of Medicine; 
Final negotiated indirect cost rate: 69.5%; 
Amount of indirect cost reimbursement: $55.3; 
Number of NIH grant awards: 380; 
Cost of living index[A]: 216.7; 
Type of institution: Private; 
University is or has a medical school: Yes; 
Eligible for the utility cost adjustment[B]: Yes. 

University: New York University School of Medicine; 
Final negotiated indirect cost rate: 69.5%; 
Amount of indirect cost reimbursement: $54.5; 
Number of NIH grant awards: 344; 
Cost of living index[A]: 216.7; 
Type of institution: Private; 
University is or has a medical school: Yes; 
Eligible for the utility cost adjustment[B]: Yes. 

University: Weill Medical College of Cornell University; 
Final negotiated indirect cost rate: 69.0%; 
Amount of indirect cost reimbursement: $35.6; 
Number of NIH grant awards: 257; 
Cost of living index[A]: 216.7; 
Type of institution: Private; 
University is or has a medical school: Yes; 
Eligible for the utility cost adjustment[B]: Yes. 

University: Albert Einstein College of Medicine, Yeshiva University; 
Final negotiated indirect cost rate: 66.0%; 
Amount of indirect cost reimbursement: $53.1; 
Number of NIH grant awards: 353; 
Cost of living index[A]: 159; 
Type of institution: Private; 
University is or has a medical school: Yes; 
Eligible for the utility cost adjustment[B]: Yes. 

University: Yale University; 
Final negotiated indirect cost rate: 65.6%; 
Amount of indirect cost reimbursement: $114.1; 
Number of NIH grant awards: 839; 
Cost of living index[A]: 122.1; 
Type of institution: Private; 
University is or has a medical school: Yes; 
Eligible for the utility cost adjustment[B]: Yes. 

University: University of Massachusetts Medical School, Worcester; 
Final negotiated indirect cost rate: 64.5%; 
Amount of indirect cost reimbursement: $44.3; 
Number of NIH grant awards: 335; 
Cost of living index[A]: 103.3; 
Type of institution: Public; 
University is or has a medical school: Yes; 
Eligible for the utility cost adjustment[B][A]: Yes. 

University: Boston University Medical Campus; 
Final negotiated indirect cost rate: 63.5%; 
Amount of indirect cost reimbursement: $29.1; 
Number of NIH grant awards: 241; 
Cost of living index[A]: 132.5; 
Type of institution: Private; 
University is or has a medical school: Yes; 
Eligible for the utility cost adjustment[B]: Yes. 

University: University of Southern California; 
Final negotiated indirect cost rate: 63.0%; 
Amount of indirect cost reimbursement: $56.4; 
Number of NIH grant awards: 352; 
Cost of living index[A]: 136.4; 
Type of institution: Private; 
University is or has a medical school: Yes; 
Eligible for the utility cost adjustment[B]: Yes. 

University: Johns Hopkins University; 
Final negotiated indirect cost rate: 62.0%; 
Amount of indirect cost reimbursement: $171.8; 
Number of NIH grant awards: 1,227; 
Cost of living index[A]: 119.2; 
Type of institution: Private; 
University is or has a medical school: Yes; 
Eligible for the utility cost adjustment[B]: Yes. 

University: Harvard University; 
Final negotiated indirect cost rate: 61.5%; 
Amount of indirect cost reimbursement: $55.1; 
Number of NIH grant awards: 111; 
Cost of living index[A]: 132.5; 
Type of institution: Private; 
University is or has a medical school: Yes; 
Eligible for the utility cost adjustment[B]: Yes. 

Source: GAO analysis of NIH and Division of Cost Allocation (DCA) data. 

[A] We measured local cost of living using the U.S. Census Bureau's 
"cost of living index" for 2010, which measures relative price levels 
of consumer goods and services in participating areas at a single 
point in time. Localities get a score between 82.8 and 216.7; the 
higher the score, the higher the cost of living. 

[B] Certain universities are eligible for a rate increase of 1.3 
percent to account for the cost of utilities. This rate increase is 
known as the utility cost adjustment. 

[End of table] 

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. Some 
factors are related to the facilities costs, and others are related to 
administrative costs. NIH has not assessed the potential impact of 
future increases in indirect costs on its research mission, including 
planning for how to deal with these potential increases. 

Uncapped Facilities Component of the Indirect Cost Rate Provides Few, 
If Any, Incentives to Control Costs: 

Some stakeholders underscored the importance to the research effort of 
providing funding for the costs of facilities. 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. Some university officials we 
interviewed noted that these research facilities are necessary for 
conducting innovative biomedical research, such as research devoted to 
the role of genetic mutation for breast cancer that uses advanced lab 
space and equipment. They also noted that costs for these facilities 
have increased over time as biomedical research has become 
increasingly sophisticated. For example, a university's officials 
stated that from fiscal year 2002 to fiscal year 2009, the cost of its 
facilities to support research--including those used to support 
advancement in data and computing--has grown from about $88 million to 
about $145 million. 

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. Officials also 
noted that these interest costs are out of DCA's control and may vary. 
For example, at the time of our work, interest rates--which are used 
to determine interest costs--were very low, but they 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. Because of this factor, the 
indirect cost rate could be expected to increase, resulting in a 
potential increase in the amount of indirect cost reimbursements 
provided by NIH. 

In addition, some stakeholders noted that, at the time of our work, 65 
of about 500 universities receiving reimbursement for indirect costs 
in fiscal year 2012 were eligible for a rate increase of 1.3 percent 
to account for the higher cost of utilities.[Footnote 34] DCA 
officials added that OMB's proposed revisions to Circular No. A-21 
would allow all universities to receive some reimbursement for utility 
costs based on a revised formula. As a result, NIH reimbursements for 
indirect costs could be expected to increase as more universities 
would be eligible to include this cost in their indirect cost rates. 

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. For example, 
university officials explained that their administrative costs have 
increased in order to comply with recent changes in regulatory 
reporting requirements, such as those related to reporting conflicts 
of interest. Some university officials explained that they have hired 
additional full-time staff to review and manage various reporting 
requirements as well as invested in additional information technology 
(IT) to support new software related to regulatory requirements. 
Additionally, some stakeholders noted that administrative costs also 
have increased due to trends in the way biomedical research is 
conducted, such as an increase in collaboration between universities 
in research studies and an increased use of IT for biomedical 
research. For example, some university officials explained that many 
biomedical research projects now use advanced technology--such as high-
sequencing technology or imaging--that requires greater investment in 
computing resources by the university. Additionally, one university's 
officials noted that the advancements in IT provide support for 
interconnectivity, complex data security and data privacy 
requirements, and requirements for long-term storage and maintenance 
of electronic data. According to university officials at another 
university, in some instances they may charge some advanced computing 
equipment as a direct cost because it is specifically related to 
research; however, in most instances these computing resources are 
included in the administrative component of the indirect cost rate. 

According to DCA officials, if costs that are part of the capped 
administrative component increase significantly, indirect cost 
reimbursements overall could increase if universities begin to 
categorize some of the costs as part of the uncapped facilities 
component. Specifically, DCA officials explained that currently there 
is a provision in Circular No. A-21 that advises certain limits on 
changing the categorization of certain costs--such as those costs 
incurred by a university that are associated with increased use of 
information technology--from the administrative to the facilities 
component. However, they noted that the proposed revisions to Circular 
No. A-21 did not include such a provision. DCA officials stated that 
they may be limited in their ability to control increases in 
reimbursements associated with these categorization changes if this 
provision is removed and if university administrative costs continue 
to increase. 

NIH Has Not Assessed the Potential Impact of Increases in Indirect 
Costs on Its Mission: 

NIH has not assessed the potential impact of future increases in 
indirect costs on its research mission, including planning for how to 
deal with potential future increases of these costs. As we previously 
reported, NIH has a program to periodically identify, analyze, and 
manage significant risks to its objectives, strategy and mission. 
[Footnote 35] NIH officials noted that they assess risks related to 
all extramural research funding as part of this program, and that this 
assessment does not specifically focus on indirect costs for 
universities. According to NIH officials, NIH has not conducted such 
planning because overall indirect costs have remained around 27 
percent of NIH's total budget for all extramural research, and, in 
their opinion, future cost increases are unlikely to change this 
figure significantly in spite of factors that may contribute to 
increased indirect costs. 

Therefore, NIH officials stated that they do not anticipate the need 
to consider adjusting reimbursements for indirect costs for most 
grants below the amount determined by a university's negotiated 
indirect cost rate, which would require a change in law or 
regulation.[Footnote 36] However, NIH officials told us that should 
indirect costs rise significantly, they may need to reduce the number 
of research projects, which have already been reduced in part because 
of budget limitations and increases in the direct costs of research. 
NIH noted that the reduced budget in fiscal year 2013 resulted in 700 
fewer individual research grants. Even at current levels, indirect 
costs constitute a significant portion of NIH's budget at about 20 
percent. Therefore, over time, increases in indirect costs could cause 
further reductions in the number of research projects that NIH could 
support. 

Conclusions: 

NIH has indicated that NIH funding for both the indirect and the 
direct costs of university research provides critical support for 
biomedical research, covering the indirect costs of operating a 
research institution and the direct costs of specific research 
projects. NIH faces uncertainty related to the potential impact of 
increasing indirect costs on its funding of future research. Among 
research grants to universities specifically, NIH's indirect costs are 
increasing at a faster rate than direct costs. While changes in recent 
years have generally been small, annual changes in reimbursement for 
indirect costs have consistently increased relative to those for 
direct costs, by either increasing at a faster rate or declining at a 
slower rate. Further, this has occurred while the growth in NIH's 
budget for extramural research has slowed in recent years, putting 
pressure on NIH to find ways to continue to maximize its support of 
innovative biomedical research. Several factors are expected to 
contribute to future growth in indirect costs for NIH. These factors 
include that NIH's current system of reimbursing indirect costs--
through indirect cost rates for each university calculated according 
to OMB guidance--provides few, if any, incentives for universities to 
control facilities costs. At the same time, the cost of university 
facilities to support biomedical research is increasing over time, as 
cutting-edge research requires more advanced labs and equipment. 

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. If so, such increases 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. 

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. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to HHS, and HHS provided written 
comments (reprinted in app. II). HHS also provided technical comments, 
which we incorporated as appropriate. 

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. Specifically, HHS stated that NIH assesses the 
impact of indirect costs through its annual budget projections, 
through planning and congressional justifications, and as part of its 
risk management program. The draft report acknowledged NIH's efforts 
in assessing risk facing its extramural research program. However, NIH 
has not indicated how these actions would address our recommendation 
by assessing the potential ongoing impact of indirect costs for 
universities on its funding of future research. Moreover, NIH has not 
developed a plan for how to deal with potential continuing increases 
in indirect costs for universities. Instead, HHS indicated that, in 
past years, increases in indirect costs have been proportionally 
consistent with increases in direct costs, and therefore, there is not 
an immediate risk to NIH's research portfolio. 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. Further, as indicated in the draft report, 
there are multiple indications that, for universities, indirect costs 
are likely to increase at a faster rate in the future, so past 
stability may not be sustained in future years. 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. 

In addition, in its comments, HHS included an analysis of indirect 
costs over the past decade for its overall extramural research 
portfolio. This analysis was different from our analysis because it 
focused generally on extramural research rather than specifically on 
university research. As noted in the draft report, our research 
questions were focused specifically on universities. Moreover, as 
institutions of higher education, universities generally have a 
broader focus on education than research institutions. Further, as 
noted in the draft report, universities are subject to OMB Circular 
No. A-21 and their administrative costs are capped, unlike other 
research institutions. Because of the unique issues that universities 
face, our analysis of indirect costs excluded nonuniversity research 
institutions to avoid the possibility of data from these other NIH 
grantees masking trends for universities, which are the recipients of 
the largest portion of NIH's grant funding. 

Finally, HHS stated that we did not provide an opportunity for the 
department to provide input on our review of NIH's assessment of the 
potential impact of indirect costs on NIH's research mission. We 
disagree with this characterization. NIH provided input on this issue 
to us during three separate meetings. For all three meetings, we 
provided discussion questions in advance. During one of the meetings, 
we and NIH officials discussed the key facts that were to be included 
in the draft report, including this issue. In addition, we offered NIH 
officials the opportunity to provide additional information in 
writing, as appropriate. 

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. 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. In addition, the report will be available at no charge on 
GAO's website at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-7114 or at kohnl@gao.gov. Contact points for 
our Office of Congressional Relations and Office of Public Affairs can 
be found on the last page of this report. Other major contributors to 
this report are listed in appendix III. 

Sincerely yours, 

Signed by: 

Linda T. Kohn: 
Director, Health Care: 

[End of section] 

Appendix I: Indirect Costs and Rates for the Top 50 National 
Institutes of Health--Funded Universities, Fiscal Year 2012: 

University: Johns Hopkins University; 
Reimbursement for indirect costs ($): $171,842,189; 
Indirect cost rate: 62.0%. 

University: University of Pennsylvania; 
Reimbursement for indirect costs: $132,558,612; 
Indirect cost rate: 60.0%. 

University: University of Michigan at Ann Arbor; 
Reimbursement for indirect costs: $128,851,678; 
Indirect cost rate: 55.5%. 

University: University of California San Francisco; 
Reimbursement for indirect costs: $123,730,058; 
Indirect cost rate: 54.5%. 

University: University of Pittsburgh at Pittsburgh; 
Reimbursement for indirect costs: $115,284,723; 
Indirect cost rate: 51.5%. 

University: University of Washington; 
Reimbursement for indirect costs: $114,508,104; 
Indirect cost rate: 54.0%. 

University: Yale University; 
Reimbursement for indirect costs: $114,126,199; 
Indirect cost rate: 65.5%. 

University: University of California at San Diego; 
Reimbursement for indirect costs: $107,909,828; 
Indirect cost rate: 54.5%. 

University: Stanford University; 
Reimbursement for indirect costs: $101,755,908; 
Indirect cost rate: n/a. 

University: Duke University; 
Reimbursement for indirect costs: $101,094,258; 
Indirect cost rate: 57.0%. 

University: Washington University; 
Reimbursement for indirect costs ($): 100,949,670; 
Indirect cost rate: 52.0%. 

University: University of California Los Angeles; 
Reimbursement for indirect costs: $92,485,025; 
Indirect cost rate: 54.0%. 

University: Vanderbilt University Medical Center; 
Reimbursement for indirect costs: $89,397,501; 
Indirect cost rate: 56.0%. 

University: University of North Carolina Chapel Hill; 
Reimbursement for indirect costs: $89,328,438; 
Indirect cost rate: 48.0%. 

University: Columbia University Health Sciences; 
Reimbursement for indirect costs: $88,890,770; 
Indirect cost rate: 60.0%. 

University: Emory University; 
Reimbursement for indirect costs: $74,684,383; 
Indirect cost rate: 55.0%. 

University: University of Minnesota Twin Cities; 
Reimbursement for indirect costs: $66,118,864; 
Indirect cost rate: 52.0%. 

University: University of Wisconsin Madison; 
Reimbursement for indirect costs: $60,091,265; 
Indirect cost rate: 50.5%. 

University: University of Southern California; 
Reimbursement for indirect costs: $56,436,393; 
Indirect cost rate: 63.0%. 

University: Mount Sinai School of Medicine; 
Reimbursement for indirect costs: $55,349,423; 
Indirect cost rate: 69.5%. 

University: Harvard University[A]; 
Reimbursement for indirect costs ($): 55,128,269; 
Indirect cost rate: 61.5%. 

University: New York University School of Medicine; 
Reimbursement for 
indirect costs: $54,484,823; 
Indirect cost rate: 69.5%. 

University: Albert Einstein College of Medicine, Yeshiva University; 
Reimbursement for indirect costs: $53,081,812; 
Indirect cost rate: 66.0%. 

University: Oregon Health and Science University; 
Reimbursement for indirect costs: $51,944,196; 
Indirect cost rate: 54.0%. 

University: University of Texas Southwestern Medical Center--Dallas; 
Reimbursement for indirect costs: $51,217,775; 
Indirect cost rate: 58.5%. 

University: University of California Davis; 
Reimbursement for indirect costs: $50,658,691; 
Indirect cost rate: 53.5%. 

University: University of Chicago; 
Reimbursement for indirect costs: $50,134,610; 
Indirect cost rate: 57.0%. 

University: Baylor College of Medicine; 
Reimbursement for indirect costs: $48,366,907; 
Indirect cost rate: 56.5%. 

University: University of Alabama at Birmingham; 
Reimbursement for indirect costs: $47,643,167; 
Indirect cost rate: 46.5%. 

University: Northwestern University at Chicago; 
Reimbursement for 
indirect costs: $47,324,211; 
Indirect cost rate: 54.5%. 

University: University of Texas MD Anderson Cancer Center; 
Reimbursement for indirect costs: $46,842,255; 
Indirect cost rate: [B]. 

University: Case Western Reserve University; 
Reimbursement for indirect costs: $46,746,052; 
Indirect cost rate: 57.0%. 

University: University of Colorado Denver; 
Reimbursement for indirect costs: $46,231,183; 
Indirect cost rate: 53.0%. 

University: University of Iowa; 
Reimbursement for indirect costs: $45,128,057; 
Indirect cost rate: 51.0%. 

University: University of Massachusetts Medical School Worcester; 
Reimbursement for indirect costs: $44,347,569; 
Indirect cost rate: 64.5%. 

University: University of Rochester; 
Reimbursement for indirect costs ($): 43,942,735; 
Indirect cost rate: 54.5%. 

University: Ohio State University; 
Reimbursement for indirect costs ($): 39,755,792; 
Indirect cost rate: 52.5%. 

University: University of Illinois at Chicago; 
Reimbursement for indirect costs: $38,574,578; 
Indirect cost rate: n/a. 

University: University of Maryland Baltimore; 
Reimbursement for indirect costs: $38,569,736; 
Indirect cost rate: 48.0%. 

University: University of Utah; 
Reimbursement for indirect costs: $37,945,477; 
Indirect cost rate: 49.5%. 

University: Weill Medical College of Cornell University; 
Reimbursement for indirect costs: $35,555,472; 
Indirect cost rate: 69.0%. 

University: University of Miami School of Medicine; 
Reimbursement for indirect costs: $33,617,736; 
Indirect cost rate: 53.0%. 

University: University of California Irvine; 
Reimbursement for indirect costs: $32,851,174; 
Indirect cost rate: 53.0%. 

University: Indiana University--Purdue University at Indianapolis; 
Reimbursement for indirect costs: $32,389,023; 
Indirect cost rate: 55.0%. 

University: Massachusetts Institute of Technology; 
Reimbursement for indirect costs: $31,992,836; 
Indirect cost rate: n/a. 

University: University of Virginia Charlottesville; 
Reimbursement for indirect costs: $31,890,011; 
Indirect cost rate: 54.0%. 

University: University of California Berkeley; 
Reimbursement for indirect costs: $30,868,910; 
Indirect cost rate: 53.5%. 

University: Boston University Medical Campus; 
Reimbursement for indirect costs: $29,091,950; 
Indirect cost rate: 63.5%. 

University: University of Florida; 
Reimbursement for indirect costs : $28,396,985; 
Indirect cost rate: 46.5%. 

University: Cleveland Clinic Lerner College/Med-CWRU; 
Reimbursement for indirect costs: $26,451,255; 
Indirect cost rate: n/a. 

Source: GAO analysis of NIH and Division of Cost Allocation (DCA) data. 

Note: 

n/a = not available: this institution does not negotiate its indirect 
cost rate with DCA. 

[A] Harvard University negotiates three separate rates--one for the 
university, one for its School of Public Health, and one for its 
Medical School. The information reported here is for the university. 

[B] While NIH classifies this institution as a university, it is 
classified by DCA as a hospital. Therefore, a rate is not available 
because hospitals have a different rate-setting process than 
universities. 

[End of table] 

[End of section] 

Appendix II: Comments from the Department of Health and Human Services: 

Department of Health & Human Services: 
Office of The Secretary: 
Assistant Secretary for Legislation: 
Washington, DC 20201: 

August 30, 2013: 

Linda Kohn: 
Director, Health Care: 
U.S. Government Accountability Office: 
441 G Street NW: 
Washington, DC 20548: 

Dear Ms. Kohn: 

Attached are comments on the U.S. Government Accountability Office's 
(GAO) report entitled, "Biomedical Research: NIH Should Assess The 
Impact on Its Mission of Growth in Indirect Costs" (GAO-13-760).
The Department appreciates the opportunity to review this report prior 
to publication. 

Sincerely, 

Signed by: 

Jim R. Esquea: 
Assistant Secretary for Legislation: 

Attachment: 

General Comments Of The Department Of Health And Human Services (HHS) 
On The Government Accountability Office's (GAO) Draft Report Entitled, 
"Biomedical Research: NIH Should Assess The Impact On Its Mission Of 
Growth In Indirect Costs" (GAO-13-760): 

The Department appreciates the opportunity to review and comment on 
this draft report. 

GAO 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 N11-I 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 Response: HHS concurs with the GAO's recommendation. Furthermore, 
NIH has already implemented the recommendation. Assessing the impact 
of F&A costs has always been a significant consideration and part of 
the NIH annual budget projections, planning and congressional 
justifications, as well as part of our risk management program. 
Indirect costs are a necessary cost of doing scientific research, and 
NIH considers the total cost of a grant (direct and indirect costs) 
when determining the amount of each grant awarded. Further, it is 
important to note that long-term trends and prior analysis conducted 
by NIH indicate that indirect costs have been a proportionally 
consistent part of the overall NIH budget for more than two decades. 
Accordingly, we conclude that the risk of growth in indirect costs 
adversely impacting the research mission and funding available for 
research is low. 

GAO's recommendation emanates from statements in the report that NIH 
has not assessed the potential impact of increases in indirect costs 
on its research mission. However, this objective was not included as 
part of the GAO notification letter and we did not have the 
opportunity to provide input on this objective during the field work 
phase of this engagement. The following general comments describe the 
efforts we have taken to assess the impact of indirect costs on our 
agency budget. 

NIH Conducted Assessments of Indirect Costs: 

GAO concludes on pages 18-19 that the risk assessments NIH performs 
under our agency's risk management program do not address indirect 
costs or their potential impact. To the contrary, NIH has a 
comprehensive risk management program that addresses significant risks 
to its ability to achieve its mission. We continually evaluate 
numerous risks during the process of planning NIH extramural funding 
decisions, which includes assessing total costs of awards (direct and 
indirect costs) that encompass the ever-changing environment and 
emerging issues. 

With respect to the risk of growth in•indirect cost rates, the 
Department of Health and Human Services Division of Cost Allocation 
(DCA)-—the entity responsible for reviewing indirect cost rate 
proposals and negotiating indirect cost rates for each of the 
universities for which it is responsible—-states that rising indirect 
cost rates should not be a substantial immediate risk to the federal 
government because indirect cost rates are normally set on a 
predetermined basis and are negotiated on a three- to four-year basis. 
Further, as required by the cost principles, the negotiated indirect 
cost rate in effect at the time of award to be used for the life of 
the award effectively eliminates any potential risk to a grant award 
that the indirect cost rate will increase. 

We disagree with GAO's conclusion that states, "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. If so, such increases could have an effect over the long term 
on the number and size of research grants that could be funded." 
According to the available data, indirect costs as a proportion of the 
NIH budget have remained below 30 percent over the last 25 years. NIH 
conducted this analysis of funding in 2010 as part of the Future of 
Biomedical Research (FBMR) project. The NIH Deputy Director for 
Extramural Research presented the results of this analysis at the 
December 2010 meeting of the Advisory Committee to the Director,
NIH. Further, in our recent FY 2014 Congressional Justification (see 
chart below), we noted that indirect costs from FY 2002 to FY 2012 
(the time period of GAO's review) remained at approximately 27 percent. 

Table: FY 2014 Congressional Justification: Statistical Data - Grants, 
Direct, and Indirect Cost Awarded (Dollars in Thousands): 

Fiscal year: 2002; 
Direct Cost Awarded: $12,822,068; 
Indirect Cost Awarded: $4,835,456; 
Percent of Total: 
Direct Cost Awarded: 72.6%; 
Indirect Cost Awarded: 27.4%; 
Percent Change: 
Direct Cost Awarded: 13.4%; 
Indirect Cost Awarded: 11.7%. 

Fiscal year: 2003; 
Direct Cost Awarded: $14,445,631; 
Indirect Cost Awarded: $5,301,292; 
Percent of Total: 
Direct Cost Awarded: 73.2%; 
Indirect Cost Awarded: 26.8%; 
Percent Change: 
Direct Cost Awarded: 12.7%; 
Indirect Cost Awarded: 9.6%. 

Fiscal year: 2004; 
Direct Cost Awarded: $14,892,783; 
Indirect Cost Awarded: $5,647,066; 
Percent of Total: 
Direct Cost Awarded: 72.5%; 
Indirect Cost Awarded: 27.5%; 
Percent Change: 
Direct Cost Awarded: 3.1%; 
Indirect Cost Awarded: 6.5%. 

Fiscal year: 2005; 
Direct Cost Awarded: $15,419,089; 
Indirect Cost Awarded: $5,795,178; 
Percent of Total: 
Direct Cost Awarded: 72.7%; 
Indirect Cost Awarded: 27.3%; 
Percent Change: 
Direct Cost Awarded: 3.5%; 
Indirect Cost Awarded: 2.6%. 

Fiscal year: 2006; 
Direct Cost Awarded: $15,219,138; 
Indirect Cost Awarded: $5,781,293; 
Percent of Total: 
Direct Cost Awarded: 72.5%; 
Indirect Cost Awarded: 27.5%; 
Percent Change: 
Direct Cost Awarded: -1.3%; 
Indirect Cost Awarded: -0.2%. 

Fiscal year: 2007; 
Direct Cost Awarded: $15,387,745; 
Indirect Cost Awarded: $5,876,060; 
Percent of Total: 
Direct Cost Awarded: 72.4%; 
Indirect Cost Awarded: 27.6%; 
Percent Change: 
Direct Cost Awarded: 1.1%; 
Indirect Cost Awarded: 1.6%. 

Fiscal year: 2008; 
Direct Cost Awarded: $15,295,950; 
Indirect Cost Awarded: $5,903,730; 
Percent of Total: 
Direct Cost Awarded: 72.2%; 
Indirect Cost Awarded: 27.8%; 
Percent Change: 
Direct Cost Awarded: -0.6%; 
Indirect Cost Awarded: 0.5%. 

Fiscal year: 2009; 
Direct Cost Awarded: $15,683,872; 
Indirect Cost Awarded: 66,027,543; 
Percent of Total: 
Direct Cost Awarded: 72.2%; 
Indirect Cost Awarded: 27.8%; 
Percent Change: 
Direct Cost Awarded: 2.5%; 
Indirect Cost Awarded: 2.1%. 

Fiscal year: 2010; 
Direct Cost Awarded: $16,040,991; 
Indirect Cost Awarded: $6,193,567; 
Percent of Total: 
Direct Cost Awarded: 72.1%; 
Indirect Cost Awarded: 27.9%; 
Percent Change: 
Direct Cost Awarded: 2.3%; 
Indirect Cost Awarded: 2.8%. 

Fiscal year: 2011; 
Direct Cost Awarded: $15,849,082; 
Indirect Cost Awarded: $6,173,769; 
Percent of Total: 
Direct Cost Awarded: 72.0%; 
Indirect Cost Awarded: 28.0%; 
Percent Change: 
Direct Cost Awarded: -1.2%; 
Indirect Cost Awarded: -0.3%. 

Fiscal year: 2012; 
Direct Cost Awarded: $15,978,032; 
Indirect Cost Awarded: $6,182,900; 
Percent of Total: 
Direct Cost Awarded: 72.1%; 
Indirect Cost Awarded: 27.9%; 
Percent Change: 
Direct Cost Awarded: 0.8%; 
Indirect Cost Awarded: 0.1%. 

Fiscal year: 2013 Annualized CR; 
Direct Cost Awarded: $16,058,190; 
Indirect Cost Awarded: $6,213,918; 
Percent of Total: 
Direct Cost Awarded: 72.1%; 
Indirect Cost Awarded: 27.9; 
Percent Change: 
Direct Cost Awarded: 0.5%; 
Indirect Cost Awarded: 0.5%. 

Fiscal year: 2014 President's Budget; 
Direct Cost Awarded: $16,165,258; 
Indirect Cost Awarded: $6,255,349; 
Percent of Total: 
Direct Cost Awarded: 72.1%; 
Indirect Cost Awarded: 27.9%; 
Percent Change: 
Direct Cost Awarded: 0.7%; 
Indirect Cost Awarded: 0.7%. 

[End of table] 

We have recently assessed the trend in increased application 
submissions for competing applications for investigator-initiated 
research project grants (RPGs) (see more at [hyperlink, 
http://nexus.od.nih.gov/a11/2012/08/09/more-apolications-many-more-
applicantsit4sthash.LBwbsViz.dput]). Our assessment shows an 
increasing trend in the amount of direct costs requested during the 
time period FY I 998-FY 2011, from $4.4 billion in fiscal year 1998 to 
just over $13 billion in fiscal year 2011. The amount of money awarded 
to competing applications during that time period increased from $1 
billion to around $2 billion. 

Driven by larger grant awards, the indirect costs proportionally 
increase as well. However, the rate of growth of reimbursements of 
indirect costs differed from the growth rate in direct costs by only 
1.1 percent (28.1 vs. 27.0, respectively). As a result, indirect costs 
as a percentage of total costs have changed very little, from 28.4 
percent in FY 2002 to 28.6 percent in FY 2012. 

Additionally, when NIH assessed the potential impact of indirect 
costs, we came to a different conclusion than GAO. NIH reviewed and 
analyzed the data set that the GAO used for its data analysis to 
determine the reason for the differing conclusions. We determined that 
GAO looked at a unique slice of NIH-funded entities (i.e., the data 
was limited to U.S. Domestic Institutions of Higher Education). From 
our analysis, we found that as a percentage of all research grant 
obligations, indirect costs to universities have actually decreased 
slightly, from 21.6 percent in FY 2002 to 21.4 percent in FY 2012.
More detailed analysis and comments related to the data set provided 
to the GAO follow: 

"From 2002 to 2012, Reimbursements for Indirect Costs Increased 
Slightly Faster Than Those For Direct Costs, But Increased Notably 
Faster During Some Periods." 

In actuality, the rate of growth of reimbursements of indirect costs 
to universities differed from the growth rate in direct costs by only 
1.1 percent (28.1 vs. 27.0, respectively). As a result, indirect costs 
as a percentage of total costs have changed very little, from 28.4 
percent in FY 2002 to 28.6 percent in FY 2012. 

Figure: Indirect Costs (% of Total): 

[Refer to PDF for image: line graph] 

[End of figure] 

As a percentage of all research grant obligations, indirect costs have 
actually decreased slightly, from 21.6 percent in FY 2002 to 21.4 
percent in FY 2012. 

Figure: Indirect Costs as % of NIH Research Grant Funding: 

[Refer to PDF for image: line graph] 

[End of figure] 

Where GAO states, "furthermore, in 6 of the 10 years, reimbursements 
for indirect costs increased relative to those for direct costs...," 
if there is no real difference in the growth rates of direct and 
indirect costs, only random fluctuation, we would expect changes in 
indirect costs to exceed changes in direct costs 50 percent of the 
time. Six of the 10 years is not statistically significant from 
chance. Similarly, larger indirect cost increases in 5 of the last 7 
years is not statistically significant. 

Furthermore, GAO states that "...in 2003 about 27.7 percent of NIH 
reimbursement for university research was for indirect costs, and in 
2012 this percentage increased slightly to 28.6 percent." Of the 11 
years studied, FY 2003 had the lowest indirect cost percentage. The 
percentage was higher in both the preceding and following years. In 
the following year, FY 2004, indirect costs represented 28.6 percent 
of reimbursements for university research, identical to the percentage 
in FY 2012. 

Lastly, GAO says "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 6 percent of the 
universities (50 of a total of about 800) receiving NIH funding for 
extramural research." 

These 50 universities received 70 percent of indirect cost 
reimbursement in FY 2012 because they received 69 percent of the total 
funding to universities. These 50 institutions represent
about 10 percent of the 489 institutions funded (there were about 800 
institutions that received funding in at least one of the 11 years 
studied; only 489 received funding in FY 2012). 

In FY 2012, about 95 percent of research funding to universities went 
to 150 institutions. The distribution of indirect cost rates among the 
top 50 was similar to the overall distribution among the 150 
universities. 

Figure: [Refer to PDF for image: vertical bar graph] 

Percentage of universities plotted against Indirect costs as a 
percentage of Total Cost Reimbursement: 

For: 
Top 50; 
Top 95% funded universities. 

[End of figure] 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Linda T. Kohn, (202) 512-7114 or kohnl@gao.gov: 

Acknowledgments: 

In addition to the contact named above, Will Simerl, Assistant 
Director; N. Rotimi Adebonojo; George Bogart; Amy Leone; and Roseanne 
Price made key contributions to this report. 

[End of section] 

Footnotes: 

[1] For the purposes of this report, the term "universities" refers to 
domestic higher education institutions. 

[2] Office of Management and Budget, Cost Principles for Educational 
Institutions, OMB Circular No. A-21 ((incorporated in 2 C.F.R. 220) 
(2012)). 

[3] The indirect cost rate is applied to certain direct costs--
referred to as "modified total direct costs" (MTDC). For MTDC, certain 
direct costs or portions of direct costs are excluded from total 
direct costs, such as equipment costs. For example, for a grant award 
with total direct costs of $110,000, a MTDC of $100,000, and an 
indirect cost rate of 50 percent, NIH would reimburse the university 
$50,000 for the indirect costs of research for a total grant award of 
$160,000. 

[4] OMB Circular No. A-21 assigns responsibility to negotiate rates to 
either HHS or the Department of Defense (DOD). (OMB Circular A-21, G, 
11, a, (1).) DCA handles this responsibility within HHS, and the 
Office of Naval Research (ONR) does so for DOD. As of 2010, DCA is 
responsible for negotiating rates with more than 1,000 universities, 
while ONR is responsible for 44 universities. 

[5] While OMB Circular No. A-21 requires agencies to adhere to the 
negotiated rate while it is in effect, an agency may apply a different 
rate when required by law or regulation. (OMB Circular A-21, G,11, b.) 

[6] See GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: Nov. 1, 1999). 

[7] See GAO, National Institutes of Health: Completion of 
Comprehensive Risk Management Program Essential to Effective 
Oversight, [hyperlink, http://www.gao.gov/products/GAO-09-687] 
(Washington, D.C.: Sept. 11, 2009). 

[8] See GAO, National Institutes of Health Extramural Research Grants: 
Oversight of Cost Reimbursements to Universities, [hyperlink, 
http://www.gao.gov/products/GAO-07-294R] (Washington, D.C.: January 
31, 2007); and University Research: Policies for the Reimbursement of 
Indirect Costs Need to Be Updated, [hyperlink, 
http://www.gao.gov/products/GAO-10-937] (Washington, D.C.: Sept. 8, 
2010). 

[9] See [hyperlink, http://www.gao.gov/products/GAO-10-937]. 

[10] Our analysis focused on the relative differences between changes 
for indirect cost reimbursements and direct cost reimbursements. 
Therefore, we do not adjust the changes in reimbursements for 
inflation. 

[11] We obtained and reviewed data for approximately 300 "long-form 
universities," which are those universities that use a "long form" 
during negotiations with DCA because their total federal funding is 
greater than $10 million per year. 

[12] For indirect cost funding amount, indirect cost rate, and the 
number of grants, we used fiscal year 2012 data. For cost of living, 
we used the U.S. Census Bureau's "cost of living index" for 2010. 

[13] Our review does not include nonuniversity grantees (such as 
nonacademic research institutions) that received NIH grant funding. 

[14] For more information on NIH funding provided to universities, see 
[hyperlink, http://www.gao.gov/products/GAO-07-249R]. 

[15] See OMB Circular No. A-21, D,1. 

[16] A subaward is an award provided by a recipient of a federal award 
to another researcher, for the performance of substantive work under 
the federal award. 

[17] Certain direct costs or portions of direct costs are excluded 
when estimating indirect cost rates. Examples of these exclusions are 
equipment and portions of subawards in excess of $25,000. 

[18] OMB Circular No. A-21 requires all costs for reimbursement to be 
allowable, allocable, and reasonable, and provides that the federal 
government bear its fair share of total costs, determined in 
accordance with generally accepted accounting principles, except where 
restricted or prohibited by law. A cost is allowable if it is 
reasonable, is allocable to the agreement, is treated consistently 
with generally accepted accounting principles appropriate to the 
circumstances, and conforms to principles in OMB Circular No. A-21 and 
the sponsoring agreement. A cost may be considered reasonable if the 
nature of the goods or services acquired or applied, and the amount 
involved, reflect the action that a prudent person would have taken 
under the circumstances prevailing at the time the decision to incur 
the cost was made. A cost is allocable to a particular cost objective 
(i.e., a specific function, project, sponsored agreement, department, 
or the like) if the goods or services involved are chargeable or 
assignable to such cost objective in accordance with relative benefits 
received or other equitable relationship. (OMB Circular No. A-21, C.) 

[19] Certain universities are eligible for a rate increase of 1.3 
percent to account for the cost of utilities--known as the utility 
cost adjustment. 

[20] While OMB Circular No. A-21 requires agencies to adhere to the 
negotiated rate while it is in effect, an agency may apply a different 
rate when required by law or regulation. (OMB Circular A-21, G,11, b.) 

[21] Universities use a standard format, also known as the long form, 
for submitting their indirect cost rate proposals to their cognizant 
rate-setting agency. However, universities whose total direct costs on 
federal awards do not exceed $10 million in a fiscal year may use a 
simplified method for determining the indirect cost rate applicable to 
all federal awards. Whereas universities above the $10 million 
threshold must use an MTDC base, universities using the simplified 
method may use either salaries and wages as their base, or MTDC. As 
already noted, this report focuses on those universities that used the 
standard format for proposal submission. 

[22] Tuition remission is compensation provided to graduate research 
assistants in lieu of salary. 

[23] Costs for subawards over $25,000 and equipment are excluded 
because they can involve very large expenditures but usually do not 
require the university's facilities and administrative support. 

[24] 56 Fed. Reg. 50224 (Oct. 3, 1991) (relevant provision currently 
codified at OMB Circular A-21, G, 8, a). 

[25] 78 Fed. Reg. 7282 (Feb. 1, 2013). 

[26] This Council included NIH and other federal agencies. It reviewed 
issues related to the application of OMB Circular No. A-21 for 
federally sponsored research at universities, including the 
administrative burden associated with current policies and costs. 
Specifically, the Council solicited comments from stakeholders and 
provided various recommendations to OMB for consideration in its 
proposed revisions. 

[27] The proposed revision would include the costs of certain 
computing devices as allowable direct costs. 

[28] Our analysis generally focused on the relative differences 
between changes for indirect cost reimbursements and direct cost 
reimbursements. Therefore, we do not adjust the changes in 
reimbursements for inflation. Percentages are calculated based on the 
total amounts of reimbursement reported by NIH; the amounts of 
reimbursements in our narrative are rounded. 

[29] This change in reimbursement for extramural research includes 
only research grants awarded to universities, and does not include 
training grants. 

According to NIH officials, the difference between the increases in 
direct and indirect costs during the period from fiscal year 2002 to 
fiscal year 2007 and the increases in these costs from fiscal year 
2008 to fiscal year 2012 was due in part to NIH's budget doubling in 
fiscal years 1999 through 2003. 

[30] NIH provided direct and indirect cost data for 802 universities 
that received extramural research funding from fiscal year 2002 to 
2012. 

[31] Indirect cost rates for 5 universities out of the top 50 were not 
available from DCA. 

[32] We measured local cost of living using the U.S. Census Bureau's 
"cost of living index" for 2010, which measures relative price levels 
of consumer goods and services in participating areas at a single 
point in time. Localities get a score between 82.8 and 216.7; the 
higher the score, the higher the cost of living. We defined high cost 
of living as an index of greater than 120. 

[33] Certain universities are eligible for a rate increase of 1.3 
percent to account for the cost of utilities. This rate increase is 
known as the utility cost adjustment. 

[34] The utility cost adjustment was implemented in 1998 to replace a 
system of special utility cost studies. It was made available to 65 
institutions identified in Exhibit B of OMB Circular No. A-21, based 
on whether they had submitted a special study in their most recent 
indirect cost rate proposal. Universities on the list receive this 
adjustment in addition to the utilities portion of indirect costs that 
a school negotiates based on its proposal. Although OMB Circular No. A-
21 states that, beginning in July 2002, federal agencies must 
reevaluate periodically the eligibility of institutions to receive the 
utility cost adjustment, no changes have been made to the list since 
the utility cost adjustment was implemented in 1998, as we reported in 
2010. 

[35] See [hyperlink, http://www.gao.gov/products/GAO-09-687]. 

[36] As previously noted, while OMB Circular No. A-21 requires 
agencies to adhere to the negotiated rate while it is in effect, an 
agency may apply a different rate when required by law or regulation. 
(OMB Circular A-21, G,11, b.) 

[End of section] 

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