A little over a week ago, the National Institutes of Health issued a new guidance policy on indirect costs in Federal grant awards. Presently, NIH negotiates the indirect cost rate with individual institutions through a carefully regulated process that ensures an appropriate rate for a given institution’s unique circumstances, while also providing robust safeguards and auditing requirements to ensure that the rate is no greater than necessary. The new policy—similar to what the previous Trump administration proposed in 2017—would replace the negotiated rates with a standard rate of 15%. For comparison, the average rate among grantee institutions is around 27%, and many of the top research institutions currently have negotiated rates exceeding 50% or even 60%, which amount to tens of millions of dollars in some cases. The rate cap would apply both prospectively to new grants, as well as to all in-progress grants.
Indirect costs are the institutional expenditures that cannot be attributed to a particular research project. These are the costs of keeping the lights on, and the lab clean, and the MRI machine running. They pay for biocontainment labs, or clinical testing facilities, or computer systems to analyze data, facilities each of which might be shared by multiple NIH-funded projects. Though indirect, they are significant costs incurred by the institution and are an unavoidable part of conducting grant-funded research. From a government efficiency standpoint they are also highly desirable, in that they reduce unnecessary redundancy as well as exceedingly time-consuming and expensive bookkeeping.
Support for indirect costs in grant funds is essential to institutions’ ability to take part in Federal grant-making. If the new guidance policy is allowed to stand, universities collectively expect to lose many hundreds of millions of dollars from the move, losses which in turn will lead to decreases in important, sometimes life-saving research. This new policy has raised serious concerns among affected institutions.
To say things are moving quickly in Washington, these days, would be an understatement. The administration has, of course, been releasing a flurry of sometimes sweeping executive orders. The pace is dizzying. In this case, in the space of just four days—two of which were a weekend—the NIH issued its guidance; at least three different lawsuits were filed, each in the District of Massachusetts; and a judge entered a temporary restraining order on the guidance. A hearing on the restraining order is scheduled for February 21 (the cases have not yet been consolidated, though they almost certainly will be if they proceed).
In our view, there are multiple clear violations of law in the guidance, both of statute and of the Constitution. While we await the hearing, we thought it worthwhile to highlight to authors some of legal challenges it will face. Many others have already written on this topic—for more responses to the guidance policy, we recommend COGR’s collection of responses from the grantee community, as well as this post by Holden Thorpe in Science and this post from Lisa Janicke Hinchliffe in Scholarly Kitchen (which draws important connections to scholarly publishing).
Some Fact-Checking
At the outset, an examination of the issuing guidance reveals holes in the chain of authority that anticipate problems with the new order. For example, the guidance asserts that “NIH may, however, use ‘a rate different from the negotiated rate for either a class of Federal awards or a single Federal award.’ 45 C.F.R. 75.414(c)(1).” The citation at the end refers to Title 45, part 75 of the Code of Federal Regulations, where NIH’s parent agency, the Department of Health and Human Services (HHS), codifies its grant guidelines. Here is the entire paragraph:
“Negotiated indirect cost rates must be accepted by all Federal agencies. A Federal agency may use a rate different from the negotiated rate for either a class of Federal awards or a single Federal award only when required by Federal statute or regulation, or when approved by the awarding Federal agency in accordance with paragraph (c)(3) of this section.” 45 C.F.R. § 75.414(c)(1) (emphasis added).
Note that this paragraph doesn’t say NIH generally may use a different rate, as the guidance appears to claim. Rather, it states the exception—they may not do so unless they are required to by statute or another regulation. Alternatively, under paragraph (c)(3) of the regulation, NIH must “implement, and make publicly available, the policies, procedures and general decision making criteria that their programs will follow to seek and justify deviations from negotiated rates.” (emphasis added). The paragraph doesn’t give NIH general permission, it constrains them.
The notice’s very next sentence provides arguably its most egregious claim, namely that the cap may be applied retroactively to existing grants, in defiance of institutions’ reliance on their contractually negotiated rates. The notice states that “NIH may deviate from the negotiated rate both for future grant awards and, in the case of grants to institutions of higher education (‘IHEs’), for existing grant awards. See 45 CFR Appendix III to Part 75, § C.7.a; see 45 C.F.R. 75.414(c)(1).” The citation, to Appendix III of Part 75, purports to support the claim that NIH may unilaterally, and retroactively, alter the terms of a contract. Here is the cited paragraph, in its entirety:
“Except as provided in paragraph (c)(1) of § 200.414, Federal agencies must use the negotiated rates in effect at the time of the initial award throughout the life of the Federal award. Award levels for Federal awards may not be adjusted in future years as a result of changes in negotiated rates. “Negotiated rates” per the rate agreement include final, fixed, and predetermined rates and exclude provisional rates. “Life” for the purpose of this subsection means each competitive segment of a project. A competitive segment is a period of years approved by the Federal awarding agency at the time of the Federal award. If negotiated rate agreements do not extend through the life of the Federal award at the time of the initial award, then the negotiated rate for the last year of the Federal award must be extended through the end of the life of the Federal award.” (emphasis added)
Once again, the cited text not only does not support the claim, but if anything forecloses it. This paragraph does not purport to give permission to change an existing agreement. To the contrary, the paragraph requires NIH to respect the negotiated rate for the life of the award. (Sec. 200.414(c)(1), referenced in the appendix, points to the OMB Uniform Guidance, and is essentially the same as HHS’s Sec. 75.414(a), which is discussed above).
The end result is that the notice rests its legal authority to carry out the policy on regulations that in fact work against the new policy. Not a great start.
Violation of law and policy
Though federal agencies are ultimately under the direction of the President, this does not give the executive branch unfettered authority to dictate an agency’s policies. Agencies act as agents for carrying out the laws passed by Congress. This means that Congress has the last word as to what an agency is authorized to do or not do, or must do or not do. In fact, every act of an agency must, in some way, be tied to an act of Congress (admittedly, the connection is often fairly loose).
Congress has actually prohibited the president—this president—from capping the negotiated indirect cost rates. In 2017, when the president pressed Congress to limit indirect costs to 10% of the grant award, Congress not only rejected the idea, but in Sec. 226 of the Consolidated Appropriations Act of 2018 (p.394) they forbade the president from pursuing the policy. Under Sec. 226 rider, Congress provided that the existing regulations pertaining to indirect costs are to continue, and that the department may not expend funds in pursuing a policy to the contrary. The rider has persisted in every appropriations bill since, including the most recent one.
The policy also is contrary to HHS’s own regulations that govern new policies such as this one. The notice purports to “implement, and make publicly available, the policies, procedures and general decision making criteria” as required by 45 CFR 75.414(c)(3) (discussed above), but in fact it only satisfies one of the three requirements. The notice publishes a policy (the 15% rate cap), but it does not make the procedures or general criteria available as required by the regulation. And publication must occur prior to the policies’ effective date, not simultaneously with it.
Under the Administrative Procedure Act (APA), in place since 1946, Congress has established the courts’ jurisdiction to review agency actions, such as this one, and to “decide all relevant questions of law.” The courts are empowered to set aside agency actions that are not in accordance with law, whether because they are contrary to the agency’s own regulations, acts of Congress, or the Constitution. As the three complaints observe, Congress has forbidden NIH from changing the system of negotiated indirect costs, and the new policy is also in violation of the agency’s own regulations.
Constitutional violations
The Constitution also has something to say about the guidance. In addition to the separation of powers problems, related to Congress’s actions discussed above, the retroactive nature of the guidance raises problems under the Fifth Amendment’s due process and takings clauses. These problems arise because the guidance professes to alter the indirect costs for existing grants, effectively unilaterally rewriting the grant agreements without regard to the institutions’ justified reliance on the binding nature of the agreements.
Contracts are a form of property, and contracts are binding on the U.S. Government to the same extent that they are on private parties. Though grant agreements are not formally contracts per se, the Supreme Court has observed that legislation enacted under the Spending Clause, as all grants are, is “much in the nature of a contract.” The grant agreements bind the grantee institution to numerous terms and conditions (some of which could be said to be consideration for the award) in return for federal financial support for the project. The grant agreements are clearly binding on both parties, and renegotiation of a contract requires consent of both parties.
States, for their part, are explicitly forbidden from legislating their way out of contractual agreements, such as the NIH purports to do, under the Constitution’s Contracts Clause, but that clause does not apply to the Federal government. Still, the Federal government is prohibited, under the Fifth Amendment, from taking private property (and again, contracts are property) for public use without just compensation, and from depriving a party of property (for any purpose) “without due process of law.” Grantee institutions rely on the government’s promise to follow through on the agreed upon, negotiated indirect cost rate, and that reliance interest is in some cases hundreds of millions of dollars. NIH’s implementing this new policy, and with no notice (much less a hearing or opportunity to comment as the APA would require) sounds a lot like deprivation of property without due process.
Conclusion
NIH-funded research has produced an astonishing amount of highly significant, impactful research, and its role in the biomedical research ecosystem is pivotal. The authors NIH has funded have won every major prize in the field many times over, and their research has saved and improved countless lives. But NIH’s track record is only as strong as its grantees—authors who do the research and the institutions that employ them. If NIH is permitted to recklessly cut its promised support to those grantees, the inevitable resulting loss of research will be a great detriment to the scientific community, both home and abroad, and to Americans in general.