Takeaways to understand ‘indirect costs’ and NIH funding

On Feb. 7, the National Institutes of Health (NIH) announced an immediate cap of 15 percent on the Facilities & Administration (F&A) rates on research grants to universities.  For Penn, that would reduce annual funding for medical research by approximately $240 million. A federal judge temporarily blocked this order nationwide, but should the rate cut be allowed to proceed, its impact would be significant for Penn as groundbreaking medical research and life-saving clinical trials would be disrupted or ended. The repercussions for science would be both global and local, endangering research that leads to breakthroughs like the COVID-19 mRNA vaccines and would result in the elimination of thousands of research associated jobs in Philadelphia.  

“NIH-funded research at Penn has enriched the world in innumerable and lifesaving ways, whether combatting cancer with CAR T therapy; developing vaccines with mRNA technology; creating gene editing tools and advancing gene therapy cures; developing drugs that treat a range of maladies, including those that combat macular degeneration and rare forms of congenital blindness—the list is long and powerful in its impact,” said Interim Penn President J. Larry Jameson in a Feb. 11 message to the Penn community. “The reduction in funds announced by the federal government would blunt this critical, lifesaving work.”

The Association of American Universities filed a motion in federal court for a restraining order to block the implementation of these cuts. Penn joined a number of other universities in filing this action.

Here, Penn’s Vice President for Finance and Treasurer Mark Dingfield and Senior Associate Vice Provost and Senior Associate Vice President for Research Missy Peloso offer insights into NIH funding, F&A costs—often referred to as “indirect costs”—and the implications of capping funding on research at Penn. These are just a few takeaways.

F&A (“indirect”) costs support critical infrastructure and personnel

Indirect costs can be broken into two categories: facilities and administrative.

Facilities support includes building maintenance, utilities, shared lab equipment and core facilities—to name just a few items. Patients participating in highly specialized clinical trials at Penn, for example, stay in hospital facilities supported by indirect costs. Federal funds are not used for upkeep of building space not intended for research, meaning that classrooms and lobbies are not included in indirect costs.

Administrative costs, meanwhile, help pay the wages for personnel who are essential for maintaining research functions. This includes staff who have expertise in hazardous waste disposal, regulatory compliance, human and animal safety, and much more.

“There’s a huge amount of infrastructure necessary to make research successful,” says Dingfield. “There was a great analogy in the Inquirer recently. Consider what it takes for the Eagles to be successful. Direct research funding is akin to paying the salaries of the players. But think about the all the people and systems that support the Eagles—there’s physical infrastructure like a stadium and locker rooms, and administration like trainers or coaches. All of these are similar to the support infrastructure that is supported by indirect cost recovery.”

It is also important to understand, says Dingfield, that when Penn receives funding for indirect costs from the NIH, those funds are received as a reimbursement for costs already incurred. He explains that these funds also only cover a portion of the infrastructure necessary to support Penn’s research.

“In FY25, we’re expecting to receive approximately $370 million in indirect cost recovery, in total, from all sources. If we had to support the expenses that are being covered off of that, it would be devastating to the operating budgets of the schools, who receive nearly 90% of the indirect cost recovery, but also to our long-term ability to continue sponsored research at the same levels,” says Dingfield. “We are already heavily subsidizing research with other University funding, including the endowment, so the idea that we could somehow make up for the lost federal funding is incorrect.”

Penn invests significant resources to support compliance with federal regulations

Peloso, who leads a team that supports federally funded research, explains that Penn regularly undergoes audits and reviews from federal agencies, and that Penn staff work tirelessly to ensure regulatory compliance. The University also renegotiates its indirect cost rate every four years. This provides Penn and the federal government an opportunity to review and discuss the underlying costs of conducting research on a systematic basis.

An NIH cut would impact Penn’s workforce

Several thousand positions at Penn are supported by indirect cost recovery, and any reduction in staff would have significant implications for how research proceeds.

“Reducing regulatory and compliance staff across campus would mean that it takes longer to get research online and complete it,” says Peloso. “Will we stop all research? No, but we’ll see a gradual decline in the level of service we’re able to provide to support researchers in the best way we possibly can across campus.”

Cuts would reduce Penn’s research capacity

This model of research funding from the federal government has existed since the post-war era of World War II, empowering research universities like Penn, which serve society, to conduct research independently and creatively in lieu of creating a separate government research arm. To shift from this longstanding precedent would tremendously impede the research capacity at Penn. The impact, as Dingfield says, would be “dire.”

“The finances matter, but more important is the life-changing science, patients, and jobs that would be at risk—and not just at Penn, but throughout the large ecosystem of companies that do business or are affiliated with Penn’s research enterprise,” says Dingfield.

Peloso adds that, while there is an immediate crisis felt from the threat to FY25’s funding, the long-term impact that could ensue cannot be overstated.

“To me, the worst thing is the potential for gradual diminution of research at Penn over time,” she says. “We have world-class research facilities right now; if we lost the ability to continue to build new research infrastructure and new labs for the newest and best technologies, that’s where we lose the science.

“It’s not instant, but it would happen, and it would happen relatively quickly over time.”