The issue of indirect costs associated with federally funded research has a special resonance, given the Trump administration's expressed interest in such matters, but a May 24 congressional hearing suggested that legislators see few good options when it comes to reining in such spending.

The Trump administration's budget for fiscal 2018 included a proposal to impose a uniform indirect cost rate on all NIH grants, one of the administration's moves designed to tamp down on federal spending. The budget proposal also included a substantial cut to budget authority for the FDA, cuts that would be more than offset by increases in user fees, but the administration also seeks more than $5 billion in cuts to the NIH. (See BioWorld Today, May 24.)

Rep. Barbara Comstock (R-Va.), who chairs a subcommittee for the House Committee on Science, Space and Technology, said 20 percent of National Science Foundation grants go to indirect costs; the figure balloons to 27 percent for extramural grants funded by the NIH. Comstock said the committee is looking to streamline overhead costs, which would leave more money for research.

Comstock, added that each government agency negotiates its own indirect cost rates, which sometimes run in excess of 50 percent, noting that smaller colleges and universities have indicated that they have trouble competing with their larger brethren for grants because these universities have difficulty covering indirect costs without putting pressure on tuition rates.

One of the witnesses at the hearing, James Luther, associate vice president for finance at Duke University, said the current system recognizes differences in the underlying costs associated with different types of research. Facilities and administrative (F&A) costs are recognized as a legitimate cost of research, he said, adding that such costs cover functions as basic as turning on the lights and as complex as disposing of bioactive hazards. Luther said that an average of nearly six new regulations governing federally funded research have been promulgated over the past few years, adding to the compliance costs.

Luther said research centers in urban areas necessarily have more facilities costs because the cost of doing business in urban areas is higher across the board, but he noted that a grant for public policy research is also cheaper than for a grant that requires biocontainment facilities.

"It truly is all about the type of research being done," Luther commented, adding that comparisons between federal grants and private sector endowments are complicated for several reasons.

The Gates Foundation will directly pay for things the federal government would not cover, but Luther said a foundation's F&A rate is based on total direct costs rather than modified direct costs. Foundations are also more likely than the federal government to provide incremental funding for ongoing projects, Luther said.

Richard Vedder, a professor of economics at Ohio University, said federal government policy "is seriously flawed," charging that the existing system "creates unnecessary distortions in the operations of universities, and has very high transaction costs."

Vedder said the immediate cost to a university for a $1 million grant is likely "at most several thousand dollars" in many instances, adding, "I think the current system incentivizes universities to pad" expenses because "the more you spend, the more you get. Where is the incentive to have linoleum floors instead of marble?" he asked.

Vedder said a uniform national rate, perhaps 20 percent, could maintain the current level of research activity, and that universities "would still vigorously apply for grants . . . but hold fewer grant-writing workshops." He said that the better endowed colleges and universities tend to have higher indirect cost rates, and while some circumstances legitimize differences in those rates, his school has an overhead rate of 50 percent, while Harvard's is 69 percent.

Vedder argued that a large part of those costs are consumed in negotiations between the source of the grants and the applicant, but also that audits are another cost center that could be relieved with a change in policy. "Why not set a flat rate and be done with it?" Vedder asked.

Luther pushed back by stating that Duke's overhead is not bloat, claiming that Duke and other universities lose money on the cost of a building "regardless of the type of research" being conducted. He agreed that some buildings in places like Harvard have marble floors, but observed that some research requires a $2.5 million DNA sequencer. "It's not the marble. Its everything else that goes into that research," such as facility depreciation, and the unseen costs associated with operations and maintenance, Luther said.

Rep. Dan Lipinski (D-Il.) seemed relatively unconcerned about the indirect cost question, stating that indirect cost calculations are based on modified total direct costs rather than total direct costs. Modified total direct costs can exclude some expenses related to F&A expenses, and thus the indirect cost rates in reality "are much lower than the more commonly reported negotiated rate," Lipinski said. He also made the case that for every federal dollar awarded, institutions spend 30-40 cents for costs associated with a grant.

Comstock closed the hearing without comment other than to note that the record will be kept open for two weeks for additional testimony.