Billions at stake as appeals court hears NIH arguments on indirect costs

Questions and comments from federal appeals court judges during a hearing Wednesday suggested they may be skeptical of some of the Trump administration’s central arguments in a lawsuit challenging its proposed changes to research overhead payments.

The case centers on a multibillion-dollar question: Did the National Institutes of Health, the nation’s largest funder of biomedical research, violate federal law in connection with a reported plan to slash support for research overhead?

The plaintiffs, which include 22 states as well as universities and academic groups, allege that the NIH’s policy to cap overhead costs, currently blocked by a lower court ruling, is “arbitrary and capricious” and thus violates the Administrative Procedure Act, a law that governs how federal agencies implement new regulations. They also claim the policy violates language included in Congressional appropriations.

The Trump administration argued that the federal district court did not have jurisdiction to make its decision and that even if it did, the NIH has the authority to restrict overhead costs and announced the policy in a manner consistent with federal law. The administration asked the appeals court to either overturn the lower court’s decision or send the case back to the district court with instructions to dismiss it for lack of jurisdiction.

There were several moments when members of the three-judge panel of the First Circuit Court of Appeal in Boston questioned the government’s jurisdictional argument, which treats the indirect costs case as a contract dispute that must be handled in the U.S. Court of Federal Claims, which can award damages but generally cannot issue injunctions to prevent a reduction in payments in the first place. As precedent, the administration cited a case involving the Department of Education and California regarding the termination of subsidies.

“I don’t completely agree with your argument that this is actually more about individual grant terminations than an agency-wide policy. [changes] that a majority of the Justices of the Supreme Court… stated that it could be challenged under the [Administrative Procedure Act]and therefore the district court had jurisdiction to decide,” Judge Julie Rikelman said.

Other judges were equally skeptical. In an exchange with Judge Kermit Lipez, Justice Department lawyer Jennifer Utrecht, representing the Trump administration, told the judge that his questions about the merits of the policy meant “you have rejected our arguments about jurisdiction.”

Lipez read a congressional appropriations bill intended to prevent the federal Department of Health from adopting a “modified approach” to indirect cost policy.

“It’s not just a changed approach, it’s a radically changed approach,” he said of the proposed changes. “I would say that might be the end of the story, if that’s a good way to read the rider.”

The justices did not speak definitively or issue a decision, nor did they hint at when they might issue an opinion.

Wednesday’s hearing marked the latest skirmish in a contentious, multi-front battle between the Trump administration and the scientific community. The first salvo was fired in early February, when the NIH announced it would reduce its support for overhead costs, also known as indirect costs. The term describes facility and administrative expenses that include costs such as maintaining lights in laboratories and salaries of administrators who help prepare grants. Direct costs, which can be more easily linked to particular projects, include reagents and scientist salaries.

The federal government negotiates with each university to set institution-specific indirect cost rates, which often vary between 30% and 70% of a grant’s direct costs. The NIH announced that it would cap these payments at 15 percent for all current and future grants, noting that the move would save the government $4 billion annually and that taxpayer dollars would be better spent on direct spending.

The policy, announced late Friday afternoon, was to take effect the following Monday. Many academics immediately warned that the 15% cap would halt biomedical progress and jeopardize the country’s pre-eminence in research. STAT’s own analysis of public finances showed that some universities and academic medical centers — including institutions in conservative states — could lose more than $100 million a year if the change is implemented.

The legal response was rapid. Three lawsuits were filed in the U.S. District Court of Massachusetts on the day the cap was supposed to take effect. The plaintiffs in these cases included attorneys general representing 22 states and organizations representing public and private universities, hospitals and academic medical centers.

In April, a federal judge issued a permanent injunction blocking the policy. But the administration quickly appealed the decision and is also seeking to cap payments for indirect costs from the National Science Foundation, the Department of Energy and the Department of Defense.

The ongoing legal wrangling is one of several ways the administration, academic groups and lawmakers are seeking to shape indirect cost policy. Case in point: In late July, the Senate Appropriations Committee approved a bill that retained language intended to prevent the administration from deviating from negotiated indirect rates, noting that the current system has “been essential to supporting federally funded research.” Yet in September, a House subcommittee introduced a bill that would limit overhead costs at wealthy private universities and colleges. Both efforts have been blocked by the current government paralysis.

Separately, the Trump administration issued an executive order in August on grantmaking that directs federal agencies, “all other things being equal,” to preferentially award grants to institutions with lower indirect cost rates. Experts have warned that the provision could trigger a race to the bottom that prioritizes the cost of research over quality. The order also directs the White House Office of Management and Budget to revise the Uniform Guidance, a government framework for managing grants and other awards, to “appropriately limit” indirect cost recovery. The OMB has not yet announced updated guidance.

Many of the academic groups that have sued the administration are simultaneously seeking a compromise, including the Association of American Universities, the Association of Public and Land-grant Universities and the Association of American Medical Colleges. A coalition of 10 organizations assembled a team of policy experts led by Kelvin Droegemeier, a former Trump adviser, and proposed a new model that would give research institutions two options for overhead reimbursement: detailed expense accounting that would turn most indirect costs into direct costs, or a less burdensome option that would pay a fixed percentage of a project’s total budget for certain research and facilities costs.

Some senators have expressed interest in the model. A member of Droegemeier’s team told STAT that OMB appreciates the proposal’s increased transparency but is concerned that it could increase federal overhead at a time when the agency has been given clear instructions to do the opposite.

It’s unclear which of these disparate efforts will turn into lasting policy. But taken together, they offer growing evidence that, whatever the courts decide, the current system appears headed for major upheaval.