Impact of Trump Administration Directives on Scientific Research in the U.S.

Overview

The United States has long held the well-earned position of a world leader in cutting-edge scientific research and innovation. In the past few weeks, the second Trump administration has taken active steps to significantly reshape various aspects of the United States’ federal funding infrastructure, the effects of which are reverberating across all industry sectors. These actions include the February 7, 2025 announcement that the National Institutes of Health (NIH) will cap the indirect costs NIH grantees can recoup at 15% of the amount of each grant. This change represents a seismic shift for institutions accepting federal research funding,¹ including universities, teaching hospitals, and other research institutions, which typically receive almost double or triple that 15% rate. For example, in 2023 alone, NIH provided more than $35 billion in total funding, $9 billion of which was allocated to overhead through indirect cost rate reimbursements. The fate of this new policy remains in flux, as 22 states and a coalition led by the Association of American Medical Colleges (AAMC) quickly filed for injunctive relief. And, on February 10, 2025, a federal district court judge in Massachusetts issued a temporary restraining order barring the administration from imposing the cap in those 22 states, followed later that day by a nationwide injunction in the AAMC case.

Capping Indirect Cost Rates for Federally Funded Research

NIH Guidance

NIH announced in NOT-OD-25-068: Supplemental Guidance to the 2024 NIH Grants Policy Statement: Indirect Cost Rates (the NIH Guidance) that it is implementing a 15% indirect cost rate cap across all NIH grants. This replaces the previous system under which each research institution negotiated rates with NIH based on its actual documented expenses. The NIH Guidance applies to all new grants that NIH issues beginning on February 10, 2025. And, for Institutions of Higher Education (IHEs) and institutions affiliated with IHEs (e.g., teaching hospitals and research institutes), the new policy applies to “all current grants for go forward expenses from February 10, 2025”. In the NIH Guidance, NIH argues that it has the authority to make these unilateral changes to previously negotiated indirect cost rates, even though this is a significant deviation from prior precedent.

What Are Indirect Costs?

Indirect cost rates, or those for “facilities and administration (F&A),” are designed to cover general operational, administrative, and other overhead expenditures of a research institution’s infrastructure. This long-standing arrangement recognizes that those institutions incur substantial expenses to maintain and run facilities that are the backbone of the institution’s entire research enterprise. These F&A expenses are called “indirect” because it is difficult and impractical to directly assign each of these costs to specific aspects of a given research project. As the Code of Federal Regulations specifically recognizes: “[T]ypical examples of indirect (F&A) cost for many nonprofit organizations may include depreciation on buildings and equipment, the costs of operating and maintaining facilities, and general administration and general expenses, such as the salaries and expenses of executive officers, personnel administration, and accounting.”² Since not all universities provide the same resources for each grant or researcher, and because the overhead costs of space, electricity, administration, security, and other personnel vary widely, each university and research institution historically has negotiated its own, specific indirect cost rate with NIH and other federal funding agencies. Finally, it is important to recognize that all NIH grants, including those covering the indirect costs, are subject to incredibly detailed recordkeeping and audit requirements.

NIH Rationale for Reduction and Potential Challenges

The NIH Guidance offers a rationale for this shift: (1) to align indirect costs with those of the private sector — that is, the indirect cost rates that tax-exempt foundation grantors use, and (2) to allocate more of the funding budget toward direct research costs, rather than overhead.

As a basis for aligning federal rates with those of the private sector, the NIH Guidance cited the indirect cost rates of nine philanthropic organizations, which ranged from 10% to 15%. However, many in the research and philanthropic communities consider this to be an apples-to-oranges comparison. Unlike foundations, which typically focus on the interests of their donors or management in a particular research mission, the federal government historically has had a much broader mandate to spur innovation, fund early stage research, and fill the gaps that non-governmental entities and industry are not funding.

In addition, there is a marked disparity between the funding levels that universities and research institutions receive from the government and from nonprofit foundations. Annually, the former provides over $190 billion on research and development, with $35 billion coming from NIH; the latter sector gives out closer to $2 billion a year. This is because, in part, the funds available to foundations to fund research, though substantial, pale in comparison to the funds available to the government. Equally important, NIH and private foundations routinely account for direct costs differently. In particular, foundations often treat certain expenditures (such as those for equipment and facilities) as direct costs of research, even those expenses that may actually be attributable to multiple research projects. By contrast, such costs would be tagged as indirect costs in an NIH grant.

With respect to the second rationale, the White House has commented that capping indirect costs will increase the available budget for direct costs. While this argument has facial appeal, universities have pointed out that the complex, cutting-edge research conducted by U.S. research institutions requires capital-intensive operations and facilities. This “overhead” includes the construction and maintenance of specialized labs, the acquisition of highly sophisticated lab equipment, development and monitoring of protocols for patient safety, compliance with complex regulations applicable to medical research, the disposition of hazardous waste, and security for toxic materials and highly lethal and transmissible pathogens. Generally, these costs cannot be charged to any specific federal grant because they are not allocable to just one research project.

Impact on Universities and Foundations

Each of the lawsuits that have been filed make clear that NIH’s proposed cap will present a significant shortfall in the amount of federal money available to support scientific and medical research in the U.S. Using NIH’s own figure of $9 billion of indirect costs in 2023, the 15% cap would have resulted that year in a cut of as much as $5 billion. Filling that gap on such short notice will be extraordinarily difficult, if not impossible, particularly given the current underfunding of scientific research. The shortfall for IHEs will be particularly acute because the 15% cap applies to existing grants for ongoing research for expenses going forward, which will throw their long-term planning, budgeting, and staffing into disarray in the near term, even if the overall funding for the research portion of grant amounts stays the same.³

The NIH Guidance itself estimates that this new policy will affect grants to more than 2,500 academic research institutions across the U.S., each of which will suffer a significant financial blow to its operational costs and research infrastructure. In addition, a flat indirect cost rate cap will disproportionately affect smaller research universities and teaching hospitals, many of which operate in rural areas and rely on those indirect cost reimbursements to sustain their operations and to provide care to underserved populations. Lastly, critics of the government’s attempt to subject all research institutions to the same flat indirect cost rate have highlighted existing government regulations which expressly acknowledge the “diversity of nonprofit organizations” and note that it is impossible “to specify the types of cost which may be classified as indirect (F&A) cost in all situations.”⁴

Such a deep reduction in indirect cost rates could also have significant ripple effects across university campuses and the U.S. economy. According to the National Center for Science and Engineering Statistics, nearly 200,000 employees worked in research and development within U.S. nonprofit organizations in Fiscal Year 2021: 39% were researchers; 39% were technicians; and 22% were support personnel. Many of those individuals work across grants and a reduction of billions of dollars in funding could well lead to wide-spread layoffs throughout the scientific research community.

How We Can Help

Every university, teaching hospital, and research institute, as well as their foundation and industry collaborators, should quickly consult with knowledgeable counsel about how to identify, prepare for, and respond to this rapidly shifting legal, regulatory, enforcement, and policy landscape.

To assist in these efforts, we are working with clients to:

• Assess reliance on federal funding and explore and negotiate alternative funding and costs savings, including collaborations and resource sharing with other institutions; emergency or bridge funding from foundations; and industry partnerships
• Identify and seek state-level funding to safeguard operations in case of disruption to federal funding streams
• Navigate potential delays in funding from NIH and other federal agencies
• Analyze the terms of NIH and other government contracts to assess legal rights and potential claims against federal funders
• Stay fully informed of the latest developments in this rapidly shifting environment
• Plan for engaging with policymakers in Congress and the executive branch to educate them on the negative impact these cuts will have on essential, life-saving research and related operations
• Formulate and implement a diverse set of litigation strategies
• Reexamine accounting systems to determine whether costs currently recouped through the indirect rate can be appropriately reconsidered and recovered elsewhere

Conclusion

Arnold & Porter is keeping abreast of the recently issued Trump administration executive orders on all industry sectors, including academic research, and will provide updates through the following portal: The Second Trump Administration: Insights on New Executive Actions.

If you have any questions about the content discussed in this Advisory or would like more information, please reach out to one of the authors or any of your existing Arnold & Porter contacts.

© Arnold & Porter Kaye Scholer LLP 2025 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.