Source: Pierre Azoulay, et al., “Indirect Cost Recovery in U.S. Innovation Policy: History, Evidence, and Avenues for Reform,” (working paper 33627, National Bureau of Economic Research, Cambridge, Massachusetts, June 2025)
Commentary: The U.S. government has funded research at universities for nearly 80 years, with the majority of funding allocated to the direct costs of research. However, the government also funds the indirect costs of research, including infrastructure, equipment, and lab space, with indirect cost recovery (ICR). Because indirect costs are difficult to quantify on an annual basis, universities and the government have negotiated ICR rates for decades, with the government paying a set percentage point above the direct costs of research to cover indirect costs. These negotiated rates averaged between 43 and 56 percent; however, due to cost caps, the actual rate paid to research institutions averaged between 35 and 45 percent, which covers only a portion of indirect costs.
In February, the National Institutes of Health (NIH), the world’s largest funder of biomedical research, announced a flat 15 percent ICR rate for all NIH grantees, a sharp reduction in the effective rates paid to universities. Under this new rate, most institutions will lose between 15 and 20 percent of their current NIH funding. At least a dozen institutions will lose more than $1 million per year. The universities that will experience the greatest declines in funding are highly ranked institutions with successful biomedical research programs, where research is linked to more commercial patents, more valuable commercial patents, and a greater number of FDA-approved drugs.
