Federal appeals court judges’ questions and comments 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 revolves around a multibillion dollar question: Did the National Institutes of Health, the nation’s premier funder of biomedical research, violate federal law in an announced plan to slash support for research overhead?
The plaintiffs, which include 22 states as well as universities and academic groups, allege that the NIH policy seeking to cap overhead payments, 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 has argued that the federal district court did not have jurisdiction to issue its ruling, and that even if it did, the NIH has the authority to restrict overhead payments and announced the policy in a manner consistent with federal statutes. The administration has requested that the appeals court either reverse the lower court’s decision or send the case back to the district court with instructions that it be dismissed due to a lack of jurisdiction.
There were several moments when members of the three-judge panel of the First Circuit Court of Appeals in Boston questioned the government’s jurisdictional argument, which treats the indirect cost case as a contract dispute that must be handled in the U.S. Court of Federal Claims, which can award monetary damages but generally cannot issue injunctions to prevent reduced payments in the first place. As precedent, the administration cited a case involving the Department of Education and California over terminated grants.
“I’m not quite following your argument that this is actually more like the individual grant terminations, rather than the agency-wide policy [changes] that a majority of the Supreme Court justices … said could be challenged under the [Administrative Procedure Act], and therefore the District Court did have jurisdiction to decide,” said Judge Julie Rikelman.
Other judges were similarly skeptical. During an exchange with Judge Kermit Lipez, Department of Justice attorney Jennifer Utrecht, representing the Trump administration, told the judge that his questions about the merits of the policy meant “you have rejected our arguments on jurisdiction.”
Lipez read from congressional appropriations language meant to prevent the federal health department from taking a “modified approach” to indirect cost policy.
“It’s not just a modified, it’s a dramatically modified approach,” he said of the proposed changes. “I would suggest that might be the end of the story, if that’s a proper way to read the rider.”
The judges did not definitively weigh in and issue a bench ruling, nor did they hint at when they might issue an opinion.
Wednesday’s hearing marked the latest skirmish in a contentious, multipronged battle between the Trump administration and the scientific community. The first salvo was fired in early February, when the NIH announced that it would reduce support for overhead, also known as indirect costs. The term describes facility and administrative expenses that include such costs as keeping the lights on in labs and the 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 range from 30% to 70% of a grant’s direct costs. The NIH announced it would cap these payments at 15% for all current and future grants, noting the move would save the government $4 billion a year and that taxpayer dollars would be better spent on direct expenses.
The policy, announced on a late Friday afternoon, was set to take effect the following Monday. Many academics immediately warned that the 15% cap would grind biomedical progress to a halt and jeopardize the nation’s preeminence in research. STAT’s own analysis of public financial records showed that some universities and academic medical centers — including institutions in conservative states — could lose more than $100 million a year if the change were implemented.
The legal response was swift. Three lawsuits were filed in the U.S. District Court in Massachusetts the day the cap was supposed to take effect. The plaintiffs for those cases included attorneys general representing 22 states and organizations representing public and private universities, hospitals, and academic medical centers.
A federal judge in April issued a permanent injunction blocking the policy. But the administration quickly appealed the ruling, and it is also seeking to cap indirect cost payments from the National Science Foundation, Department of Energy, and Department of Defense.
The ongoing legal feud is one of many ways the administration, academic groups, and legislators are looking to shape indirect cost policy. Case in point: In late July, the Senate Appropriations Committee endorsed a bill that retained language intended to prevent the administration from deviating from negotiated indirect rates, noting that the current system has “been essential for supporting federally-funded research.” Yet in September, a House subcommittee advanced a bill that would limit overhead payments at wealthy private universities and colleges. Both efforts have been stalled by the ongoing government shutdown.
Separately, the Trump administration in August issued an executive order on grantmaking that directs federal agencies, “all else being equal,” to preferentially award grants to institutions with lower indirect cost rates. Experts have warned this provision could trigger a race to the bottom that would prioritize research cost over quality. The order also instructs the White House Office of Management and Budget to revise the Uniform Guidance, a government-wide framework for managing grants and other awards, to “appropriately limit” indirect cost recovery. OMB has yet to announce any updated guidance.
Many of the same academic groups that have sued the administration are simultaneously searching for a compromise, including the Association of American Universities, Association of Public and Land-Grant Universities, and Association of American Medical Colleges. A 10-organization coalition assembled a team of policy experts led by Kelvin Droegemeier, a former Trump adviser, and has proposed a new model that would give research institutions two options for overhead reimbursement: a detailed accounting of expenses 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 facility costs.
Some senators have expressed interest in the model. A member of Droegemeier’s team told STAT that the OMB likes the proposal’s increased transparency but worries that it could increase federal overhead payments 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, regardless of how the courts rule, the current system seems headed for a major shake-up.
