NIH’s Mandatory 15% Indirect Rate – Next Steps Following Preliminary Injunction

Background

Context is critical here. In 2017, the first Trump administration attempted to reduce indirect cost rates for all NIH grants to 10%, which was the “de minimis” rate at the time under the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (the “Uniform Guidance) at 2 C.F.R. Part 200, and Department of Health and Human Services (HHS) Supplement to the Uniform Guidance at 45 C.F.R. Part 75. Congress responded by including language in the 2018 Consolidated Appropriations Act requiring that HHS’s regulations relating to indirect costs, “including with respect to the approval of deviations from negotiated rates, shall continue to apply to [NIH] to the same extent and in the same manner as such provisions were applied in the third quarter of fiscal year 2017.” Pub. L. No. 115-141 § 226, 132 Stat 348, 740. The 2018 appropriations rider prohibited HHS and NIH from spending appropriated funds “to develop or implement a modified approach to” HHS’s regulations on indirect rates. Id. Subsequent appropriations, including the 2024 Further Consolidated Appropriations Act, contained the same prohibition. See Pub. L. No. 118-47, div. D, tit. II, § 224, 138 Stat. 460, 677.

Fast forward to 2025. On February 7, NIH published Notice No. NOT-OD-25-068, Supplemental Guidance to the 2024 NIH Grants Policy Statement: Indirect Cost Rates (the “Rate Change Notice”). The Rate Change Notice applies to both new and existing grants and was set to become effective on February 10, 2025 (one business day after it was published). Twenty-two states, the Association of American Medical Colleges, the Association of American Universities, and other plaintiffs immediately filed lawsuits in the US District Court for the District of Massachusetts challenging the Rate Change Notice. See Commonw. of Mass. et al. v. NIH et al., No. 1:25-cv-10338; Ass’n of Am. Med. Colls. et al. v. NIH et al., No., 1:25-cv-10340; Ass’n of Am. Univs. et al. v. HHS et al., No. 1:25-cv-10346. All three suits challenged the Rate Change Notice as contrary to the 2024 Further Consolidated Appropriations Act and HHS’s regulations, and invalid under the Administrative Procedure Act (APA), 5 U.S.C. §§ 701-706. On February 10, 2025, Judge Kelley issued a temporary restraining order (TRO) in Commonwealth of Massachusetts, enjoining NIH from implementing the Rate Change Notice in any of the 22 plaintiff states. The next day, Judge Kelley issued a separate TRO in Association of American Medical Colleges, enjoining NIH from implementing the Rate Change Notice nationwide.

Legal Shortcomings of the Rate Change Notices

The court’s memorandum and order identifies numerous substantive and procedural defects in the Rate Change Notice, which the plaintiffs had emphasized to varying degrees in each of the three lawsuits. This article focuses on the three defects that the Government will likely seek to rectify – and, indeed, may have already begun to rectify – to attempt to achieve substantially similar results as the Rate Change Notice through other means.

1. The Rate Change Notice Is Inconsistent With the Uniform Guidance’s Indirect Rate Provisions, as Well as HHS’s Supplement to the Uniform Guidance

The Rate Change Notice recognizes that, “[i]n issuing grants, NIH generally uses the indirect cost rate negotiated by an agency with cognizance for F&A/indirect cost rate (and other special rate) negotiation.” Notice No. NOT-OD-25-068; accord 45 C.F.R. § 75.414(c)(1) (“The negotiated rates must be accepted by all Federal awarding agencies.”); 2 C.F.R. § 200.414(c)(1) (verbatim). The Rate Change Notice, however, purports to rely on the authority in these regulations to “use a rate different from the negotiated rate for a class of Federal awards or a single Federal award,” in 45 C.F.R. § 75.414(c)(1) (italics added for emphasis). That authority, however, may only be used “when required by Federal statute or regulation, or when approved by a Federal awarding agency head or delegate based on documented justification as described in paragraph (c)(3) of this section.” Id. Section 75.414(c)(3), in turn, requires NIH and other HHS awarding agencies to “implement, and make publicly available, the policies, procedures and general decision making criteria that their programs will follow to seek and justify deviations from negotiated rates.”

The court’s memorandum and order recognizes the obvious fact that the Rate Change Notice is not a “deviation” from negotiated rates for “a class of Federal awards or a single Federal award.” It is a refusal by NIH to accept negotiated rates for any award, despite Section 75.414(c)’s explicit default requirement that “negotiated rates must be accepted by all Federal awarding agencies.” See also 45 CFR § 75.352(a)(4) (requiring pass-through entities to similarly use a subrecipient’s negotiated cost rates in subawards). Moreover, NIH has not published “the policies, procedures and general decision-making criteria” that will be used “to seek and justify deviations from negotiated rates,” whether in the Rate Change Notice or otherwise. The Rate Change Notice does not contain or contemplate “decision making criteria” because it does not allow for further decision making – the Rate Change Notice itself is a blanket decision for all NIH awards. See generally Mem. & Order at 18-22.

Section 75.414(c) recognizes that, once a cognizant awarding agency negotiates rates with a recipient, those rates should be honored by other awarding agencies. This is because the negotiated rate has already been found to reflect a reasonable causal/beneficial relationship between the costs in the indirect expense pool, on the one hand, and the costs in the allocation base for that pool, on the other. Section 75.414(c) recognizes that it may be appropriate to deviate from these negotiated rates for individual awards or classes of awards where, for one reason or another, that causal/beneficial relationship does not hold – e.g., where the individual grant or class of grants receives a substantially greater or lesser benefit from indirect costs than is reflected in the negotiated rates. Any such deviation, however, can only be made on a recipient-by-recipient basis, for an individual grant or a class of grants. To our knowledge, the authority in Section 75.414(c) has only ever been used on a case-by-case basis.

The Rate Change Notice is inconsistent with the Uniform Guidance and HHS’s supplement for other reasons, as well :

• The Rate Change Notice reflects a determination by NIH that any indirect rate above 15% is too high, which turns the Uniform Guidance’s entire approach to indirect rates on its head. Fifteen percent is the “de minimis rate” that recipients are allowed to use as a matter of default – i.e., without negotiating indirect rates or provisional rates and submitting the cost data supporting the proposed rate. 2 C.F.R. § 200.414(f).[1] The Uniform Guidance allows recipients to elect to use the de minimis rate in lieu of a negotiated or provisional rate, but the Rate Change Notice effectively makes the election immaterial for NIH awards, as the Notice prevents NIH from negotiating a higher rate.
• Similarly, the entire purpose of negotiated indirect rates is to avoid agency-specific rates. The Uniform Guidance therefore generally requires agencies to honor the rates negotiated by other agencies. 2 C.F.R. § 200.414(c)(1); 45 C.F.R. § 75.414(c)(1). The Rate Change Notice creates an NIH-specific rate that necessarily will conflict with virtually every existing indirect rate agreement, as no recipient will have an agreement for a 15% rate, because no agreement is necessary to apply the de minimis rate.

The Government may have been expecting the court to rule against it on these grounds. On February 28, 2025, HHS issued a “Policy Statement” that its regulations regarding grants and contracts would no longer be subject to the APA’s notice and comment rulemaking process, which allows members of the public an opportunity to participate in the rulemaking process by reviewing proposed rules and offering an agency their views on the wisdom of rules before they go into effect. (See Policy on Adhering to the Text of the Administrative Procedure Act 90 Fed. Reg. 11029 (Mar. 3, 2025).) Although the APA does exempt matters involving grants and contracts from APA’s notice and comment requirements, HHS in 1971 established a policy of employing notice and comment rulemaking, which courts have held binding on HHS.

Based on HHS’s February 28 Policy Statement, the Government may quickly seek to eliminate the principal barrier that the court identified to the Rate Change Notice by amending Section 75.414(c) without public notice and an opportunity to comment. Although any such amendment would itself be subject to judicial review under the APA, that review would focus on whether the amended rule is arbitrary, capricious, an abuse of discretion, or not in accordance with some other law.[2]

2. The Rate Change Notice Violates the Further Consolidated Appropriations Act of 2024

The court agreed with the plaintiffs that the Rate Change Notice seeks to do exactly what the first Trump administration attempted to do in 2017, and what Congress explicitly prohibited HHS and NIH from doing in each appropriations bill since. Mem. & Order at 22-28. The Rate Change Notice violates Congress’s riders in three ways: (1) by disregarding the deviation process in Section 75.414(c); (2) by spending appropriated funds to “develop or implement a modified approach” to HHS’s existing indirect rate regulations; and (3) by “substantially expand[ing]” the fiscal effect of the deviation in negotiated rates from the fiscal effect of prior deviations.

As with Section 75.414(c), this statutory obstacle may also be short-lived. A final appropriations bill for 2025 has not yet been passed; however, the Trump administration may be able to work with Congress to remove or revise this language in a final 2025 bill.

3. The Rate Change Notice Is Arbitrary and Capricious

The court also agreed with the plaintiffs that the Rate Change Notice fails to provide any meaningful justification or rationale for an across-the-board standard indirect rate for all grants, existing and new, regardless of the terms and conditions, type of grant, or other nuances in grant administration. (Mem. & Order at 30-37.) The court specifically rejected as conclusory and unsupported the Rate Change Notice’s assertion that a 15% indirect rate will allow more funds to be allocated to “direct scientific research costs rather than administrative overhead.” (Notice No. NOT-OD-25-068.) The court ruled that NIH “fails to address how the money will actually be directed to cover direct costs and how that research will be conducted absent the necessary indirect cost reimbursement provided by the Federal Government.” (Mem. & Order at 33.) Similarly, the court faulted NIH’s unsupported premise that there is a “market” for funded research, disregarding key differences between how the Federal Government funds research and how private foundations fund research, and the types of research that these organizations fund. Id. at 34. More fundamentally, the court faulted the Rate Change Notice for not considering whether aligning Federal indirect rate reimbursement with reimbursement by private foundations “is actually a good thing.” Id. at 35.

The Rate Change Notice also focuses entirely on indirect costs, even though the total cost that NIH will reimburse in a given grant is a combination of direct and indirect costs 45 C.F.R. § 75.402, and even though HHS’s regulations recognize that “[t]here is no universal rule for classifying certain costs as either direct or indirect (F&A) under every accounting system” id. § 75.402. See also id. § 75.414(b) (“Because of the diverse characteristics and accounting practices of nonprofit organizations, it is not possible to specify the types of cost which may be classified as indirect (F&A) cost in all situations.”). The Rate Change Notice therefore arbitrarily focuses on only one side of the incurred cost coin and punishes recipients that hold multiple grants and have invested in facilities and other administrative capabilities that support those multiple grants, even if those same recipients’ overall costs are relatively inexpensive and efficient for the research they perform and the science they advance.

Ultimately, however, this aspect of the court’s order may provide NIH and HHS with a roadmap for the development of a new rule that achieves the same result. As noted above, HHS’s February 28 policy statement signals that HHS believes it can enact rules without notice and comment rulemaking, eliminating a potentially time-consuming obstacle to revising Section 75.414(c). Although any new or amended rule would itself be subject to judicial review under the APA, NIH and HHS now have a checklist of considerations that they could seek to address to support a new regulatory approach to indirect rates.

Next Steps

Although the preliminary injunction prevents NIH from implementing a blanket 15% indirect rate across all NIH grants, the Government’s arguments and actions in this litigation and in litigation involving other funding freezes strongly suggest that the Government will seek to achieve the same result through other means. If and when Congress passes an appropriations bill for 2025, Congress may remove or relax the statutory prohibition on changing HHS’s indirect rate rules. And the Government may seek to issue a new deviation under Section 75.414(c) for something fewer than all NIH grants, or it may seek to do away with Section 75.414(c) altogether. Either way, the Government may move quickly to position itself to nominally argue that it is making individualized deviation decisions consistent with law. Other district courts have criticized the Government’s efforts to “simply search for and invoke new legal authorities as a post hoc rationalization for the enjoined agency action,” but have struggled to draw the line between post hoc rationalizations and “undertaking a good-faith, individualized assessment of a contract or grant and, where the terms or authority under law allows, taking action with respect to that particular agreement consistent with any procedures required.” ECF No. 28 at 2, 6, Global Health Council et al. v. Trump et al., ECF No. No. 25-00402 (D.D.C. Feb. 20, 2025). The Government will likely test the location of that line here. Finally, the Government will almost certainly appeal the preliminary injunction and may receive an appellate ruling that vacates or relaxes the injunction.

Given this uncertainty, recipients with existing NICRAs – particularly NICRAs that will expire in the near future – should consider taking the following steps:

1. Immediately gather relevant documents and accounting data and prepare for a fight, whether under an existing NICRA or the negotiation of a new NICRA.

Recipients should gather their indirect rate proposals and agreements, along with all supporting information provided to the cognizant Federal agency that negotiated those indirect rates. Recipients should also gather all grant proposals and applications documenting their reliance on the negotiated indirect rates, as well as any correspondence or submissions regarding indirect costs for individual awards. The goal is to establish a history of agreement with the Federal Government that the negotiated indirect rates reflect the recipients’ actual, allowable indirect costs for all grants. These documents and data will be critical not only in the event that the Government refuses to honor negotiated rates under existing grants, but also will be important for negotiating rates for future years not covered by an existing agreement, and for responding to future attempts by the Government to justify deviations for particular grants. This information will also be critical to defending against efforts to adjust negotiated rates under existing regulations, which generally require the Government to demonstrate that the recipient’s cost proposal for those rates included unallowable costs. 45 C.F.R. § 75.411.

2. Quickly challenge any refusal by NIH to reimburse costs under existing grants in accordance with negotiated indirect rates, as well as any attempt by NIH to unilaterally modify existing grants to reduce indirect cost recovery.

The preliminary injunction in Massachusetts v. NIH and other lawsuits under the Administrative Procedure Act will provide a vehicle to challenge attempts by NIH to create post hoc rationalizations for a blanket mandatory 15% indirect rate. As the court recognized, however, the Tucker Act 28 U.S.C. § 1491 provides a vehicle for a monetary judgment against a Federal agency under a grant. Recipients should consider carefully whether a particular action by NIH reflects the implementation of a broader effort to effectuate some arbitrarily low cap on indirect costs, or instead reflects a refusal by NIH to honor the terms of a particular grant. Because these are not mutually exclusive scenarios, recipients will need to carefully select the appropriate forum for ensuring that they receive the reimbursements to which they are entitled. In any case, it is important for recipients to assert their rights quickly, before the Government can backfill the record with additional post hoc explanations and arguments.

3. Carefully consider the benefits and risks of changing accounting practices and understand the limits on your ability to do so.

As noted above, both the Uniform Guidance and HHS’s regulations recognize that “[t]here is no universal rule for classifying certain costs as either direct or indirect (F&A) under every accounting system.” 2 C.F.R. § 200.412; 45 C.F.R. § 75.412. These regulations also recognize that the “diverse characteristics and accounting practices of nonprofit organizations” allow for a variety of approaches to classifying costs as direct or indirect. 2 C.F.R. § 200.414(b); 45 C.F.R. § 75.414(b). Although these regulations provide recipients with discretion to reasonably select a particular classification, the regulations repeatedly emphasize the need to consistently follow the selected approach. 2 C.F.R. §§ 200.403(d), 200.412; 45 C.F.R. §§ 75.403(d), 75.412. The requirement consistently applies even if a recipient elects to use the de minimis rate. 2 C.F.R. § 200.414(f); 45 C.F.R. § 75.414(f).

NIH’s standard rate agreements typically provide that NIH’s acceptance of the recipient’s rates is subject to several conditions. In addition to the condition that costs included in the recipient’s rate proposal are allowable, the agreement requires that the same costs that have been treated as indirect costs are not claimed as direct costs, and that similar types of costs have been accorded consistent accounting treatment. Violation of these conditions could provide a basis for NIH to rescind the rate agreement and potentially assert a claim for payments made pursuant to the agreement.

Further, the consistent treatment of costs as either direct or indirect, but not both, is a key factor regarding the adequacy of an organization’s accounting system. The Government requires grantees or contractors to maintain adequate accounting systems when receiving and disbursing Government funds. The Government may, and does, perform its own audits and assessments of grantee or contractor accounting systems to determine if such systems are capable of accounting for Federal funds received on a consistent, fair, and equitable basis. If the Government determines that accounting system deficiencies exist, the Government may determine the accounting system to be inadequate, thereby potentially negatively affecting a grantee’s or contractor’s ability to receive additional Federal funding opportunities.

Any change in accounting practices must therefore be done carefully and transparently, and in most cases should only be done prospectively. Recipients considering such a change should consult with experienced accounting and legal professionals to ensure that the change is appropriate and does not hand NIH a basis to achieve a unilateral rate reduction for a particular grant that achieves the same or a similar result that NIH sought to achieve through the Rate Change Notice.