Assuring Reasonableness of Rising Indirect Costs on NIH Research Grants--A Difficult Problem

In response to a congressional request, GAO reviewed the process followed by the Department of Health and Human Services (HHS) in establishing indirect cost rates for health research and development activities to: (1) identify HHS efforts to contain the growth of indirect costs; (2) assess HHS accountability over indirect costs; and (3) determine how often indirect cost audits are made and how the audit reports are used by HHS indirect cost negotiators.

HHS has proposed several policy options to simplify the indirect cost reimbursement process and reduce indirect cost payments made on National Institutes of Health (NIH) grants. However, GAO found that the process followed by HHS in negotiating indirect cost reimbursements does not ensure that negotiated indirect cost rates are reasonable. This is particularly true for administrative expenses, which constitute about 35 percent of the indirect cost rates at large institutions. Office of Management and Budget (OMB) Circular A-21 permits large institutions to be reimbursed on the basis of personnel activity reporting systems which are subjective and difficult to verify. However, small institutions may compute their allowable administrative costs on the basis of 20 percent of the salaries and expenses of deans and department heads. GAO found that few indirect cost audits have been performed by HHS auditors. However, in cases where indirect cost audits have been made, significant amounts of grantee-proposed indirect costs have been questioned and HHS negotiators sustained $13.9 million of $16.7 million questioned by HHS auditors over a 4.5-year period and have reduced indirect cost rates accordingly. Finally, GAO found that 49 of 69 NIH grantee negotiation files contained no written explanation of the reasons for significant increases in indirect costs from the previous years.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: David P. Baine Team: General Accounting Office: Human Resources Division Phone: (202) 512-7101