Heather Mac Donald Racist—But Underfunded? Universities have gone from arguing that science is biased to claiming that even the overhead on their massive federal research budgets must not be cut.
https://www.city-journal.org/article/nih-university-funding-research-budgets-indirect-costs
It seems like just yesterday that medical institutions were touting their antiracism efforts. In October 2020, the American Association of Medical Colleges published “Framework for Addressing and Eliminating Racism at the AAMC, in Academic Medicine, and Beyond.” The publication calls for “individual self-reflection on systemic racism,” “anti-racism efforts within the AAMC,” “anti-racism efforts within the academic medical community,” and “anti-racism efforts within the broader community.” In 2021, the David Geffen School of Medicine at UCLA launched an initiative called “Anti-Racist Transformation in Medical Education.” The initiative aims to “mitigate racism in the learning and work environment of medical schools through a formal management change process.” In January 2023, an antiracism committee at the University of Pennsylvania Perelman School of Medicine offered a Facing Microaggressions in the Workplace training, part of the school’s Action for Cultural Transformation. ACT aims to eliminate “structural injustice across Penn Medicine”; it is overseen by the medical school’s vice chairs for Inclusion, Diversity, and Equity.
Now the University of Pennsylvania, the University of California, and the AAMC are telling a different tale about science and medicine. These fields are unqualified civilizational triumphs, they say, jeopardized not by racism but by MAGA ignorance. What changed?
On February 7, 2025, the National Institutes of Health, the nation’s biggest funder of biomedical research, declared that henceforth it was limiting the amount that it would pay universities for the indirect costs of NIH-funded science. Indirect costs (also known as overhead, or facilities & administration) might include the salaries of administrators across the university, campus-wide building and equipment maintenance and depreciation, utilities across the university, janitorial services, and general office equipment. Direct costs, by contrast, are grant-specific, covering particular researchers’ salaries, lab materials, animal specimens, cell lines, and the like.
Previously, the NIH was adding up to 69 percent of a research grant to cover the facilities & administration infrastructure that allegedly undergirded subsidized research. For every dollar that a university received to support a particular project, NIH would throw in as much as an additional 69 cents for indirect costs, say, bringing the total amount of the grant to $1.69. The NIH negotiated indirect cost rates individually for each university in a complex, resource-consumptive process; after a university’s rate was determined, that rate applied for the next three to four years to every NIH research grant that that particular university might receive, as well as to grants from other federal agencies.
Now, the NIH announced in February, those indirect cost rates would be capped at 15 percent of the direct cost of a grant and would not be negotiated on a university-by-university basis. The 15 percent indirect cost-rate cap applied to grants already under way, not just to future grants.
Reaction was apocalyptic.
This new funding limit, according to the medical establishment, will decimate scientific progress. The public stopped hearing about medical bias and structural inequities. Instead, university bureaucrats reminded us about treatments for cancer, diabetes, and heart disease; mRNA technology; regenerative biology; and genome sequencing. Two days after the announcement, the University of Pennsylvania, the University of California, the AAMC, and various other university and medical organizations sued the Trump administration to block the NIH guidance.
The effects of the 15 percent cap will be “immediate and devastating,” wrote the university plaintiffs in their complaint against the NIH. The president of the AAMC predicted “longer waits for cures and for diagnosis, slower scientific progress.” Treatments for cancer, diabetes, heart attacks, and strokes—all are “at risk as a consequence of the [Trump administration’s] abrogation of commitments,” warned the University of California System Provost and Executive Vice President for Academic Affairs.
A federal judge in Boston promptly issued temporary restraining orders against the guidance—one nationwide, one applying to 22 Democratic states. On March 5, 2025, U.S. District Judge Angel Kelley converted those temporary restraining orders into a nationwide preliminary injunction, on the grounds that the plaintiffs were likely to win their suit and would suffer irreparable harm if the cap was not suspended while the litigation proceeds.
How to measure the costs of, and pay for, university research may seem an arcane matter. But this dispute about government science funding represents the Trump administration’s most radical assault against the academic-industrial complex yet, an action more consequential even than the executive orders banning DEI activities and racial preferences on college campuses. Indirect cost payments are a hidden enabler of university overexpansion. Capping those payments would deliver the biggest financial hit to universities of anything the White House has announced to date: $4 billion to $5 billion of taxpayer money that will no longer disappear down the maw of the academic bureaucracy in the first year alone.
The key to understanding indirect costs is that they are not itemized in a grant, unlike direct costs. Since they are not itemized, the disbursement of indirect cost funds is not revisited over the course of the grant to ensure that they are properly spent. Commingled with other university resources, indirect cost payments free up money for any number of unrelated activities, such as DEI hiring and trainings, the argument against them has gone.
Debate about indirect cost recovery has been raging for decades. It is a Rorschach test of one’s faith in higher education. University defenders present indirect cost payments as self-evidently reasonable and not presently subject to abuse. Overhead is a normal part of many contracts, they say. Indirect cost reimbursements from the federal government don’t begin to cover the actual overhead costs of doing research, the advocates argue. Without such reimbursements, however allegedly inadequate, no research could get done. The administrative component of facilities & administration payments has been legislatively capped at 26 percent since 1991; the average indirect cost rate across universities has been relatively stable in recent years. In other words, nothing to see here, folks; move on.
It is difficult to tease out just what that average indirect cost rate is. Ordinarily, the indirect cost rate is presented as a percentage of direct costs—69 cents on the dollar, say, or 69 percent, as described above. The NIH guidance alleges that the agency’s indirect cost rate has averaged 26–27 percent over time. But the guidance also says that in 2023, the NIH spent $9 billion on indirect costs and $26 billion on direct costs, for a total of $35 billion in total grant-making. Calculated as the usual indirect-to-direct cost ratio, those numbers mean that the NIH has averaged a 35 percent indirect cost rate, not a 26 percent rate. The NIH presumably derived its 26 percent number by measuring its indirect cost spending against its total grant-making—$35 billion—inclusive of indirect costs. Numerous studies have put the indirect cost-rate average at over 50 percent, however—not 26 percent. NIH may have lowballed the average to make its 15 percent cap look like less of a hit on university finances.
University skeptics reject the advocates’ arguments. A number of red flags suggest that federal overhead payments are not the lean and mean reimbursements that the universities claim they are. The principle of economies of scale appears to have been suspended in the indirect cost funding context. Ordinarily, one would think that bigger universities with richer grant portfolios would spend a lower percentage of their grants on indirect costs. The opposite is the case. Harvard pulls in an additional 69 cents from the NIH for indirect costs for every dollar it gets for NIH-sponsored research; Yale pulls in 67.5 cents for every dollar of direct cost funding; and Johns Hopkins University pulls in 63.7 cents for every dollar of direct funding costs.
Within each university, the marginal indirect costs of each new grant should also diminish. But if a university has already pulled in $250 million in indirect cost funding—say, calculated at 60 percent of its direct costs—and then it gets another grant of $10 million, that new grant will generate another $6 million in overhead reimbursement, even though the marginal cost of facilities & administration for that additional $10 million grant is likely to be lower than 60 percent.
Furthermore, similar indirect cost rates apply to wildly different types of research grants. The university advocates have been invoking complex medical research to justify high indirect cost rates. But the NIH funds social-science projects as well, especially in the areas of structural racism and health equity. Recent grants include “innovative observational and intervention-based research to identify and characterize the pathways and mechanisms through which health and health care disparities occur among sexual and gender minority populations of minoritized racial/ethnic and socio-economic statuses”; “Short Courses on Techniques for Measuring Intimate Partner Violence (IPV) in Different Populations”; and a project to encourage investigators with no expertise in firearm-mortality and injury-prevention research to enter the field. The need for cutting-edge biomedical equipment for the majority of the NIH’s sociology and identity-based public-health projects is zero. The indirect costs tied to those grants are likely pure surplus.
In 2023, NIH gave Stanford University $2 million to cover the direct costs of enrolling “sexual minorities (individuals with a sexual orientation that is not heterosexual) and gender minorities (individuals with a gender identity that is not congruent with their sex assigned at birth)” in a federal health database, in the words of the NIH grant. According to the agency, “sexual and gender minority communities” share a “common experience of social marginalization, legal discrimination, political disenfranchisement, and familial rejection.” The NIH grant included $907,660 in indirect costs. It is unlikely that that database project imposed nearly $1 million in overhead on Stanford University, even if the target population is, as NIH insists, “socially marginalized” and “politically disenfranchised.”
The NIH guidance justified its new 15 percent indirect cost cap by comparing what foundations typically pay for indirect costs: zero. The Gates Foundation has a maximum indirect cost rate of 10 percent. The Robert Wood Johnson Foundation pays up to 12 percent. If universities accept zero to 12 percent indirect cost rates from foundations, they should accept a similar rate from the government, argues the NIH.
Colleges reject the relevance of the comparison. They can forgo indirect cost funding from foundations only because the government already provides it, they say. In other words, taxpayers are easy marks when their money is being stewarded by federal bureaucrats. Private funders drive a harder bargain with their resources.
The AAMC thinks that this cross-subsidization from taxpayers to private foundations counts in universities’ favor. “NIH’s justification [for the funding cap] ignores the fact that the very system it seeks to dismantle is what allows lower indirect cost rates from private foundations to be possible in the first place,” the AAMC argued in its motion for a temporary restraining order. This alleviation of budgetary pressure on foundations should simply be seen as an additional taxpayer subsidy to Big Philanthropy.
The for-profit sector is just as careful with its money. A Silicon Valley tech firm recently negotiated a contract with the University of Southern California to place one of the firm’s engineers in a university computing lab. USC asked for 22 percent in indirect costs. The company bargained the university down to nothing in indirect cost reimbursement.
Universities are so confident of the government’s forking over millions in indirect cost payments that they develop their future budgets on the assumption of such payments, even before receiving a single government grant. This assumption of an eternal windfall should count as a so-called reliance interest on the universities’ part, the academic plaintiffs argued in their motion for a temporary restraining order: “Universities have accordingly made costly decisions about long-term investments, such as what physical infrastructure should be built, in reliance on negotiated rates with federal agencies allowing for the recovery of some such costs via depreciation.”
Taxpayers may be interested to learn the extent to which they have been viewed as sugar daddies—not just paying for astronomical tuitions but providing a subsidy to the entire academic operation.
The universities with the highest indirect cost rates have among the highest endowments: $53.2 billion at Harvard, $41.4 billion at Yale, and $13.1 billion at Johns Hopkins, the NIH observed. NIH’s entire budget, by contrast, was $35 billion in 2023. These financial colossi bridle at the suggestion that they could make up the shortfall in indirect cost payments by drawing on their endowments. Some of that endowment money is designated for specific projects, they say, and cannot be used to cover general expenses. Just how much of a college endowment is thus restricted is never disclosed. In any case, it is apparently better to raise tuition or lay off faculty than to touch that sacrosanct generator of virtually tax-free income.
Academia’s alleged life-or-death dependence on federal funding is a relatively recent development. Through the first part of the twentieth century, universities avoided entanglement with the federal government, according to 2017 congressional testimony by Kelvin K. Droegemeier, a vice president for research at the University of Oklahoma. Accepting Washington’s money would compromise their academic integrity, colleges believed; they shunned New Deal grants, seeing them as the start of a federal takeover of higher education.
World War II dismantled the wall of separation between the federal government and universities, but academia accepted federal military contracts only reluctantly. Those first wartime defense contracts included a flat indirect cost rate of 50 percent added to the contract—a seeming bargain compared with the 100 percent markup for indirect costs that private companies were getting.
After the war, the gravy train was supposed to end. The NIH initially announced that it would pay no indirect costs in its grants; but after an outcry, it agreed in 1950 to pay up to 8 percent of direct costs as indirect costs. In 1958, Congress enacted a 15 percent cap on indirect costs, and then raised it to 20 percent in 1963. By 1983, indirect cost rates, at about 30 percent, were widely seen as out of control. Yet from 1984 to 1991, they rose another 67 percent, a faster rate of growth than the 64 percent growth rate of direct costs.
Stanford University became the symbol of indirect cost abuse. In 1990, it was collecting 74 cents in indirect costs on the research dollar. Some of the items bought with Stanford’s indirect cost grants included salaries for employees of a shopping center owned and operated by the university, as well as home renovations for the president, vice provost, and vice president. Most infamously, Stanford charged depreciation on a yacht to its indirect cost fund, though that charge proved to be an unintended accounting error.
Congress responded to the scandal with another cap, this time limiting the administrative portion of indirect cost reimbursements to 26 percent of the direct cost grant. Universities were furious. The cap results in the “under-recovery of costs associated with administrative and oversight burdens of 21st century science,” complained the University of California’s bloated Office of the President. Inevitably, government regulators added more rules to prevent another Stanford embarrassment: 215 complex new regulations of grant recipients from 1991 to 2023. More bureaucrats were hired to comply with the growing regulatory burden; their salaries and benefits got funneled into the growing indirect cost tab. But universities also kept adding new bureaucratic posts that had nothing to do with regulatory compliance.
Negotiating the indirect cost rates of federal grants has become a cottage industry. Outside consultants advise universities in how to, in the words of one such consulting firm, “optimize your indirect cost rate calculation process and performance.” There is a revolving door between federal grant-making agencies and the consulting firms. Government bureaucrats may wink at excessive fees in the hope of eventually being hired by the firms with which they are currently negotiating.
An even more elaborate, consultant-bedecked process occurs every several years, when schools conduct an expensive, university-wide audit to estimate their future overhead expenses for research. These costing studies entail baroque accounting rules and complex algebraic modeling, and result in what economists Roger Noll and William Rogerson have dubbed “precisely calculated but arbitrary” cost estimates of various university activities. The expense of conducting those costing studies are themselves included in indirect costs.
Professors are pressured to bring in federal grants. Every tenure discussion for junior faculty entails discussion of a candidate’s ability to generate external funding. The benign explanation for this emphasis on future grant attainment is that federal research awards are a measure of scientific accomplishment. That may have once been true, but under the federal government’s diversity regime (in theory, now suspended), getting a grant may mean having an allegedly “marginalized” identity. The cynical explanation for the grants treadmill is that universities are counting on indirect cost funds to underwrite their insatiable appetite for growth.
Faculty complain that they see no benefit from the indirect cost portion of their federal grants. Sometimes a department chair will try to entangle the labyrinth of “functional pools,” time and effort accounting, and other “precisely calculated but arbitrary” inputs into the indirect cost equation but will inevitably give up and go back to his teaching or research. Meantime, the indirect cost payments keep pouring in and fueling the expansionist enterprise.
The academic-industrial complex is right about one thing: implementing this new cap immediately, on existing grants as well as future ones, will disrupt university finances—at least in the short term. The University of Pennsylvania predicts a $250 million annual shortfall from the cap; the University of Michigan, $181 million; the University of California, San Diego, $150 million; and Harvard University, $104 million.
Academia has little credibility to complain, however.
Though its bureaucratic growth was partly a response to federal and state regulations, much of that growth was discretionary. Universities piled on administrators to undertake blatantly political tasks, such as reeducating students and faculty in the intricacies of white privilege and microaggressions. They created vice presidents of institutional strategic planning, associate directors of community engagement, assistant coordinators of outreach and external relations, student success managers, senior coordinators of student accountability, health promotion specialists, and advisors to vice provosts of academic affairs. They employ senior officers of yield management to lure ever more unqualified students into first-year classrooms, and then another cadre of retention specialists to try, largely ineffectually, to keep those ill-prepared students from dropping out. Some prominent schools employ three times as many bureaucrats as faculty, and one administrator per student. Universities have expanded their remit beyond what most people would think of as essential university functions, whether embarking on spending sprees for pricey real estate and luxurious conference centers or creating new disciplines in how the West oppresses “minoritized” populations.
So when universities claim that they will be bankrupted, not just temporarily disrupted, by a 15 percent cap on overhead charges, it’s hard to take them seriously. Inevitably, academic apologists are playing the race card as well, claiming that black colleges will be particularly hard hit, and thus that scientific progress will take an even bigger hit. Neither claim is credible.
University of Pennsylvania interim president J. Larry Jameson is a peerless example of academia’s hypocrisy. From 2011 to late 2023, Jameson was the dean of Penn’s Perelman School of Medicine. He created a vice dean for Inclusion and Diversity and an associate dean for Diversity and Inclusion (ostensibly different functions). The Office of Diversity and Community Outreach in Undergraduate Medical Education started the Inclusion, Diversity, Equity, and Learner Experience Program in Medical Education. Next up was the Office of Inclusion and Diversity (subsequently renamed the Office of Inclusion, Diversity, and Equity), the Transgender Patient Advocate program, and the LGBT Student-Trainee-Faculty Mentorship program.
Now, as interim president of Penn, Jameson claims that the Trump funding cuts “represent an existential threat across our University.” In a February 24, 2025, campus-wide e-mail, Jameson called on the Penn “community” to “protect Penn’s soul” and reaffirm its “enduring values.” “Everything we do must support freedom of inquiry and thought, open expression, and the rigorous pursuit of truth,” Jameson insisted.
If universities have souls, Penn’s should be troubled. The interim president has done nothing to support the academic freedom of Penn law professor Amy Wax, whom Penn has punished for off-campus speech that contravenes university dogmas around systemic racism.
Penn, Jameson wrote, must also hold on to its value of “principled non-discrimination,” as well as to its “commitment to inclusive excellence.” Non-discrimination and “inclusive excellence” are antonyms. It was the medical school’s insistence on “inclusive excellence”—i.e., on admitting poorly qualified students because they are neither white nor Asian—that provided a pretext for its bureaucratic expansion. Ever more diversity functionaries were brought on board to fight the systemic racism that was allegedly holding its inclusively excellent medical students back.
Far from demonstrating the legitimacy of Penn’s lawsuit against the NIH, the Jameson memo supports the costs cap. Hothouse bureaucratic fiefdoms pour forth from its pages, especially those connected to the safetyist ethos of the contemporary university. He directs students to Wellness at Penn, to help them navigate their “emotional discomfort” caused by this “period of uncertainty.” He recommends the vast University Life bureaucracy, which can provide “meaningful experiential opportunities.” Experience is apparently something that college students can no longer muster on their own. Providing those “meaningful experiential opportunities” requires manpower—to be precise, 30 University Life staffers, including a vice provost of student life, a director of communication and special projects, a senior associate vice provost for student affairs, an associate vice provost for University Life, an associate director of Community Care, a director of Student Intervention Services, a director of Instructional Design for Integrated Care, an associate vice provost for Diversity, Equity, Inclusion & Belonging, an assistant vice provost for Strategic Planning and Operations, and a director of Strategic Initiatives. Seven of the nine members of University Life’s leadership team are black, a proportion not likely the result of the “principled non-discrimination” that Jameson argues is lodged in Penn’s “soul.”
University Life is a node in Penn’s costly commitment to the politics of victim identity. The administrative fiefdom presides over the Office of Inclusion Initiatives and Social Justice Education, the Lesbian Gay Bisexual Transgender Center, Makuu: The Black Cultural Center, and the Penn Women’s Center.
We are to believe that indirect cost payments had no enabling effect on Penn’s budget for this identity superstructure.
The chancellor of the University of California, San Diego, also directed his readers to UCSD’s safety and wellness services in his February 26 e-mail regarding the NIH’s indirect cost recovery cap. “We also want to remind you to take care of yourself and each other,” wrote Chancellor Pradeep K. Khosla, recommending recourse to UCSD’s Counseling and Psychological Services, mental-health services, counseling appointments, and the “latest wellness events.” The University of California is a plaintiff against the NIH.
Universities have announced that they are retracting Ph.D. offers and pausing faculty hiring in response to the NIH cap. None has announced a diminution of the student services and identity bureaucracies.
An indirect cost-rate cap is justified. Even if universities had not undermined their claims of barebones efficiency with their uncontrolled and politicized spending, setting a single rate for indirect cost recovery will save the universities and the federal government millions of dollars in accounting, audits, and, at least superficially, aversive negotiations. An average reimbursement rate will create an incentive for administrative efficiency now lacking in a regime of individualized rate-setting.
But however justified, the Trump administration botched the rollout of the NIH cap. Advance notice that a change was coming, or lowering the cap incrementally, would not have compromised the initiative’s goals. If, in fact, the average indirect cost rate is over 50 percent, an interim rate of 25 percent, say, in the first year of change would have been a reasonable compromise.
Any rate cap should have been accompanied by a reduction in federal regulations. At the very least, the Trump administration should signal to universities that regulatory relief is rapidly on the way.
Imposing the cap on current grants is needlessly disruptive. The administration could have provided fuller justification for choosing 15 percent as the cost recovery rate. Only belatedly has the administration disclosed that the federal money saved with a rate cap will be plowed back into direct research support. A 15 percent cap on indirect cost rates will lower the $9 billion that the NIH spent on indirect costs in 2023 by over $4 billion; that $4 billion will stay in the NIH budget and go out as direct research funding.
The Department of Government Efficiency (DOGE) team that presumably drove this rule change passed up an opportunity to utilize market forces to come up with a more accurate assessment of indirect costs. A different mechanism would tie indirect cost recovery to the rate that any given university accepts from the private sector, as the Heritage Foundation’s Jay Greene has suggested. This rule would generate a dynamic equilibrium whereby the “marginal cost of a grant is just less than the expected value of the research output,” Greene explains. This market mechanism would be immune from the bracket creep that has affected previous legislated ceilings on indirect rates.
Alternatively, the government could decouple direct and indirect cost payments in federal grant-making entirely. Research grants would include only the direct costs of doing research. If universities want to make the case that American taxpayers should provide an untraceable subsidy for virtually the entirety of their operations, let them do so.
In 2017, the first Trump administration proposed a 10 percent cap on NIH’s indirect cost rate in its first budget proposal. The then–Republican controlled Congress rejected the cap and passed an abysmally drafted rider to an appropriations bill that university advocates read as banning any change to how indirect cost rates are set.
Now, the second Trump administration is moving ahead more forcefully than in 2017, imposing the cap by executive action. The backlash today is even greater. Besides the multiple lawsuits against the NIH—from 22 states, the AAMC, several higher education associations, and 13 universities—academia has mobilized a sympathetic press to make its case that we may be facing, in the words of a Chronicle of Higher Education web post, the “end of science as we know it.” The lawsuits argue that the government is violating both substantive and procedural law, that the guidance is impermissibly retroactive, and that it was developed without required public input and notice to affected parties. The government responds with the same opaque regulations that the plaintiffs rely on, but in justification of its actions. The 2017 appropriations rider bans only changes that reduce funding to the NIH, the Justice Department attorneys argue; but under the 15 percent cap, the NIH budget will stay the same. The government also argues that the suits have been filed in the wrong court. It does seem to concede, however, that the retroactive nature of the cap is its most vulnerable aspect.
It is difficult to predict how the Supreme Court would rule on the case, if the litigation reaches it. The new head of the NIH, Jay Bhattacharya, avoided taking a position on the cap during his confirmation hearing; it is conceivable that he might drop an appeal. If the Trump administration sought legislative approval for limiting indirect cost reimbursement, it would likely receive more Republican support than the cap proposal did in 2017.
Academia’s sense of entitlement to taxpayer resources may already be shifting, however. Big Law has gotten involved in the fight against the NIH, as it does in almost all left-wing causes. But an advisory from Arnold & Porter squeezes into its doomsaying a few practical suggestions for coping with a reimbursement cap, such as resource sharing among institutions, bridge funding from foundations, and industry partnerships. It suggests recouping indirect costs through other means, presumably by recategorizing them as direct costs. That’s a change that both parties would benefit from, since direct costs can be monitored for misuse.
With luck, the spirit, if not the exact details, of the NIH cap can be salvaged. It was motivated by a justified disgust at ever more self-righteous universities assuming the right to invisible amounts of taxpayer subsidy, while holding their bureaucracies, endowments, and political commitments harmless. The NIH should move quickly to shore up its rationale and go on the offensive against unaccountable academic spending with better examples and fuller explanations. If, by universities’ own account, academic medicine is so racist, then it does not deserve a blank check, the NIH might argue. If the rate cap survives, it will be the most powerful tool yet to reform higher ed. If it is crushed entirely, academia will be further emboldened to protect the status quo.
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