Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Kuakini Medical Center
DATE: April 12, 1991
Docket No. 90-36
Decision No. 1242
DECISION
The Kuakini Medical Center of Honolulu, Hawaii (Kuakini), appealed
a
determination by the National Institutes of Health Grant Appeals
Board
(NIH) disallowing $118,061.48. The disallowance was comprised
of
various items which NIH determined were not allowable charges
to
Kuakini's research grant. Kuakini appealed selected aspects of
the
disallowance totalling $103,567.73. The specific items
and
corresponding dollar amounts are identified below.
The record in this appeal consists of the parties' briefs and
evidentiary
submissions as well as the transcript (Tr.) of an oral
argument held by
telephone conference. Based on the following analysis,
we sustain
$93,689.01 of the amount disallowed and reverse the
disallowance of items
totalling $9,878.72.
Background
On September 25, 1980, the National Institute on Aging (NIA), a
division
of NIH, awarded Kuakini a research grant titled Epidemiology
of
Osteoporosis in An Aging Japanese Population. 1/ The grant was
intended
to monitor, over a ten-year period, 2,500 older Japanese-Americans
for
bone-mineral loss and fractures caused by weakened bones.
Kuakini's grant was examined by NIH's Division of Management Survey
and
Review (DMSR). The DMSR Report, issued April 4, 1989,
recommended
disallowance of several items totalling $172,658.89 in federal
funds.
NIA accepted the DMSR Report and issued the disallowance.
Kuakini
conceded part of the disallowance, but appealed $160,627.96 to NIH.
2/
As noted above, the NIH Decision upheld disallowance of slightly more
than
$118,000. Kuakini appealed $103,567.73 to this Board.
The
components of the appeal are:
1. Purchase cost for an Osteoanalyzer - $11,700.00
2. Costs for calibrating the Osteoanalyzer
3/
-
11,268.41
3. Personnel Charges - 17,689.04
4. Failure to credit income to the
grant
-
3,703.00
5. Charges for Fall Symposium - 30,453.28
6. Data Processing Charges - 19,154.00
7. Prepaid Computer Costs 4/ - 9,600.00
Analysis
1. The Osteoanalyzer
NIH disallowed a total of $16,846.73 for the purchase of an
Osteoanalyzer
(OA). Kuakini appealed $11,700 of this amount, which it
identified as
the purchase price for the OA. The balance ($5,146.73),
which Kuakini
did not appeal, was for lease-purchase payments. Tr. at
16.
An OA is a data gathering device which measures forearm and
heel
density. Kuakini acquired the OA in December 1983 as a back-up for
its
primary data gathering device, a VCH. 5/ From the outset of the
DMSR
investigation, Kuakini emphasized the maintenance and quality
control
problems it had with the VCH. Kuakini asserted that, even
in the early
stages of its research, the VCH was not expected to last until
the end
of the study. Kuakini noted that the VCH was a one-of-a-kind
piece of
equipment which could not be easily repaired or replaced, if at
all.
Kuakini indicated that its researchers felt an obligation to
validate
the results from the VCH with substitute equipment before the VCH
became
inoperable. Consequently, Kuakini decided to acquire the
OA. See
generally Kuakini Ex. 2-A; Kuakini Brief (Br.), Section A at
5
(unnumbered).
The questions in the dispute are whether prior approval by NIA
was
necessary for purchase of this item, and if prior approval was
necessary
(since admittedly there was no prior approval requested or
granted),
whether NIA should have approved the purchase retroactively.
A. Was prior approval necessary?
The cost principles at 45 C.F.R. 74.176 (1980) 6/ establish the types
of
cost allowable with approval.
Specifically, subsection (b) provides:
(1) . . . costs . . . treated as direct costs, . . . must
be
approved in advance by the awarding party;
* * *
(3) If the costs are not specified in the budget, . . .
the
recipient shall obtain specific prior approval in writing
from
the awarding party . . . .
The PHS Grants Policy Statement (December 1, 1982) refined
this
requirement for equipment purchases by requiring "prior approval for
the
purchase of . . . special purpose equipment costing $1,000 or more . .
.
." Id. at 32.
Additionally, PHS provided for a conditional waiver of prior approval
for
certain costs for grantees with an institutional prior approval
system
(IPAS). The IPAS standards are detailed in the PHS Grants
Policy
Statement. Accompanying those standards is a notation that
operation of
the IPAS as a whole, as well as individual actions taken under
it, is
subject to review by the awarding office. Id. at 44-45.
NIH found that prior approval was necessary for the following reasons:
given that there was no . . . [IPAS] in place at Kuakini,
the
then applicable Public Health Service Policy required . .
.
approval for the purchase of any special-purpose
equipment
costing $1,000 or more. Based on this policy and the
fact that
. . . [Kuakini] was aware of . . . requirements pertaining
to
IPAS . . . prior approval for purchasing the OA was necessary.
NIH Decision at 5-6 (footnote omitted).
Kuakini initially maintained that it had an IPAS in place at the time
it
purchased the OA. Thus, Kuakini asserted, there was no need for
prior
approval from NIA. NIH responded that while Kuakini may have had
an
IPAS in place, it did not use its IPAS when it purchased the
OA.
Rather, NIH argued that Kuakini's IPAS was merely a rubber stamp
for
that purchase. Kuakini ultimately admitted that only "part of
the
standards required for the operation of the institutional prior
approval
system had been carried out." Kuakini Submission (January 17,
1991),
Attachment 2 at 1 (emphasis added).
Unless an IPAS is used correctly, it does not serve its intended
purpose
as a substitute for agency prior approval. Here, Kuakini
admitted that
it did not fully comply with the IPAS, but asked that we now
accept its
after-the-fact justification for the purchase. We cannot do
this and
preserve the integrity of the prior approval requirement.
Kuakini also argued that prior approval was not necessary, based on
an
addendum to the PHS Grants Policy Statement effective April 1,
1984.
That addendum revised the exceptions to the prior approval
requirement
(most notably eliminating the need for prior approval of
equipment
purchases costing less than $25,000). Kuakini Br., Section A
at 1
(unnumbered). However, since the OA was purchased in 1983,
the
addendum's revised exceptions do not apply here. Thus, Kuakini
was
clearly required to obtain prior approval for purchase of the OA.
B. Should NIH have granted retroactive approval?
Although we conclude above that prior approval was required for
purchase
of the Osteoanalyzer, the absence of prior approval would not
be
dispositive if retroactive approval should have been granted.
NIH
implied that the failure to obtain prior approval for the purchase
ended
the matter. Tr. at 27. However, that is not the correct
test.
The applicable PHS Grants Policy Statement has a specific provision
for
granting retroactive approval (subject to certain conditions) if
the
transaction would have been approved had the grantee requested
approval
in advance. Id. at 44.
The Board has said that while an agency has considerable discretion
in
determining whether to grant retroactive approval, it must have
a
substantive basis for denying retroactive approval.
Economic
Opportunity Atlanta, Inc., DAB No. 313 (1982); see also Alabama
Dept. of
Human Resources, DAB No. 939 (1988).
NIH did consider whether it would have been scientifically advisable
to
approve Kuakini's development of the OA in 1983. NIH questioned
the
overall value of the OA in Kuakini's research. NIH noted that the
VCH
was a one-of-a-kind experimental device and, at the time in issue,
the
OA was also an experimental device. Thus, NIH determined
that
acquisition of the OA would not have been scientifically prudent,
given
the availability of other data gathering devices on the
commercial
market. NIH Decision at 6.
While Kuakini stressed how important it was to have the OA in case the
VCH
failed, Kuakini did not persuasively refute NIH's position that
acquisition
of a second experimental device was not scientifically
prudent. Indeed,
the actual purchase of the OA seemed almost an
afterthought because grant
funds were available. The budget for the
grant year in question showed
that $50,000 was requested and approved
for a dual photon spine-scanning
system, which was commercially
available. When this system was
purchased for $32,200, the principal
investigator used some of the remaining
funds to purchase the OA from
Osteon. 7/ DMSR Report at 4-5.
Further, we find that the DMSR Report gave an additional reason
which
alone would be sufficient ground for NIH not giving retroactive
approval
of the OA purchase. The Report said that the OA "was used
almost
exclusively to scan clinical non-Kuakini Osteoporosis study
subjects"
and that up to the time of the review "the VCH had been used
almost
exclusively to scan research subjects." DMSR Report at
5-6. Kuakini
offered no evidence to rebut these statements which were
adopted by NIH.
NIH Decision at 6. The fact that the OA is now used as
the primary
research tool by Kuakini does not negate the NIH finding that
Kuakini
did not act prudently in buying the OA at the time it was
actually
purchased, nor does it negate the finding that the OA was at first
used
almost exclusively on subjects having no connection to the
research
grant.
The question comes down to whether NIH abused its discretion in
refusing
to approve the purchase retroactively. Kuakini has not shown
that NIH's
decision to refuse retroactive approval for purchase of the OA was
an
abuse of discretion.
Based on this analysis, we sustain the disallowance of the
$11,700.00
appealed by Kuakini as the purchase price of the OA.
2. Costs incurred testing and calibrating the OA
At issue here is $11,268.41 for salaries, including fringe benefits
and
indirect costs, incurred by Kuakini while testing and calibrating
the
OA. NIH based its disallowance of these costs on the fact that the
cost
of the OA itself was unallowable. NIH Decision at 9. Kuakini
agreed
that the allowability of these costs was dependent on a finding that
the
cost for purchase of the OA was allowable. See Kuakini
Submissions
(January 17, 1991 and October 25, 1990). Kuakini provided
no evidence
to detail the actual costs incurred. However, even if
Kuakini had
documented these costs, since the purchase of the OA was an
unallowable
cost, the costs incurred for its calibration and testing were
also
unallowable.
3. Personnel Costs
In late 1983, Kuakini formed an Osteoporosis Center, composed of
research
and clinical programs. Kuakini's Osteoporosis grant was the
first
research study to be included in this program, although others
were added
later. The clinical program allowed physicians to refer
patients for
consultation or bone-mineral evaluation. DMSR Report at 6.
From 1981 through 1983 the subjects scanned at Kuakini were
primarily
participants in grant research. For research purposes,
Kuakini's
personnel was divided into two general categories, those involved
in
collecting the data and those who analyzed it. DMSR found
that,
beginning in January 1984, personnel who had been involved
with
acquiring grant data also began to scan clinical subjects who had
been
referred by their physicians. DMSR determined that, from January
1984
through August 31, 1987, 57% of all patients scanned by
research
personnel were clinical subjects. 8/ After discussions with
Kuakini,
DMSR concluded that salaries of certain employees were charged to
the
grant out of proportion to the actual effort the employees
spent
scanning research subjects. Id. at 6-7.
NIH ultimately disallowed $17,689.04 based on its determination
that
Kuakini had charged personnel costs incurred in processing
clinical
patients to the grant.
DMSR found that Kuakini had not maintained the documentation necessary
to
properly support a charge of the salaries of support personnel to
the
grant. However, instead of recommending disallowance of all
personnel
costs, DMSR interviewed grant employees and calculated the
time
necessary to scan clinical and research patients (51 minutes
for
clinical versus 66 minutes for research). DMSR applied its
calculation
to the grant employees' salaries to determine the amount of
personnel
costs attributable to that function. Even after DMSR prorated
the
scanning time, Kuakini's lack of documentation meant that there
was
still "unaccounted time," i.e., time which could not be
readily
identified as attributable to either research or clinical
activities.
DMSR determined that clinical patients comprised 77% of
Kuakini's
overall patient population. Then DMSR applied its prorated
estimate of
scanning time to the overall patient population to allocate
the
"unaccounted time," between clinical and research patients. DMSR
Report
at 8-10; NIH Decision at 7; Tr. at 36-37.
Before NIH, Kuakini argued that DMSR had vastly under-estimated the
amount
of time it took to scan a research patient. Kuakini insisted
that the
proper allocation was 53 minutes for clinical patients and 240
minutes for
research. Kuakini asserted that DMSR's miscalculations
carried over to
the "unaccounted time," essentially asserting that all
remaining time after
processing clinical patients was spent on
grant-related activities. Tr.
at 36; NIH Decision at 8.
NIH found that DMSR acted properly in attempting to allocate costs
between
research and clinical activities, rather than simply disallowing
all
personnel costs. However, NIH agreed with Kuakini that
considerably
more time was necessary to process research patients.
Absent any
substantive documentation from Kuakini, NIH was willing to adopt
a
position somewhere between the contentions of the parties, namely,
that
a 2:1 time distribution ratio (100 minutes research versus 50
minutes
clinical) was appropriate. NIH Decision at 7-8.
Before this Board, Kuakini essentially reiterated the arguments it
had
advanced to NIH.
A. Was documentation required?
The documentation of personnel costs is the essential element in
their
allowability.
The principles for determining costs applicable to research
and
development under grants and contracts with hospitals are found at
45
C.F.R Part 74, Appendix E. Paragraph IX of Appendix E establishes
the
general standards for selected items of cost.
Specifically, subparagraph B.7.c, provides:
Charges for salaries and wages of individuals other than
members
of the professional staff will be supported by daily time
and
attendance and payroll distribution records. For members of
the
professional staff, current and reasonable estimates of
the
percentage distribution of their total effort may be used
as
support in the absence of actual time records . . . In order
to
qualify as current and reasonable, estimates must be made
no
later than one month (though not necessarily a calendar
month)
after the month in which the services were performed.
NIH alleged, and Kuakini did not deny, that Kuakini did not have
adequate
documentation to support its allocation of time between
clinical and research
patients. Instead, Kuakini asserted that the
regulation did not require
the records which NIH was seeking. Kuakini
based its position on the
fact that its time distribution had never been
questioned in the past and on
an allegation that other DMSR auditors had
reviewed a separate Kuakini
research project and not questioned the same
time distribution process under
scrutiny here. Tr. at 32-33.
It is a long-standing principle of grant law that costs for which
federal
funding is claimed must be supported by adequate documentation.
See
Acadia-Vermillion Community Action Program, Inc., DAB No. 1201
(1990) and
cases cited there. Here, the program regulation quite
clearly
establishes the requirements which grantees, like Kuakini, must
follow in
order to receive federal reimbursement for personnel costs.
Kuakini did not
provide current and reasonable estimates to support its
claims for
professional salaries, nor did it provide daily time and
attendance and
payroll distribution records for support staff salaries.
Kuakini's arguments
that no one had questioned its time distribution in
the past and that DMSR
had failed to challenge similar time distribution
in at least one other grant
are irrelevant. The issue is the time
distribution for this grant.
Kuakini was required to maintain adequate documentation. Absent
that
documentation NIH might have been justified in disallowing
the
research-related personnel costs in their entirety. Moreover, as
we
explain below, Kuakini's lack of documentation fatally undercuts
its
arguments about the reasonableness of NIH's proration formulas.
B. Was NIH's time distribution formula reasonable?
NIH disallowed only the personnel costs which it determined
were
attributable to clinical activities, even though the absence
of
documentation might have justified disallowing all research
personnel
costs claimed by Kuakini.
Kuakini argued that NIH's estimate of 100 minutes for a research
patient
was arbitrary. Kuakini noted that it had commissioned a time
study by
an independent audit firm. The time ratios produced by this
study
supported Kuakini's position as to the amount of time necessary to
scan
a research patient. Tr. at 37-41.
The validity of the time study is suspect. While NIH approached
its
estimate from the position that all working time was somehow
allocated
between research and clinical activities, the time study was
premised on
Kuakini's assertion that all time not spent actually scanning
clinical
patients was devoted to research. Thus, it appears the study
assumed
the validity of the very premise which it was designed to prove,
rather
than independently verifying it. See Kuakini Ex. 1-B.
Obviously, the time study is no substitute for actual
documentation.
Moreover, it appears to be self-serving and, therefore,
unreliable.
NIH's estimates reflect a reasonable attempt to approximate the
proper
allocation of the time spent on research by Kuakini personnel in
the
absence of adequate documentation.
C. Was application of the time distribution formula to
the
"unaccounted time" reasonable?
As noted above, Kuakini maintained that all personnel time, other
than
that spent actually scanning clinical patients, was spent
on
research-related activities. Kuakini asserted that both NIH and
DMSR
had overlooked that "in addition to scanning, the osteoporosis
center
did a lot of research related things like writing papers, reviewing
and
summarizing data, analyzing data . . . ." Tr. at 37.
Neither party's argument on this issue is particularly well-developed
or
informative. However, a grantee bears the burden of documenting
its
personnel and other costs. Kuakini failed to meet that burden here
and
cannot support its claim that all unaccounted for time was devoted
to
research. Without adequate supporting evidence from Kuakini, NIH
was
obliged to determine how the "unaccounted time" should be
allocated
between clinical and research activities. In doing so, NIH
relied on
its knowledge of Kuakini's research and its own experts to produce
what
we consider a reasonable result.
Based on our analysis of the three components of this issue, we
sustain
the disallowance of $17,689.04 in personnel costs.
4. Kuakini's failure to credit income to the grant
NIH characterized this issue as involving two questions: First,
whether
loaning or giving I-125 sources 9/ valued at $2,900 to Osteon
was
appropriate, and second, whether crediting Kuakini's
Osteoporosis
Research Fund with $803 in income from the sale of I-125 sources
was
appropriate. The total amount in dispute is $3,703. NIH
Decision at 9.
A. The I-125 used to calibrate the OA
NIH asserted that Kuakini gave, or loaned free of cost, I-125 sources
of
too little strength for further research purposes to Osteon
for
calibrating the OA. NIH correctly noted that the allowability of
this
cost was tied to the allowability of the OA purchase. NIH Decision
at
10. As we noted in section 2 above, Kuakini agreed that costs
related
to the calibration of the OA were allowable only if the purchase of
the
OA was an allowable expense. Since the OA purchase was not an
allowable
charge to the grant, the grant cannot be viewed as having
benefitted
from calibration of the OA. Consequently, NIH's
determination that
Kuakini should have credited $2,900 to the grant for the
I-125 given or
loaned to Osteon was correct.
B. The sale of I-125
Kuakini also sold $803 worth of I-125 which had been purchased with
grant
funds and credited its Osteoporosis Research Fund (Fund) with the
proceeds of
the sale. NIH asserted that Kuakini should have credited
the grant with
those proceeds.
Kuakini indicated that most of the Fund's income resulted from the sale
of
"scrap" such as the I-125 in question. Kuakini asserted that the
Fund
directly paid expenses of the research project which augmented
grant
work. Kuakini argued that since the I-125 was equipment with no
further
value, it was not obligated to credit the grant with proceeds
from the
sale. See 45 C.F.R. 74.139(a). Further, Kuakini indicated
that
the proceeds from the sale of I-125 were placed in its Osteoporosis
Research
Fund, along with income from other sources, "a portion of . . .
[which] was
used to support grant activities." Kuakini Br., Section C
at 1-2
(unnumbered); see also 45 C.F.R. Part 74, Appendix E, paragraph
III,
subparagraph E.1.
NIH found that Kuakini's grant application budgeted I-125 as a
supply
item, not equipment. Further, NIH noted that only "institutions
of
higher education and nonprofit organizations whose primary purpose
is
the conduct of scientific research," not hospitals such as Kuakini,
were
exempt from accountability for funds such as those produced by the
I-125
sale. See NIH Decision at 10.
It is sufficient for our purposes to note that the terms "equipment"
and
"supplies" are defined by regulation at 45 C.F.R. 74.132. Kuakini
did
not rebut NIH's assertion that the I-125 was a supply item as
specified
in the budget prepared by Kuakini. Certain Federal statutes
permit
title to supplies to vest in a grantee without further obligation
where,
for example, the supplies are "purchased with the funds of grants . .
.
for the conduct of . . . research at nonprofit institutions of
higher
education or nonprofit organizations whose primary purpose is
scientific
research." See 45 C.F.R. 135(a). There is no evidence
that Kuakini is
either a nonprofit institution of higher education or
nonprofit
organization whose primary purpose is scientific research.
Thus, the
regulatory exemption does not apply.
Unless it receives specific approval to the contrary in its Notice
of
Grant Award, a grantee must credit the grant with the proceeds from
the
sale of assets acquired with grant funds. See 45 C.F.R. 74.41(a);
see
also PHS Grants Policy Statement at 49. Here, Kuakini admitted,
both
that it failed to directly credit the grant with these proceeds and
that
it commingled the sale proceeds with other income in the
Osteoporosis
Research Fund, which only paid some "portion" of grant
activities. See
Kuakini Br., Section C at 2 (unnumbered).
Further, Kuakini did not
document the "portion" of the activities which were
allegedly paid in
this manner.
NIH correctly determined that Kuakini failed to credit the grant with
$803
earned from the sale of I-125.
5. Charges for the Fall 1985 Symposium
NIH disallowed $30,453.28 which it alleged represented personnel
costs
incurred in preparation for and during a three-day symposium held
by
Kuakini in the Fall of 1985. There is no dispute that the
primary
purpose of the symposium was to solicit expert opinions about the
future
direction of Kuakini's research. NIH Decision at 11-12.
As we discuss more fully below, this was not a situation where
Kuakini
actually charged specific salaries to the grant. Rather, NIH
started
from the position that the symposium would not have been an
allowable
charge to this grant. Then, in the absence of payroll
documentation,
NIH estimated the amount of time the various individuals spent
on the
symposium and disallowed a commensurate portion of their salaries
as
charged to the grant.
A. Professional Staff
NIH determined that these individuals must have attended the symposium
on
grant time. Accordingly, NIH disallowed that portion of
their
grant-related salaries reflecting the time they spent at the
seminar.
Kuakini identified the individuals in question, and their
respective
salaries, as Dr. Ross - $2,385.49; Dr. Vogel - $440.58; and
Dr. Wasnich
(the principal investigator) - $2,252.65. The amount in
issue is
$5,078.72. See Kuakini Submission (January 17, 1991),
Attachment 1 at
4-5.
Kuakini asserted that the regulations would have permitted it to
charge
professional salaries incurred in connection with the symposium to
grant
funding. However, Kuakini denied that its professionals
used
grant-related time on the symposium. Kuakini also asserted that
its
professionals provided enough excess hours to the grant to more
than
compensate NIH for grant time which may have been spent on
the
symposium. Tr. at 47-48.
NIH argued that research funds could not be used to support
conferences
and that Kuakini failed to take advantage of alternative methods
of
obtaining expert advice. NIH asserted that a "good alternative"
for
obtaining expert advice would have been "to invite several
expert
consultants and charge their services to the grant." NIH
insisted that
it was unrealistic to believe that professional personnel at
Kuakini
were contributing their personal time to the symposium. NIH
Decision at
12-13.
NIH adopted the logic of the DMSR Report for its determination that
there
was a cost allowability problem. DMSR contended that Kuakini
equated
the effort a professional devotes to a grant to a 40-hour work
week. Rather,
DMSR asserted that in determining the percentage of a
professional's salary
that can be charged to a grant, consideration must
be given to the an
individual's total professional effort at an
institution, regardless of the
number of hours worked. DMSR noted that
while these individuals did not
receive full time salaries from Kuakini,
all salary which they did receive
was charged to the grant. Thus, all
work they performed at Kuakini must
have been grant-related. DMSR
Report at 26.
NIH indicated that for these costs to have been allowable,
the
professionals would have had to provide prior (to the symposium)
written
evidence from Kuakini and, for example, the University of Hawaii
showing
that they had been released from their time commitments to
those
institutions. NIH Decision at 13. NIH concluded, that, at
the very
least "prior consultation . . . should have been initiated by
Kuakini."
NIH Br. at 3.
As Kuakini noted, 45 C.F.R. Part 74, Appendix E, paragraph
IX,
subparagraph B.7.d., permits a grantee to charge professional
salaries
incurred while attending such a symposium to its grant if attendance
is
supported by a reasonably contemporaneous written estimate of
effort.
Thus, in theory, this type of cost is generally allowable.
Here,
however, the record is devoid of evidence that Kuakini attempted
to
charge the grant for professional time spent at the symposium.
Rather,
it is NIH's assumption that this is what Kuakini has done which
serves
as the basis for the disallowance.
Clearly, a grantee has the burden of documenting personnel costs
charged
to Federal funding. However, in this case there has not been
an
identifiable charge to Federal funds related to time spent at
the
symposium. Instead, the disallowance is based solely upon an
assumption
that such a charge must have been made. NIH has done no more
than
assert the implausibility of professionals attending a symposium
on
their own time as justification for the disallowance. In doing so,
NIH
has expanded a grantee's burden to document personnel costs
by
effectively requiring Kuakini to document time for which no
Federal
funding is claimed.
Based on our examination of the parties' arguments, we can find
no
reasonable basis for NIH's decision to disallow these costs.
Therefore,
we reverse NIH's disallowance of $5,078.72 related to the salaries
of
these three professionals.
B. Support Staff
Kuakini sought to reduce NIH's disallowance of support staff
salaries
expended in connection with the symposium by $8,587.31.
Kuakini broke
this figure down to $7,979.76 ($2,519.96 and $5,459.80) for
two
individuals working in preparation for the symposium and $607.55
for
salaries of personnel working at the symposium.
Regarding the proposed reduction of $2,519.96, Kuakini noted that
NIH
correctly attributed 25% of one individual's efforts, from September
1,
1984 through September 28, 1985, to the symposium. Kuakini
asserted
that this estimate of unallowable time should be reduced by
8%
($2,519.96) to reflect the time this individual spent
assisting
professionals in preparation for the symposium. Kuakini
Submission
(January 17, 1991), Attachment 1 at 5.
Regarding the proposed reduction of $5,459.80, Kuakini indicated that
the
individual in question worked on the symposium as a volunteer prior
to being
hired by Kuakini on February 25, 1985. Thereafter, she split
her time
between grant and symposium work. Kuakini noted that this
person had
told the DMSR auditor that she had spent practically all her
time on the
symposium when she first started at Kuakini, but neglected
to mention that
this was in a voluntary position. Kuakini indicated
that its claim is
supported by documentation already considered by NIH.
Id.
NIH addressed this documentation in its decision and essentially found
the
absence of supporting time records for these individuals, made it
impossible
to accept Kuakini's assertions as to the time which would be
properly
chargeable to grant funds. NIH Decision at 13. Kuakini
provided no
further evidence to this Board regarding either individual.
Absent any
additional documentation to the contrary, we find that the
inadequacies cited
by NIH still exist. Consequently, we find NIH's
determination to be
reasonable and correct.
Kuakini indicated that although NIH disallowed staff salaries for
five
days at the symposium, the symposium had only taken place over
four
days. Thus, Kuakini argued that the disallowance should be reduced
by
$607.55, representing the cost of one day's worth of staff salaries.
In
both its decision and its brief, NIH asserted that Kuakini provided
no
documentation in support of its position. See NIH Decision at 13;
NIH
Br. at 3. While the question of the length of the symposium should
be
relatively easy to resolve, Kuakini has provided no evidence
to
substantiate its position. Accordingly, we sustain the disallowance
of
these costs as originally determined by NIH.
Based on the above analysis, the disallowance for support staff
salaries
was proper.
6. Computer processing of clinical data
Kuakini noted that DMSR cited $38,309 in costs paid by Kuakini to
the
University of Hawaii for computer services between June 1985 and
August
1987. Kuakini indicated that because computer processing records
were
not available to support this cost, DMSR arbitrarily determined
that
one-half of those costs should be disallowed, allegedly because
they
represented the cost of processing clinical data. Kuakini Br.,
Section
F at 1 (unnumbered).
In its decision, NIH--
did not dispute . . . [Kuakini's] claim that there was no
other
purpose for processing data from clinical patients except
for
possible future comparisons with data from research subjects
and
those from literature . . . [NIH] held that from a
scientific
standpoint there was no compelling reason for such
comparisons
and that the associated expense was therefore
inappropriate.
NIH Decision at 15.
Kuakini asserted that processing clinical data was an important part
of
the research envisioned by this grant. Additionally, Kuakini
argued
that even if a disallowance was warranted, the methodology used here
was
improper. Kuakini Br., Section F at 1 (unnumbered). Kuakini
admitted
that the number of clinical and research patients for whom data
was
processed was about the same. However, Kuakini asserted that the
actual
processing time itself was negligible and that the "real cost"
was
incurred in data analysis and manipulation of the data incidental to
the
research. Kuakini indicated that some clinical data was used to
augment
research-related publications, but insisted that "no more than 5% of
the
computer time" was involved. Kuakini Submission (January 17,
1991),
Attachment 1 at 3.
This issue comes down to the value of the clinical data in this
research
grant. NIH fully reviewed the merits of Kuakini's position and
found
that "there was no compelling scientific reason, necessary to . . .
the
grant for processing data from clinical patients . . . ." NIH Br.
at 4.
In essence, Kuakini took the position that any clinical
information,
however remote to the purposes of the grant-supported research,
has
value to the research. Thus, Kuakini reasoned, the cost of
processing
clinical information should be an allowable charge to its
federally
funded research grant.
Kuakini's argument, however, is clearly self-serving. The
grant
provided a funding source to cover its data processing
costs.
Apparently, Kuakini attempted to include under the umbrella
of
research-related costs all that it could. On the other hand, the
NIH
determination was based on an independent analysis of the costs in
light
of the grant purpose.
Kuakini has failed to demonstrate that data from clinical patients
had
more than tangential value to the purposes of the grant. Thus, we
find
that NIH reasonably concluded that these costs were not
allowable
charges to research grant funding and we uphold the disallowance
of
these costs in principle.
Having determined that a disallowance was appropriate, we now must
examine
the manner in which the disallowance was calculated. Again, we
are
faced with a situation where Kuakini cannot document costs claimed
under the
grant. In the absence of supporting documentation NIH
disallowed costs
based on Kuakini's concession that the split between
the number of research
and clinical patients was approximately 50-50.
See Kuakini Submission
(January 17, 1991), Attachment 1 at 3. A grantee
must document its
claims for federal funding. Not only has Kuakini
failed to document
these costs, but it is now asking that we accept its
much lower estimate of
clinical processing time, again without
supporting documentation.
Absent documentation to the contrary, NIH's
50-50 split of clinical and
research data programming costs is
reasonable. Kuakini provided no
basis for accepting its figures over
NIH's. Accordingly, we sustain the
disallowance of $19,154 in data
processing costs.
7. Prepaid Computer Costs 10/
The original project period for this grant was September 29, 1980
through
August 31, 1983. There is no dispute that, on July 20, 1983,
the
project period for the grant was extended to September 30, 1986.
On
August 3, 1983, Kuakini prepaid the University of Hawaii $9,600
for
computer services to be provided to the grant beginning in
September
1983. However, DMSR disallowed the $9,600 because it was
expended for
services extending beyond the project period ending August 31,
1983.
Tr. at 61-62.
Kuakini contended that, at the time of its review, DMSR was unaware
that
the grant had been extended for three years. Thus, Kuakini
asserted,
the grant received the full benefit of this expenditure. Id.
at 61-64;
Kuakini Submission (January 17, 1991), Attachment 1 at 2.
This situation might have been different if the grant project period
was
ending in August 1983. In that case, the money would have been
expended
for services to be rendered after the end of the grant period.
However,
here when the prepayment was made, the project period had already
been
extended, so the services would benefit the grant during the
extended
project period. As Kuakini argued, it would be elevating form
over
substance to disallow these costs in their entirety simply because
the
payment was technically made before the first project period
was
extended.
This does not, of course, answer the question whether the expenses
are
allowable in full, as charges to the grant. In section 6 above, we
found
that only one-half of computer processing costs should properly
be
charged to the grant. Since no detailed documentation was submitted
on
the underlying nature of the prepaid computer costs, we find
similarly
that one-half of those costs should be disallowed as not
properly
documented costs of the grant.
We therefore reduce the original amount of disallowed prepaid
computer
costs by $4,800. Conversely, the same amount is allowable.
Conclusion
Based on the proceeding analysis, we reduce the NIH disallowance by
a
total of $9,878.72. The reduction consists of $5,078.72,
disallowed as
professional salaries connected with the fall 1985 symposium,
and $4,800
disallowed as prepaid computer costs. We sustain the
remainder of the
disallowed costs totalling $93,689.01.
Donald F. Garrett
Norval D. (John) Settle
Alexander G. Teitz Presiding Board Member
1. NIH is a division of the United States Public Health
Service
(PHS).
2. The appeal to NIH was taken pursuant to regulations at
42 C.F.R.
Part 50, Subpart D. Prior to NIH's decision, NIA conceded
$3,758.34.
Thus, the amount at issue in the NIH Decision was
$156,869.62. See NIH
Decision at 2-3.
3. During the course of this appeal, NIH agreed that
Kuakini could
amend its appeal to include these costs (identified as
salaries,
including fringe benefits, and indirect costs). See NIH
Memorandum
(September 27, 1990) at 2, included with Kuakini's January 28,
1991
Submission; see also Kuakini Submission (October 25, 1990).
4. NIH initially maintained that since Kuakini failed to
appeal the
disallowance of prepaid computer costs to NIH, it could not appeal
that
issue to this Board. Tr. at 59-64; NIH Memorandum for the
Record
(September 12, 1990). Ultimately, NIH withdrew its
objection. NIH
Memorandum for the Record (January 25, 1991).
5. A VCH is a bone-density data acquisition unit first
designed in
1978 in conjunction with NASA's Apollo and Skylab space
programs. The
acronym "VCH" is drawn from the first letters of the last
names of the
instrument's designer, hardware engineer, and software
engineer. See
Kuakini Exhibit (Ex.) 2-A at 1-3.
6. Unless otherwise indicated, all regulatory references
are to the
1980 edition of 45 C.F.R. Part 74.
7. Osteon was actually a Hawaii corporation formed by the
principal
and co-principal investigators to develop, manufacture, and
market
instruments for diagnosing and monitoring osteoporosis. The DMSR
report
found nothing improper in the purchase of the OA from this
corporation.
DMSR Report at 3-6. In fact, the purchase price of $11,700
was
presumably the cost of the parts and did not represent any profit.
8. DMSR noted that for the one year period September 1,
1985 through
August 31, 1986, the clinical to research ratio was more than
10:1.
However, for that same period two thirds of the personnel costs
involved
were charged to the grant. DMSR Report at 7.
9. A radioisotope, I-125 is used as a radiation source in
bone
density measurement. See Cover Letter to DMSR Report (April 4,
1989).
10. As indicated in note 4 above, NIH initially objected to
Kuakini's
appeal of these costs to this Board. While NIH ultimately
withdrew its
objection, it did not provide any substantive argument on
this