GAB Decision 125
October 3, 1980 Sweetwater Health Services, Inc.; Docket No. 79-98
Coster, Clarence; Settle, Norval Przybylinski, Donald
This case is before the Departmental Grant Appeals Board (Board) on
appeal from a decision of the Public Health Service (PHS) Grant Appeals
Board issued on April 20, 1979 regarding Sweetwater Health Services,
Inc. (SHS, grantee). The PHS Board upheld three or four audit
disallowances by the Office of Health Maintenance Organizations (OHMO),
PHS. The disallowances involve determinations by the PHS Board that:
(1) SHS could not account for $406.68 transferred to SHS from a prior
grantee; (2) SHS did not demonstrate that $2,587.46 expended for legal
services was payment for services to SHS; and (3) SHS lacked sufficient
documentation for $17,560.15 in cash and in-kind contributions SHS
claimed as its non-Federal share.
This decision is based on grantee's appeal, PHS's response to the
appeal and an Order to Develop the Record, and the parties' comments on
the Draft Decision issued by the Board. The Draft Decision invited
comments from the grantee and PHS but noted that unless the parties
provided persuasive new information or arguments, the Board might issue
a decision in substantially the same form.
Background
Wyoming Health Services, Inc. (WHS), was awarded a Federal grant in
April 1972 (08-P-000019-01-0) to study the feasibility of establishing a
Health Maintenance Organization (HMO) in Sweetwater County. In January
1973, WSH received a grant of $150,817 (08-P-000019-02-0) for the
purpose of developing an HMO in Sweetwater County. During this time,
local physicians and community leaders had formed SHS, and worked with
WHS to develop an HMO for their locale. SHS was incorporated in June
1972 for the stated purposes of developing an organized health delivery
system and an HMO.
In May 1974, WHS formally requested that OHMO transfer Grant No.
08-P-000019-02-0 to SHS, noting that SHS had had operational authority
over the project since June 1973. In June 1974, SHS formally requested
that it be designated as the grantee and stated that it was willing to
accept responsibility for the grant. SHS also said it was in possession
of the remaining grant funds. WHS's report of expenditures through May
31, 1974 showed a total outlay of $129,749. The grant was transferred
and the Notice of Grant Award to SHS showed a total approved budget of
$21,068 ($150,817 -- $129,749). The award noted that "(all) terms and
conditions imposed on the original grant remain in effect."
SHS was awarded a grant in its own right in the amount of $205,781
for the period from October 1, 1974 through September 30, 1975
(08-P-000036-01-0). The term of the grant was subsequently extended
through November 30, 1975 to allow SHS to close out the HMO project.
When the HEW (now HHS) Audit Agency reviewed SHS's expenditures, it
found that SHS had not maintained an adequate financial management
system. The Audit Agency found it necessary to retain the services of a
certified public accountant firm to construct the records necessary to
determine whether all the Federal funds were accounted for. Audit
Agency Report, Audit Control No. 08-81600, p.3. The CPA firm determined
that in addition to the lack of accounting records, SHS had been lax in
several administrative areas, including a general lack of detail in the
documentation of most expenditures. The firm did not believe, however,
that there was a misappropriation of Federal funds or gross negligence
in handling the affairs of the organization.
I. Fund Shortage
PHS found that on June 1, 1974, when the grant was transferred to
SHS, the Federal fund balance was $21,068.00. The audit showed,
however, that only $20,661.32 could be accounted for, resulting in a
fund shortage of $406.68. SHS argued that the discrepancy could be
reconciled. In the June 8, 1979 request for PHS review of the OHMO
determinations, SHS explained that in January 1974, it paid the Travel
Management Agency $727.06 by check no. 1131 for air travel expenses
(voucher no. 1341), but WHS did not record this expense. In addition,
SHS reportedly received a $250.00 reimbursement for management services
prior to the grant transfer, but this receipt was not recorded by WHS.
According to SHS, the reconciliation would work out as follows:
Grant transfer $21,068.00 Minus
travel expenses 727.06 Plus
reimbursement, and 250.00 Petty Cash
70.20 Adjusted balance 20,661.14
Balance per audit report 20,661.32 Fund
shortage .18
SHS hypothesized that there was an error in accounting for petty cash
during the audit.
PHS, apparently in response to SHS's argument regarding the fund
shortage, reviewed the audit work paper and determined that travel
voucher no. 1341 was prepared June 30, 1974 to record $727.06 as an
expenditure for June 1974 and that check no. 1131 was listed as
outstanding on the bank reconciliation. Inasmuch as the check was never
paid, the CPA firm cancelled it and the travel voucher thereby reducing
travel expenses by $727.06.
The Board does not find SHS's explanation of the fund shortage
persuasive. Even if it was established by proper documentation that the
check to the travel agency was paid, this would not explain the
discrepancy in petty cash and the lack of documentation for the alleged
receipt of the $250 reimbursement. In fact, SHS's explanation raises
more questions than it answers. The check in question was allegedly
paid to the travel agency in January 1974 but the travel voucher was not
prepared until June 1974. Likewise, the check had still not cleared the
bank six months after it was allegedly issued. The CPA firm's bank
reconciliation was for June 30, 1974, a date subsequent to the transfer.
Thus, if the check had not been cashed by that date, it would not have
had any effect on the amount of cash on hand, funds transferred or petty
cash as of May 31, 1974, and SHS is accountable for the fund shortage as
of that date.
It is unnecessary, however, to speculate as to the effect of such
adjustments on the fund balance. When SHS accepted Federal funds, it
accepted the responsibility to properly account for the use of the
funds. Section 1307 of Public Law 93-222 (42 USC 300e-6), which
authorizes the making of this type of grant, stipulates that, "(each)
recipient of a grant . . . shall keep such records as the Secretary
shall prescribe, including records which fully disclose the amount and
disposition by such recipient of the proceeds of the grant . . . and
such other records as will facilitate an effective audit." Federal
regulations which implement the law set forth with specificity the
record keeping requirements and the accountability of a grantee. See 42
CFR 110.211-213, and 45 CFR 74.20(a), 38 FR at 26277, September 19,
1973. The Board finds that SHS did not maintain proper records and was
not able to account for the $406.68 fund shortage. Thus, SHS will be
held responsible for this amount of public funds entrusted to its use
and care.
II. Legal Expenses
PHS disallowed $2,587.46 that SHS paid to a law firm for legal
services beacuse the bill included charges attributable to Medical
Services, Inc. (MSI), as well as to SHS, and there was insufficient
documentation to allocate the respective shares. MSI was an
organization active in developing health care delivery in Sweetwater
County. An October 25, 1974 bill from the law firm to SHS, for the
period from January 1 through September 30, 1974, showed as the subject
matter "SHS-MSI." The professional services in question were listed
as:
conferences; Green River Clinic memo; MSI-hospital lease; PA
contracts; and SHS contracts.The total amount of the bill was
$3,294.32, but documentation indicated that MSI reimbursed SHS for
$706.86 of the costs. PHS had requested a breakdown of the costs but
SHS stated that the law firm was reluctant to furnish the data because
of its lack of detailed information.
An analysis of the law firm's bill shows that only one of the listed
items, "SHS Contracts," is identifiable as services rendered to SHS.One
of the other items -- "MSI-Hospital Lease" -- is directly identifiable
as services rendered to MSI, and two others are indirectly attributable
to MSI operations. According to the evidence of record, MSI entered
into a contract with the Green River Chamber of Commerce to staff the
Green River Clinic and employed at least some Physician Assistants
(PAs). Thus, the "Green River Clinic Memo" and the "PA Contracts"
appear to represent services rendered to MSI. When a cost benefits both
the grant and other endeavors, the regulation at 45 CFR Part 74,
Appendix F, Section B.4, requires that the costs be divided in
proportion to the benefits received.
Although it is impossible to determine from the bill itself how much
time was devoted to each activity, there is no evidence that SHS
received over three-quarters of the legal services which would justify
paying over three-quarters of the cost. In fact, the face of the bill
indicates that MSI received most of the services. SHS was given several
opportunities, but did not produce sufficient evidence of its
expenditures. Accordingly, the Board sustains the disallowance of the
legal expenses.
III. Non-Federal Matching Expenditures HS disallowed $17,560.15 SHS
claimed as cash and in kind contributions for lack of sufficient
documentation. The Notice of Grant Award, as amended in December 1974,
states that SHS was required to provide 10 percent of the grant
expenditures ($17,819). The cost sharing could have consisted of cash
or in-kind contributions furnished by either grantee or a third party.
See PHS Supplement, Grants Administration Manual 1-400-20c.
The Audit Agency Report indicated that SHS claimed as non-federal
share $16,029 in cash received from MSI and the Priorities Board of
Sweetwater County (Priorities) and $1,805 in in-kind contributions by
Priorities for physician recruitment. The money from Priorities was for
shared administrative salaries and support costs related to clinic
planning and development; the funds from MSI were to pay MSI's share of
the salary for SHS's Director of Clinic Management and for shared
administrative costs. See Audit Report, p. 7.
A. Physician Recruitment
In support of its position with respect to physician recruitment
costs, SHS contends that one of the purposes of the grant was to recruit
physicians to practice in Sweetwater County. Therefore, SHS argues that
the costs of activities of other parties in furthering this end could be
considered non-Federal matching funds.
SHS's application for an initial HMO development grant lists
"recruiting" as a project activity. The detailed budget submitted
with
the application allocated $25,000 to physician recruiting with $15,400
to be paid by the applicant and others, and $9,600 by grant funds. The
budget notes that "(physician) recruiting expenses will allow the
project to address its major problem; a significant level of community
matching funds will be provided to attempt to attract more doctors." One
of the project goals was "(to) recruit personnel for the organization,
with emphasis on physician recruiting."
Although a September 1974 memorandum from a Regional HMO Program
Consultant recommended that PHS reduce the SHS budget by $9,600 because
"recruiting physicians to the community but not to the HMO per se . . .
was not a developmental cost properly chargeable to the HMO grant," PHS
did not reduce the budget.
PHS apparently allowed recruitment costs which were borne by SHS
itself, but disallowed such costs as matching funds when they were
expended by Priorities.It is fundamental grant administation policy
that, as pertinent here, matching funds and Federal funds are subject to
the same rules of allowability governing project costs. See 45 CFR
74.52. Thus, if recruitment costs were allowable expenditures from
grant funds, they should be allowable as third party in-kind
contributions. The Board does not find PHS's rationale for this
disallowance to be reasonable. It is difficult to conceive how the
relative benefits derived from recruiting physicians to the HMO service
area could be allocated between the HMO and the general population of
the HMO service area. There was an identity of interests in this
objective, and both parties derived the full benefit of the recruitment.
Accordingly, the Board finds that the $1,805.30 which Priorities
expended for recruitment is allowable as matching funds.
B. Administrative Costs and Clinic Development
The Board finds that Priorities' and MSI's payments to SHS can not be
regarded as non-Federal share. The payments appear to have been
reimbursement for services rendered to MSI. The CPA firm's report
stated that SHS and MSI shared office space, secretaries and other
business expenses for a period of time. MSI reimbursed SHS for those
expenses and at the time of the audit owed SHS $2,376. The report also
stated that the auditors never found any support for salary or fee
reimbursement between SHS and MSI. The auditors believed that the
activities of SHS and MSI should have been separated.
The Audit Agency also stated that although there was some indication
that the expenditures were intended to benefit the HMO, it could not
locate any source documents which showed that the case or in-kind
contributions directly benefited the HMO developmental activities; thus,
it was not possible to determine the extent to which the contributions
constituted the non-Federal share.
SHS argued that it had received funds and services in support of two
of five major project activities set forth and approved in the grant
application, namely, physician recruiting and ambulatory care facility
development. These contributions came from Priorities and MSI. SHS
also alleged that it maintained time logs to document staff efforts and
allocated them to authorized activities. It was grantee's belief that
the auditor reviewed these records, although SHS was unable to locate
them when responding to PHS on January 8, 1979. SHS argued that it was
essential to develop an adequate health delivery system if the HMO were
to succeed and that this was understood and supported by the Federal
officials administering the grants. In view of this, SHS thought that
the positive results of SHS physician recruitment and clinic development
activities ought to provide sufficient evidence that the contributions
were of direct benefit to the grant. SHS also stated that the officials
reviewing the audit apparently did not understand that the HMO being
developed was an individual practice association prototype which
required a community based health development program.
The payments from MSI to SHS were characterized as reimbursement.
Likewise, although MSI reportedly paid half of the salary of SHS's
Director of Clinic Management, it appears that such payment represented
reimbursement for services. The Audit Agency's report observed that the
grant approved a position entitled entitled Director of Clinic
Management but the tasks described in the grant application are directed
at the acquisition of ambulatory care facilities for SHS rather than the
management of such facilities for others.
MSI was not a non-profit corporation. It was engaged in activities
which could, and usually do, provide a return on investment. Under
these circumstances, the payments to SHS must be regarded as a business
transaction in which MSI paid for services rendered by SHS employees,
not as a contribution to further the purposes of the grant.
Priorities' payment to SHS for shared administrative salaries and
support costs related to clinic planning and development no doubt
facilitated the recruitment of physicians by providing adequate office
and treatment space, but SHS did not own and operate the clinics in
question as an adjunct or part of the proposed HMO. Likewise, there is
no evidence that Priorities' activities were intended to produce
treatment facilities and a medical support substructure for the HMO.
Priorities' goal was to increase treatment capabilities in Sweetwater
County. Community leaders and area employes were willing, in effect, to
subsidize medical practitioners to achieve this end. While this may
have constituted an example of enlightened civic-mindedness, it was not
the purpose of the grant and similar expenditures by grantee would not
be allowed. An activity must be explicitly included within the scope of
the grant before it may be considered for purposes of computing the
non-Federal share. The fact that the activity may, as a secondary
result, have a beneficial effect on the purpose of the grant is
insufficient. Accordingly, the Board concludes that Priorities'
payments to SHS were compensation for services received and not a
contribution to further the purpose of the grant.
Conclusion
As discussed above, the decision of the PHS Grant Appeals Board is
affirmed except for $1805 expended for physician recruiting.
OCTOBER 04, 1983