GAB Decision 303
May 28, 1982 South Carolina Department of Social Services; Docket Nos.
81-80-SC-HC; 81-184-SC-HC Garrett Donald; Teitz, Alexander Settle,
Norval
The South Carolina Department of Social Services (Grantee) appealed
two decisions of the Health Care Financing Administration (HCFA or
Agency), disallowing a total of $98,820 in federal financial
participation (FFP) claimed under Title XIX (Medicaid) of the Social
Security Act.
In the first appeal before the Board, Docket No. 81-80-SC-HC, the
Grantee appealed $77,348. In the second appeal, Docket No.
81-184-SC-HC, the Grantee appealed $21,472. Both cases involve the same
issue dealing with the same contract, and, therefore, are considered
jointly at the Grantee's request and with the Agency's consent.
There are no material issues of fact in dispute. We, therefore, have
determined to proceed to decision based on the written record. For the
reasons discussed below, we sustain the disallowance.
Background
On September 1, 1979, the Grantee entered into a contract with
Professional Health Research, Inc. (PHR) for assistance in implementing
its Medicaid Management Information System (MMIS), a mechanized claims
processing and information retrieval system. The Grantee stated that
this contract involved follow-up activities to an original contract with
Touche Ross and Company (Touche Ross) and its subcontractor, PHR. The
Grantee stated that a decision was made to have separate contracts with
Touche Ross and PHR, rather than maintaining the previous relationship.
On October 2, 1979, the Grantee requested Agency approval of both the
PHR and Touche Ross contracts.Only the PHR contract is in question here.
By letter dated December 18, 1979, the Grantee was informed that both
contract approval requests were denied. The letter stated that the
Grantee had provided no justification for the additional manpower
requested; that since there was no indication that the MMIS had been
implemented, there was no basis for exercising the contractual provision
for one man year of effort following MMIS implementation; and that work
under the PHR contract appeared to duplicate the (2) efforts already
required under the State's previous contract with Touche Ross.
The Grantee was notified, by letter dated May 11, 1981, that all FFP
claimed in payments to PHR were disallowed ($77,348). Further on
September 29, 1981, the Agency notified the Grantee that an additional
$21,472 in FFP under the PHR contract was disallowed for a subsequent
time period. The disallowances were taken on the ground that the
Grantee had not obtained prior approval of the contract with PHR in
accordance with 45 CFR 95.611(a) (1979).
A. Grantee's arguments
Section 95.611(a) of 45 CFR concerns acquisition of automatic data
processing (ADP) equipment or services and states, in part:
A State must obtain prior written approval by the Department for
acquisition cost of ADP equipment or services when the acquisition cost
of ADP equipment or ADP services exceeds $25,000 in Federal and State
funds.
The Grantee argued that 45 CFR 95.611(a) was erroneously applied to
this case because Grantee had attempted to obtain prior approval for the
PHR contract on October 2, 1979. The Grantee argued that although the
PHR contract period began on September 1, 1979, no payments were made
until November 20, 1979, which would still have allowed time for prior
approval.
The Grantee argued further that since 45 CFR 95.611(a) had been
amended (effective February 19, 1980) so that a purchase of ADP
equipment or services had to exceed $100,000 before prior approval was
required, this revealed that the intent of HHS was not to become
involved in acquisitions of less than that amount.
The Grantee argued in the alternative that the MMIS came under 45 CFR
Part 74, Appendix C, Part II, B.1. (1973 through 1980) as an accounting
and information system, and that the PHR contract therefore, did not
need prior approval. That regulation states, in part:
The cost of establishing and maintaining accounting and other
information systems required for the management of grant programs is
allowable.
The Grantee also argued that PHR's performance under the contract was
not duplicative of work done by Touche Ross, and that the Agency's
disapproval of the PHR contract on that basis was erroneous. The (3)
Grantee stated that Touche Ross received payments only for the drawing
up of specifications for a Surveillance and Utilization Review (S/UR)
Subsystem, while PHR received no payments for specification work. The
Grantee noted also that PHR was able to do the work for the S/UR
Subsystem cheaper than Clemson University's Division of Information
Systems Development (DISD), another contractor.
The Grantee further contended that since it had received Nofification
of Certification of the MMIS, it should be eligible to receive FFP on
the PHR contract since the contract was integral to the operation of the
S/UR Subsystem of the MMIS. The certification of an MMIS by the Agency
follows the inspection and testing of the system to ensure that the
system has been implemented and that it is providing useful Medicaid
information. (See Grantee's brief, 81-80-SC-HC, p.5)
Finally, the Grantee stated that the Agency was not confusing the
basis for the disallowance of the Touche Ross contract with the basis
for the disallowance of the PHR contract, and that the finding in the
Agency's letter of December 18, 1979 regarding additional manpower did
not pertain to the PHR contract.
B. Agency's arguments
The Agency stated that the central issue was whether there had been
compliance with the statute and regulations governing the MMIS program
which require approval by HCFA of contract proposals submitted by the
Grantee prior to the time a contractual obligation is entered into by
the Grantee. The Agency asserted that 45 CFR 95.611(a) clearly
prescribes a requirement for prior approval where the acquisition of ADP
services would exceed $25,000. The Agency argued that the fact that the
Grantee made no payments on the PHR contract until November 1979 is
irrelevant to the issue of whether prior approval had been obtained.
The Agency also noted that, in addition to the requirement in 45 CFR
95.611(a) for prior approval, 45 CFR 433.112(a) required Agency approval
in this case. Section 433.112(a) provides that -
FFP is available at 90 percent in expenditures for design,
development, installation or improvement of a mechanized claims
processing and information retrieval system, if the system is approved
by the Administrator.
The Agency also cited in this respect that Board's decision in South
Carolina Department of Social Services, Decision No. 256, February 16,
1982, which stated that the development and implementation of an MMIS
required agency approval. (4) The Agency further stated that the
decision to disallow the contract was based on factors in addition to
apparent duplication of the Touche Ross contract, so that a finding that
there was no duplication would not warrant a reversal of the
disallowance. The Agency stated, moreover, that HCFA had considered the
Grantee's responses to its disapproval of the PHR contract and that
HCFA's position remained unchanged.
Additionally, the Agency stated that certification of the MMIS
program would not be an implicit approval of the PHR contract regardless
of whether the work was done more cheaply than DISD could do it.
C. Discussion
The Grantee's assertion that 45 CFR 95.611(a) was incorrectly applied
is without merit. First, the fact that the dollar limit for
acquisitions requiring prior approval has been raised has no bearing on
this case because the new regulation was not effective during the period
in question here. Although it may be within the Agency's discretion to
apply the new regulation retroactively, it has not chosen to do so.
Second, we are not persuaded by the argument that even though the
contract with PHR began on September 1, 1979, the Agency could have
given prior approval since payment was not made until November 1979.
The operative date here is the date of entering into the contract,
rather than the date that payment was made on the contract. This is
apparent from the language of section 95.611(a), which requires prior
approval for the "acquisition" of ADP services. Once the Grantee
entered into the contract with PHR, the Agency could no longer preclude
the acquisition of the services, but could only preclude the Grantee
from claiming FFP for the costs of the services. Further, 45 CFR Part
74, Subpart Q, Appendix C, Part I, B.1. (1979) states that-
(approval) or authorization of the grantor Federal agency means
documentation evidencing consent prior to incurring specific cost.
The fundamental obligation to pay the costs in question was incurred
when the contract was entered into, and not when payments were made
under that contract. Accordingly, we find that the Grantee did not
request prior approval as required by 45 CFR 95.611(a). *
(5) The Grantee's certification argument is also without merit.
Approval of the MMIS whole does not automatically mean approval of a
particular contractor or contract.
The grantee's argument that the MMIS comes under 45 CFR Part 74,
Appendix C, Part II, B.1., which provides that the cost of accounting
systems is allowable, has already been addressed by this Board. In
South Carolina Department of Social Services, Decision No. 256, February
16, 1982, the Board reviewed a description in the original Touche Ross
contract of the tasks involved in developing and implementing the
State's MMIS system. The Board found that, although the MMIS "may also
have attributes which would bring part of it within the parameters of an
accounting system . . . ," many of the tasks were "closely related
to
development and modification of computer (ADP) programs." It concluded
that the Agency therefore "reasonably determined that the costs of
development and implementation of the MMIS required prior approval."
(Decision 256, pp. 4-5) the PHR contract involved a subsystem of the
MMIS which required the same basic type of tasks as the Touche Ross
contract. We conclude, therefore, that prior approval was required here
as well.
We note finally that even though prior approval was required, the
Agency in effect treated the Grantee's October 2, 1979 request for
approval as a request for retroactive approval, which it denied. The
Grantee sought reconsideration of the disapproval in a letter dated
February 12, 1980, arguing that the prior contract with Touche Ross did
not provide for "implementation" of the MMIS system. The record
indicates that the Regional Medicaid Director carefully considered this
argument not recommended disapproval based on an analysis of the
original Touche Ross contract. (Memorandum dated March 17, 1980) He
concluded that the PHR contract duplicated the Touche Ross contract.
On appeal to this Board, the Grantee argued merely that the PHR
contract did not duplicate the work performed under the Touche Ross
contract. This argument does not meet the substance of the Agency
position, however, which was that the contract included implementation
and that the Agency has approved it with this understanding. According
to the Agency, implementation of an MMIS system necessarily means
implementation of all required sybsystems including the S/UR Subsystem.
This is supported by the applicable program regulation guide on MMIS
systems, MSA-PRG-31, and was not contradicted by the Grantee. We
therefore conclude that the Agency had a reasonable basis for denying
approval. (6) Conclusion
Based on the foregoing analysis, the disallowances totalling $98,820
are sustained. * Moreover, although 45 CFR 433.112(a) does not
expressly require prior approval, the Grantee also failed to comply with
that regulation since the cost principles quoted above define "approval"
as prior approval.
OCTOBER 22, 1983