GAB Decision 395
February 28, 1983
Missouri Department of Social Services;
Ford, Cecilia; Teitz, Alexander Settle, Norval
The Missouri Department of Social Services (Appellant, State)
appealed a decision of the Health Care Financing Administration (Agency,
HCFA, Respondent) disallowing $101,716 in federal financial
participation (FFP) claimed under Title XIX (Medicaid) of the Social
Security Act for the period October 1, 1975 through June 30, 1978. /1/
The disallowed amount represents the difference between the State's
claim for reimbursement at the 90 percent FFP rate for design,
development, or installation of a mechanized claims processing and
information retrieval system (Medicaid Management Information System,
MMIS) and the Agency's finding that the costs claimed for reimbursement
were eligible for matching only at the 50 percent FFP rate for
administrative costs.
The activities for which the State claimed 90 percent FFP and which
the Agency found were eligible for only 50 percent FFP with respect to
the State's MMIS efforts were (1) designing and implementing an
integrated data based for income maintenance; (2) documenting the
current manual system for Medicaid claims processing; and (3) preparing
specifications for bids for an outside contractor.
The Agency also determined that the State's claim for 90 percent FFP
was unallowable to the extent it was not supported by adequate time
distribution records.
Based on the record, which includes the parties' arguments, Exhibits
1-13 (Appellant's Appeal File) and Exhibits A-L (Respondent's Appeal
File), as well as a transcript of a telephone conference call held
between the parties and the Board, we sustain the disallowance at issue.
(2) I. Background
In 1974, the State of Missouri submitted an advanced planning
document (APD) to the Social and Rehabilitation Service (SRS)
(predecessor to HCFA). The objective of the Missouri Department of
Social Services was to implement a Management Information System to meet
the needs of the Department in fulfilling the requirements of Titles I,
IV, VI, X, XVI, and XIX of the Social Security Act. The State's
intention in its first phase of the development of its Management
Information System was to implement, to the maximum extent possible, a
MMIS. Exhibit 2, p. 1. The State's plan was to develop an on-line
integrated Management Information System to be "designed and built
around a state-wide integrated client data base which would contain all
data relevant to any form of public assistance, including food stamps
and medical assistance." Exhibit 3, pp. 1 and 4.
The State's APD was subsequently approved by the Regional
Commissioner of SRS. However, the Regional Commissioner, in a letter
dated January 21, 1975, stated that:
Since this is an integrated approach to several different SRS program
areas, cost records relating to this project must be maintained to
reflect expenses incurred in each of the program areas.
Exhibit 7, p. 1.
The record indicates that the original APD, submitted in 1974, was
later revised in 1976. In a letter dated June 14, 1976, the Regional
Commissioner stated that he needed additional information from the State
before final SRS action could be completed on the revised APD. In that
letter, the Regional Commissioner informed the State that:
. . . it was indicated that there was some confusion as to which
personnel the State could properly claim a 90% match on their
participation of MMIS development. The State must carefully and
explicitly identify time and support applicable to Medical Services
System improvements, since only this portion will be eligible for 90%
FFP. PRG-31 constrains 90% FFP to Systems development directly
attributable to Title XIX requirements. This is important to the
State's plan for an integrated client data base. According to question
and answer 16, on page 49 of PRG-31, little of this integrated data base
will meet the criteria of 90% FFP. Therefore, we need specific
identification of costs associated with Title XIX and of Income
Maintenance which are included in this project to assure proper costs
allocation and matching FFP.
Exhibit B, p. 2.
(3) In a letter dated November 24, 1976, the Agency, to prevent any
misunderstanding, offered additional clarification on the State's
revised ADP and several items concerning the State's development of a
MMIS.
The Agency stated that:
So that proper FFP rates can be applied to individual's time spent on
the MMIS project, the State must specifically document (time sheets)
each team members time whether it has been spent on MMIS or other Public
Welfare programs.
Exhibit E, p. 1.
The Agency also pointed out that Title XIX administrative costs are
matchable only at the 50% rate unless they can be "specifically
documented as applying to the design, development and installation of
MMIS;" then those documented costs are matchable at 90%. The Agency
further stated that in order to receive 90% FFP for computer time,
hardware usage, and supplies, the State must specifically document their
use for MMIS design, development and installation. The Agency indicated
that failure to document these costs would result in a FFP matching rate
of 50%. Exhibit E, p. 2.
Subsequently, the State submitted a new APD in July, 1977 which was
revised in September, 1977. The State in its December 1977 MMIS Status
Report indicated that the APD would be revised again. Exhibit H. The
Agency, in a letter dated February 10, 1978 to the State, responded to
the State's plan to revise the APD by pointing out that each revision
"technically negates all previous approvals . . . until at least those
revisions can be reviewed to determine their impact on the overall plan.
We remind you that 90% funding is contingent upon the State following a
plan that is approved by HEW." Exhibit D.
The State revised the July, 1977 APD a second time in May, 1978. The
revised APD set forth the rates of FFP the State intended to seek for
the different MMIS phases. The rates relevant here were: State
participation in MMIS requirements documentation (90% FFP and fiscal
agent enhancement of an operational MMIS (90% FFP). Exhibit 8, p. 3.
The APD also indicated the State's plan to use data relevant to its
Income Maintenance program as the means to enter recipient eligibility
data on the integrated data base and its plan to use MMIS to add
information for the Medicaid program. Exhibit 8, p. 8. The APD
described the activities involved in the State's effort to accomplish
Phase I of the Management Information System. The first was designing,
developing, and installing a recipient eligibility system based on
Income Maintenance which could be used for MMIS design. The APD stated:
(4) The Department of Social Services understands that this effort is
not part of MMIS and therefore, will not participate in the 90% FFP for
MMIS development.
Exhibit 8, p. 14.
The other activities included documenting the current manual Medicaid
claims processing system in order to assist in the design, development,
and installation of the MMIS, and preparing bid specification for an
outside contractor for implementing a MMIS. Exhibit 8, pp. 14-27.
The Agency, in a letter dated July 18, 1978, approved the May 24,
1978 APD subject to certain comments. The Agency stated:
On page 3, 14-18 of your APD you describe Claims documentation
activity. If this activity documents the existing system requirements,
then the FFP match is 50%.
Exhibit 10, p. 1.
Subsequently, an audit of Public Assistance Administrative Costs was
performed for the period in question here by the Agency. The Audit
Report, dated August 4, 1981, Audit Control Number 07-10201, indicated
that audit work was performed at the State agency during the period
February through July 1979. Audit Report, p. 5. The audit findings led
to the disallowance at issue in this dispute.
II. Design and Implementation of an Integrated Data Base for Income
Maintenance.
Originally, the State argued that in designing an integrated data
base for income maintenance, that data base had to contain certain
recipient eligibility information which is directly pertinent to the
MMIS system. The State contended that the costs associated with the
portion of the design and implementation of the integrated data base for
income maintenance which are pertinent to MMIS should be allocable to
MMIS and reimbursable at the 90 percent rate of FFP.
Respondent essentially argued that 90% FFP was not available because
the appellant had not established that the costs of creating the
integrated data base for income maintenance were allocable as
expenditures for MMIS which are reimbursable at the 90% rate, and not
costs allocable to income maintenance or other programs. Respondent
contended that the costs in question therefore are eligible for matching
only at the 50 percent administrative FFP rate. Respondent argued that
Medicaid reimbursement would (5) only be available for costs
attributable to the extraction of Medicaid-relevant information from the
income maintenance data base.
During the September 24, 1982 telephone conference call between the
parties and the Board, the issue here was considerably narrowed.
Respondent stated that the portion of the costs the State contended is
allocable to the design and development of MMIS including creation of
the integrated data base for income maintenance might be allowable at
the 90% rate of FFP if the State had adequate documentation to support
the allocation. Transcript, pp. 3 and 4. Having narrowed the issue to
a question of adequacy of documentation, the Presiding Board Member
asked Appellant to submit to the Board and the Respondent by October 8,
1982 a list of what documentation is available to support the State's
claim and what it would be offered to prove. Transcript, pp. 8 and 9.
By letter dated October 8, 1982, Appellant stated that it "believed
it is unnecessary to submit any additional material" and took the
position that the Agency now agreed that such costs are entitled to the
90 percent rate.
Given the fact that Appellant had an additional opportunity to
produce documentation in support of its claim, and chose not to do so,
we decided to proceed to decision in this case.
As was clearly shown in the transcript of the conference call which
was sent to the parties, the Agency did not agree that the costs are now
entitled to the 90 percent rate. The Agency only agreed that if the
State could show, with adequate supporting documentation, that costs
associated with the integrated client data base were directly
attributable to MMIS, then these costs would be allowable at the 90
percent rate. Therefore, whether federal matching is available at all
is not at issue here. Both parties agreed that the question before the
Board is whether federal matching is available at the 90% rate as
opposed to the 50% rate.
Under Title XIX of the Social Security Act, states are entitled to 50
percent FFP for amounts expended by the State in the adminstration of
the State Plan. In order for a state to receive FFP at a rate higher
than 50 percent under Title XIX of the Act, a state must satisfy certain
requirements. In 1972, Congress amended Title XIX of the Act to include
federal reimbursement of up to 90 percent of the amounts expended by a
state which are attributable to the design, development and installation
of mechanized claims processing and information retrieval systems (MMIS)
which the Secretary determines are likely to provide more (6) efficient,
economical and effective administration of the State plan. Section
1903(a)(3) of the Social Security Act. Congress intended the 90 percent
FFP as an incentive to states to own their own MMIS systems and to
assure better program controls. Respondent's Brief, p. 3, n. 3.
Congress did not intend to make 90 percent FFP a state's right. Id.
The Board previously held in analogous circumstances that where a
state is claiming reimbursement of costs at a rate higher than 50
percent, the state has the initial burden to document the costs claimed
and to show that the claim for reimbursement is proper. New York State
Department of Social Services, Decision No. 204, August 7, 1981.
The principles set forth in Decision No. 204 are equally applicable
here. As we stated in that decision, it is a fundamental principle of
grants management that a grantee is required to document its costs.
Id., at p. 5, see also Head Start of New Hanover County, Inc., Decision
No. 65, September 26, 1979. In addition, the cost principles at 45 CFR
Part 74, Appendix C, Part I, Section C provide that in order to claim
costs under a grant program, the grantee must show that the costs are
necessary and reasonable for the administration of the grant program,
are allocable to the program, and are incurred for the benefit of the
program. Also, under 45 CFR 74.64(a), (f), (g), standards for grantee
financial management systems, grantees are required to make and retain
records of expenditures and support these records with source
documentation. In Neighborhood Services Department, Decision No. 110,
July 15, 1980, the Board found that "(these) provisions clearly place
the burden of establishing allowability of costs on the grantee."
Furthermore, in administering the Medicaid program, a state is required
by 45 CFR 205.145 to maintain an accounting system and supporting fiscal
records to assure that claims for federal funds are in accordance with
applicable federal requirements. The Board determined in Decision No.
204 that if an audit report makes findings that certain costs or claims
for expenditures are not proper, the standards outlined above impose an
obligation on the grantee to show in response to the audit report that
its claim is proper. In this case, like the case before the Board in
Decision No. 204, the State does not lose this initial obligation of
documenting costs even though its claim for FFP in these costs was paid
by the Agency. The State must provide documentation sufficient to show
that its claim for 90 percent FFP for costs attributable to the design,
development and implementation of MMIS was proper. Finally, whenever a
State is claiming funding under the various special authorizations in
the Act of funding beyond the regular 50% rate, the State has the burden
of showing how it meets the special qualifications.
(7) The record indicates, as set forth in the Background section
above, that besides the clear regulatory requirements, the State had
been informed as early as January 21, 1975, of the need to maintain cost
records reflecting expenses incurred in each of the program areas. The
record also indicates that on July 14, 1976 and again on November 24,
1976, the Agency informed the State that in order to receive 90% FFP for
MMIS development the State must specifically identify time and support
applicable to the MMIS project. The Agency also informed the State that
Title XIX administrative costs are matchable only at the 50% rate unless
the costs can be "specifically documented as applying to the design,
development and installation of MMIS." The Agency indicated that failure
to document these costs would result in a matching FFP rate of 50%.
Exhibit E, p. 2.
While the State may be correct in arguing that some of the costs
expended in designing an integrated data base for income maintenance are
directly pertinent and attributable to MMIS, the State has not provided
documentation to support the claim for reimbursement. Therefore, there
is no persuasive evidence before the Board to support the State's
argument that the claimed costs were directly attributable and allocable
to MMIS and reimbursable at 90 percent FFP.
III. Documentation of Current Manual System for Medicaid Claims
Processing
The central issue here is whether the State's efforts in documenting
its existing manual system for Medicaid claims processing are entitled
to 90 percent FFP rather than 50 percent FFP for administrative costs.
To be entitled to 90 percent reimbursement, the State's expenditures
must be incurred for the design, development, and installation of the
MMIS.
This activity was comprised of preparing a documentation book for
each claim type. The State claimed that this book plus the model MMIS
information would aid the State in the design, development, and
installation of MMIS. The State argued that the documentation of the
State's current manual system for Medicaid claims processing was
necessary for the definition of a new system in order to detail the
current functions and procedures and how they will relate to the new
system.
The State claimed that MSA-PRG-31, page 13, specifically provides
that system analysis, design requirements, and definition are entitled
to 90 percent FFP. The State therefore concluded that since the
definition of the existing system was necessary for the development of
the new system, the State is entitled to 90 percent reimbursement for
this activity. The State also pointed (8) out that its revised 1978 APD
(Exhibit 8) stated that the State would claim 90 percent reimbursement
for research and requirements gathering for MMIS.
Respondent, citing a portion of the audit report, argued essentially
that the documentation of the existing manual claims systems from
November, 1976 to the completion of this activity in March, 1978, was
not necessary for the design of the entire processing system.
Respondent's Brief, p. 14.
Respondent also contended that the definitions of "design" or "system
design," development" and "installation" contained in 42
CFR 433.11
(1980) did not include the State's efforts in documenting the existing
manual system and that the State's efforts appear remote from the
definition of "design and development" contained in the Medical
Assistance Manual (MSA-PRG-31) at section 7-71-10D.
Respondent further argued that section 7-71-25 C.6 of MSA-PRG-31,
contemplates, as a future event, installation of the MMIS which, for
Missouri, would have been a new system based upon new design and
development. Respondent pointed out that Missouri's documenting efforts
were devoted to the operation of the current processing system which
would not be matched by 90 percent FFP.
Respondent's final argument pointed out that the Regional Medicaid
Director, by letter dated July 17, 1978, notified the State that its APD
was approved subject to certain comments and conditions. One of those
comments was that "(if) this (claim documentation) activity (noted at
pages 14-18 of Missouri's revised APD) documents the existing systems
requirements, then the FFP match is 50%." Exhibit 10 at paragraph 3, and
Exhibit 8, pp. 14-18.
Although the State argued that the documentation of the current
system is a necessary step in the definition of a new system, we have
determined that the State's efforts were not directly attributable to
design, development and installation of the MMIS. "Design and
development," as defined in the implementing regulations at 45 CFR
250.90(a)(4) (1976), the Medical Assistance Manual, section 7-71-10 D,
MSA-PRG-31 (1974) at p. 3, and the checklist at p. 13 of MSA-PRG-31,
(cited by the State as specifically providing 90 percent FFP for system
analysis, design requirements, and definition) refers to the design and
development of a MMIS the definition of that system's requirements and
the detailing of that system's specifications, programming and testing.
Missouri, in its revised 1978 APD, stated:
(9) The information gathered (pursuant to the State's documentation
of the existing manual system) will be used with the model MMIS to
assist in the design, development and installation of the Missouri MMIS
. . . . Once the claim type documentation book is finished we will be
in a position to design, develop and install a "MMIS" for that claim
type.
Exhibit 8, pp. 14 and 15. Emphasis added.
These statements support the conclusion that the State's
documentation of the existing manual system was not part of the actual
design and development of the State's MMIS.
While an understanding of the State's existing manual system might
have been useful in order to understand what should be contained in a
new automatic system, the State's extensive efforts were not necessary
for or directly related to the design and development of the MMIS.In
fact, the auditors stated that the contractor, to whom the documentation
was given, indicated that "the books were helpful but were not really
necessary for their (the contractor's) design of the entire processing
system." Exhibit 13, p. 12. /2/
Based on our analysis and conclusions here, that the State's
documentation of the existing manual system was not necessary for or
directly attributable to the design, development and installation of
MMIS, we sustain the disallowance as to this issue also.
IV. Preparation of Specifications for Bids for an Outside Contractor
The Appellant argued that its revised 1978 APD indicated that it
would contract with an outside source to develop the MMIS and that the
cost attributable to the MMIS team supervising the contractor's
development of the MMIS would be claimed at the 90 (10) percent rate.
Appellant's Brief, p. 7. Appellant claimed that this was recognized and
approved by the Regional Director. Exhibits 9 and 10.
Appellant further argued that the State Medicaid Manual, HCFA Pub.
4511, dated February, 1982 specifically provides at section 11275.1.A.
that proposal evaluation and contractor selection was entitled to the 90
percent match. The Appellant contended that between the development of
the Medical Assistance Manual, MSA-PRG-31, in 1974 (which provides at
section 7-71-25.C.4.d for 50 percent reimbursement for proposal
evaluation and contractor selection) and the release of the State
Medicaid Manual in 1982, HHS revised its opinion as to the reimbursement
rate for this activity. Appellant argued that since HHS now allows 90
percent reimbursement for contractor selection, this rate should be
applied to Missouri's claim.
The State further argued that the statutory authority for 90 percent
reimbursement allows the Secretary to determine what costs are necessary
for the design, development and installation of MMIS. Appellant's Reply
Brief, p. 3. Appellant contended that since the Secretary now concedes
that the contractor selection is a necessary cost under the statute, it
should have been considered necessary originally since the statutory
authority has not changed. The State concluded that, based on this
argument, the 90 percent rate would be applicable to its claim.
After reviewing Appellant's revised 1978 APD, we are unable to accept
Missouri's arguments. As the Respondent correctly pointed out, the
revised APD is dated May 24, 1978 and deals with activities to be
performed by the State after that date and not bid specifications prior
to that date. Also, the revised APD, Appellant's Exhibit 8, does not
state specifically that Missouri would claim 90 percent FFP for the cost
attributable to the MMIS team supervising the contractor's development
of the MMIS. The revised APD, at page 3, does state that the Appellant
will seek 90 percent FFP for the State's documentation efforts and the
Appellant's fiscal agent's enhancement of an operational MMIS, but these
activities are clearly unrelated to proposal evaluation and contractor
selection. The Appellant's claim, therefore, that the Regional Director
by approving Missouri's revised APD recognized and approved the State's
plan to claim this activity is erroneous. Appellant's Brief, p. 7.
We also cannot accept Appellant's additional arguments on this issue.
The Respondent argued and we agree that during the period covered by
this disallowance, MSA-PRG-31 was in effect, and that authority is
applicable here. The fact that the reimbursement rate for preparation
of bid specifications and contractor selection (11) was raised from 50
percent to 90 percent in the State Medicaid Manual has no bearing here
because the State Medicaid Manual was not applicable during the period
in question. Although it may be within the Agency's discretion to apply
a program guide or manual retroactively, it has not chosen to do so. We
have determined in prior cases before the Board that such retroactive
applicability of a more generous policy is a matter of discretionary
Agency policy. See, South Carolina Department of Social Services, Board
Decision No. 313, May 28, 1982; Michigan Department of Social Services,
Board Decision No. 342, September 16, 1982. The State has made no
collateral argument that refusal to extend the benefit retroactively
here might be an abuse of discretion. Furthermore, the State did not
argue, and there is no indication from the language of the State
Medicaid Manual (1982), that it was meant to be applied retroactively to
prior claims.
Therefore, we conclude that the applicable rate of reimbursement
during the period in question for preparation of bid specifications was
50 percent and sustain the Agency's disallowance on this issue.
V. Time Distribution Records
The disallowance letter stated that the Appellant's claim for 90
percent FFP was also unallowable to the extent the claim was not
supported by adequate time distribution records in accordance with 45
CFR Part 74, Subpart Q, Appendix C, Part II(B)(10)(b). This regulation
requires that salaries of employees chargeable to more than one grant
program or other cost objective will be supported by appropriate time
distribution records.
The State claimed that the auditors, in the audit report, conceded
that for the period beginning September 1976 the State maintained time
distribution records and that for, at least this period, the State was
entitled to reimbursement based on these records. The State also argued
that for the period prior to September 1976, it did maintain time
records but that the records have either been lost, misplaced, or
destroyed. /3/
(12) The State further argued that it could establish through
testimony that for the initial months of the development of the MMIS
prior to September 1976, the duties of the MMIS project team were
strictly limited to the development of the MMIS. The State contended
that the dual activities such as the development of the integrated
income maintenance data base, had not begun during those months.
Appellant stated that the fact that the project team was working
full-time on MMIS and was entitled to be claimed at the 90 percent rate
was recognized by the Regional Office in letter dated June 12, 1978 from
the Regional Medicaid Director to the State's Director of the Department
of Social Services. Exhibit 9, paragraph 5. The State, therefore,
concluded that inasmuch as the project team's time was devoted solely to
MMIS, the requirements of 45 CFR Part 74 were not applicable since the
team's salaries during those months were not chargeable to more than one
grant program.
The State's final argument was that the State can not be required to
produce time distribution records for all or any of the months prior to
September 1976 since, under the provisions of 45 CFR 74.21, a State is
required to maintain records for only a three year period. The State
contended that it appeared that all or part of the months prior to
September 1976 occurred more than three years prior to the audit period,
that the State was not obligated to keep these time distribution
records, and that a disallowance for failure to be able to produce these
records would be inappropriate.
Respondent argued that the State's offer of testimonial evidence to
establish the fact of record maintenance, even if not impeached, would
not show allocability as required under general grant principles,
regulations, MSA-PRG-31, or OMB Circular A-87. Respondent also stated
that testimonial or other non-contemporaneous evidence at this date
could not be expected to meet the State's burden of persuasion with the
required specificity and precision. In support of its position,
Respondent pointed to a letter dated January 28, 1978 from the Director
of the Missouri Department of Social Services to the Regional Medicaid
Director. In that letter, the Appellant stated:
. . . costs incurred prior to September 1, 1976 are suspect due to
the previous administration's failure to keep adequate supporting
documentation.
Exhibit J, p. 2.
In response to the Appellant's argument that because of the three
year retention rule the State cannot be required to produce time
distribution records for any or all of the months prior to (13)
September 1976, the Respondent cited to the pertinent regulations. 45
CFR 74.21 and 74.22 (1979). Respondent's Brief, p. 19.
Respondent claimed that the auditors clearly notified the State of
their intent to audit the administrative costs at issue well within the
three year period after October 1, 1975 (the disallowance covers the
period of October 1, 1975 through June 1978). The Respondent also
cntended that the State had the obligation to retain the time records
until the federal auditors had an opportunity to review them, but the
State failed to do so. Respondent's Brief, p. 21.
Appellant, in rebuttal to the respondent's argument, submitted that
the notice that an audit was tentatively scheduled, dated August 17,
1978, did not put Appellant on notice that an audit of MMIS was in
progress. Appellant's Reply Brief, p. 3. The Appellant also claimed
that the audit report dated August 4, 1981 does not state when the audit
began and that Respondent has not shown any connection between the
notice (Exhibit L) and the Title XIX audit (Exhibit 13). Appellant's
Reply Brief, p. 4. Appellant submitted that without a direct connection
between the notice and audit, it is impossible to draw the inference
that the notice related to the Medicaid audit. Appellant's Reply Brief,
p. 4.
Appellant argued that since the regulation requires only a three year
retention of records, with exceptions, the burden would be on Respondent
to show that the exceptions were triggered by a special notice to
Appellant that Medicaid administrative costs were to be audited.
Appellant's Reply Brief, p. 4. Appellant argued that without such
proof, it is impossible to tell whether Appellant was required to retain
records past the three year period, and the Board must presume the
standard three year retention period applied. Appellant's Reply Brief,
p. 4. Appellant concluded that it was not required to retain records
for the period prior to September 1976 even given that application of 45
CFR 74.22. Appellant's Reply Brief, p. 5.
a. Obligation to Retain Records
Before we can reach the issue of whether Appellant was bound by the
provisions of 45 CFR Part 74, Appendix C, Part II(B)(10)(b), we must
first determine whether Appellant had an obligation to retain records
for part or all of the period prior to September, 1976. Under the
provisions of 45 CFR 74.20(a) (1975), a grantee is required to retain
records for at least three years. The three year retention period
starts from the date the grantee submits its final expenditure report,
which for Medicaid purposes is the Quarterly Statement of Expenditures
and is due thirty (14) days after the specified reporting period. /4/ 45
CFR 74.21(a) and 45 CFR 74.73(d) (1975). However, a grantee will be
required to retain records longer than three years if an audit has begun
but is not completed at the end of the three year period, or if audit
findings have not been resolved at the end of the three year period.
Under these circumstances, a grantee must retain the records until the
resolution of the audit findings. /5/ 45 CFR 74.20(a) (1975).
Because the Appellant contended the August 17, 1978 letter was not
sufficient to put the State on notice that an audit of MMIS was in
progress, the Board, after giving the parties notice, (15) contacted the
Regional Audit Director to inquire whether the Audit Agency's records
might indicate to which audits the letters dated December 8, 1977 and
August 17, 1978 were connected and whether there was any documentation
to indicate this connection. The Board forwarded to the parties copies
of the materials submitted by the Regional Audit Director, which
included the Agency's audit control records, and two companion audit
reports to the audit report at issue here. The Board held a telephone
conference call on January 14, 1983 to allow the parties to respond to
this material and state their arguments concerning the question of
whether the letters were adequate notice to the State of an audit of
MMIS.
A representative from the Audit Agency, Region VII, explained the
audit control records and the Agency's customary and usual practice in
conducting an audit. The representative explained that typically, at
the entrance conferences, the Agency would review the State's cost
allocation plans dealing with Public Assistance Administrative Costs to
determine the extent of its audit review. The representative explained
that prior to the conference, the auditors had no knowledge of what was
included in these plans, and only after reviewing them at the audit
conference, would the auditors know what administrative costs were being
charged. The representative did state that the Agency considered costs
charged to MMIS as Public Assistance Administrative costs. The State,
however, noted during the conference call that there were separate audit
control records for the Audit of Public Assistance Administrative Costs
which indicated an entrance conference on September 11, 1978 and the
Audit of Medicaid Administrative Costs which indicated an entrance
conference on February 26, 1979. The State concluded that the fact that
two separate audit control records existed and that two separate audit
reports were issued, one dealing with Public Assistance Administrative
Costs and one on Medicaid Administrative Costs, indicated that the
Agency made a distinction between these two types of costs and
therefore, the notice of August 17, 1978 was not sufficient to put the
State on notice that an audit of MMIS was in progress.
We agree with the State that the August 17, 1978 letter was not in
and of itself sufficient to put the State on notice that an audit of
MMIS costs was to be performed. However, as we discussed above, a
grantee has the burden to document costs and to provide documentation
sufficient to show its claim for FFP is proper. This burden exists
apart from the requirements to retain records, and under the regulation
concerning retention of records, there is no presumption that a grantee
kept the records and retained them for the requisite period.
(16) The State generally averred that the records in question were
kept but were either misplaced, lost, or stolen and offered to prove
through testimonial evidence that the records in fact existed. However,
the record indicates an admission by a representative of the State that
"the costs incurred prior to September 1, 1976 are suspect due to the
previous administration's failure to keep adequate supporting
documentation." Exhibit J. Furthermore, the State has not shown whether
the records were destroyed in the ordinary course of business in
accordance with an established policy or whether the records were
disposed of deliberately or due to carelessness.
The record, in fact, indicates, as outlined in the background section
above, that from the time the State submitted its first APD and
continually through the rest of the State's project, the Agency had
expressed a concern that claims for federal reimbursement for MMIS costs
be supported by adequate documentation. In fact, the Agency repeatedly
stated that the State's receipt of 90 percent federal reimbursement for
MMIS cost was conditioned on whether there was sufficient documentation
to support these claims. Because of the Agency's continual statements
to the State that it must document its claims for MMIS costs, we
conclude that the State was on notice from the inception of this project
that the Agency required documentation to support its claims for 90
percent federal reimbursement. At the very least, knowing the Agency's
interest in these costs, the State should have contacted the Agency
prior to any disposal of these records. There is no indication that it
did so.
As we indicated above, under the regulation requiring the State to
retain records for a period of three years, there is no presumption that
the records were retained for the required period, nor does the
regulation, once the required period has ended, operate to excuse the
State from not having retained records for the three year period.
Inasmuch as documentation of costs is a fundamental principle of grants
management and the State has not shown how or why the records were
disposed of, the State cannot now use the technical requirements for
retention of records as a shield to overcome its failure to document
costs especially where the State continually had been informed of the
necessity to document these costs in order to receive 90 percent federal
reimbursement. Therefore, we conclude, under the facts of this dispute
and the reasons stated above, that the mere passage of time will not
excuse the State from the requirement to document its claim for 90
percent FFP for MMIS.
(17) b. Time and Attendance Records
We do not agree with the State's argument that the requirements of 45
CFR Part 74, Appendix C, Part II (B)(10)(b), were not applicable to the
MMIS team during this period. Besides providing that the salaries of
employees chargeable to more than one grant program or other cost
objective will be supported by time distribution records, 45 CFR Part
74, Appendix C, Part II, B.10.b (1976) provides that "payrolls must be
supported by time and attendance or equivalent records for individual
employees." This provision requires that salaries for all personnel must
be supported by documentation indicating that the amount of time an
employee worked is commensurate with the amount of salary received, for
purposes of properly charging the applicable grant for these
expenditures. So at the very least, the salaries of all the employees
were required to be documented.
Moreover, despite the fact an employee might have been assigned
permanently to MMIS, the Agency, in a letter to the State, cited to the
State's MMIS Cost Allocation Plan, which was submitted by the State and
approved by the Agency, and which stated that all employees assigned
either temporarily or permanently to MMIS were to keep time sheets.
Exhibit E. The Agency repeatedly explained to the State first in a
letter dated January 21, 1975, and in subsequent letters dated June 14,
1976, and November 24, 1976, that it was necessary to specifically
document with time sheets, each team member's time so that proper FFP
rates could be applied and to assure proper cost allocation.
Appellant, in support of its position, submitted that its Exhibit 9,
which is a letter dated June 12, 1978 from the Regional Medicaid
Director, indicated the Regional Office's recognition that the project
team was working full-time on MMIS and therefore was entitled to be
claimed at the 90 percent rate. This letter, however, is in response to
the State's revised APD, which is dated May 24, 1978, and, with regard
to the MMIS project team, addresses activities of that team which were
to commence after that date. see, Exhibit 8, at 22-24. Even if we could
accept this letter as an indication that the project team, during the
period October 1975 through August 1976, was working full-time on MMIS
and entitled to 90 percent FFP, records to support the payroll were
still required under the provisions of Part 74.
Appellant also argued that the auditors conceded that for the period
beginning September 1976 the State maintained time distribution records
and that for at least this period, the State was entitled to
reimbursement based on these records.
(18) Appellant has misconstrued the auditors' report. The auditors
did state that for this period time records were kept. However, these
time records were not used as the basis for preparing the Division's
claim. Instead of claiming costs according to the actual amount of
effort performed by employees, as reflected by the time sheets, costs
were claimed as if all MMIS personnel were expending 100 percent of
their time on the project. The Agency did not deny reimbursement for
these costs but merely disallowed those costs claimed which were in
excess of the amount of actual effort performed by employees as
reflected in the time records.
Conclusion
For the reasons stated above, we sustain the disallowance of FFP in
the amount of $100,294. /1/ The disallowance of $101,716 was reduced
due to the State voluntarily adjusting its reimbursement claim
by $1,422. Therefore, the actual amount in dispute in this appeal is
$100,294. /2/ Furthermore, even though the State's revised APD
specifically stated that the 90 percent reimbursement rate would include
research and requirements gathering for MMIS culminating in a
documentation book for each claim type, that does not mean that the
State was necessarily entitled to such reimbursement. The record
instead indicates that the Regional Medicaid Director, as noted above,
approved the revised APD, subject to the condition that if the State's
activity documented the existing manual system requirements, the FFP
match would be 50 percent. Exhibit 10, Paragraph 3. /3/ The
State argued that it could establish through testimony that the records
were maintained and requested a hearing on this issue if the Board
believed that this was a fact issue to be decided. The Board determined
that a hearing on this issue was not necessary to resolve the question
of whether the State was obligated to retain the records. /4/
According to the facts of this dispute, the only period for which the
State's obligation to retain records may have ceased was the quarterly
period of October 1975 through December 1975. For that quarter, the
State's report was due by January 30, 1976. Using a date of submission
of the Quarterly Expenditure Report most favorable to the State of
January 2, 1976, the three year retention period for the quarter ended
December 31, 1975, would have ended January 1, 1979. Also, since the
last quarter of 1975 is the only quarter in question here, we shall cite
the 1975 CFR which was in effect during that period, even though the
parties cited the 1979 CFR. /5/ The regulations pertaining to
general administration of public assistance programs contain a similar
provision at 45 CFR 205.145 (1975). That provision requires a grantee
to provide in its State plan that it will maintain supporting fiscal
records adequate to assure that claims for Federal funds are in accord
with applicable Federal requirements. This provision also requires a
grantee to retain records for at least three years or longer if audit
findings have not been resolved. We have determined, even though the
parties did not consider this issue in their briefings, that the effect
of the provision in 45 CFR 205.145 is the same as the provision of 45
CFR 74.20; the provisions of 45 CFR 74.20 merely state more fully what
is already contained in 45 CFR 205.145. That is, if an audit has begun
and has not been completed, a grantee is obligated to retain its records
until the audit findings have been resolved. To interpret section
205.145 in any other way would strain the limits of common sense and
allow a grantee to automatically dispose of its records at the end of
the three year period even if an audit has begun, but was not yet
completed.
OCTOBER 22, 1983