West Virginia Department of Welfare, DAB No. 069 (1979)

DAB Decision 69

October 26, 1979 West Virginia Department of Welfare; Docket No.
78-100-WV-HC; Decision No. 69 Kelly, Bernard E.; Malone, Thomas Mason,
Malcolm S.


SUMMARY

(The following summary is prepared on the responsibility of the
Executive Secretary of the Board as a convenience to the interested
public. It is not an official part of the decision and has not been
reviewed by the Panel. Similar official summaries of earlier cases
appear in 45 CFR Part 16, Appendix.)

The West Virginia Department of Welfare appealed a disallowance made by
the Health Care Financing Administration of Federal financial
participation for costs relating to the development of a Medicaid
Management Information System (MMIS) under Title XIX of the Social
Security Act. The State did not contest the fact that, at the time that
it terminated the contract and supplemental agreement with the private
firm which was to have developed the MMIS, the firm had completed only
69% of the work but the State had paid out the entire amount of the
contract.

The Board found that the State's payment to the contractor for work not
done and its failure to maintain normal and reasonable controls violated
the requirements of 45 CFR Part 74, Appendix C, Part I, A.2.a, A.2.b,
and C.i.a and sustained the disallowance of $112,339.

DECISION

Procedural Background

By letter dated May 25, 1978, the Acting Assistant Director for
Financial Management of the Health Care Financing Administration (HCFA)
notified the West Virginia Department of Welfare of a disallowance of
Federal financial participation (FFP) for costs relating to the
development of a Medicaid Management Information System (MMIS) under
Title XIX of the Social Security Act, pursuant to an audit by the HEW
Region III Audit Agency (Audit Control Number 03-80221). Since there
had Dot been a request for reconsideration before March 6, 1978, the
disallowance having been made after that date, the appeal proceeded
under 45 CFR Part 16 (1978).

The State Department of Welfare filed an application for review by
letter dated June 14, 1978, which was within the 30 days requirec1 by 45
CFR 16.6. The State did not submit the required copy of the notice of
disallowance with its request but did submit one on July 17, 1978, after
the Executive Secretary advised the State on June 30, 1978, of an
extension of time to complete its filing. On December 1, 1978, the
Executive Secretary requested that a response to the appeal be filed
within 30 days by HCFA. On February 5, 1979, in response to a motion for
an extension of time for filing a response, an extension was granted,
making the response due by February 16, 1979. The HCFA response was
submitted on February 15, 1979.

An Order was issued on June 8, 1979 which summarized the facts and
issues as they appeared from the file, offered the State an opportunity
to identify the respects, if any, in which the summary of facts and
issues was materially incomplete or inaccurate and an opportunity to
brief any issue in the case, and directed the State to show cause why
the Board should not proceed to decision denying the appeal on the
ground that the State's payment of the contractor for work not done and
its failure to maintain normal and reasonable controls violated the
requirements of 45 CFR Part 74, Appendix C, Part I, A.2.a, A.2.b and C.
I.a. West Virginia was required to respond to the Order to Show Cause
within 30 days. On July 12, 1979, a request for an extension of time for
filing its response was granted, making the response due by July 23,
1979. On August 30, 1979, after

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receiving no response from the State, a member of the Board staff spoke
to the State's attorney who stated that a response would be submitted
the next day. No response to the Order to Show Cause has been received
from the State. The lack of response alone would be sufficient ground
for a ruling against the State. Cf. Del Paso Heights School District,
Docket No. 77-22, Decision No. 62, July 3, 1979. We outline, however,
the facts and issues as they appear in the file.

Statement of the Case

The disallowance originally was composed of three parts. HCFA found that
the State had claimed (1) a 90% Federal reimbursement for payments to a
contractor for work never done ($112,339 - an amount equal to the
difference between the FFP that the State actually received and the sum
to which it was entitled); (2) a 90% Federal reimbursement for costs
for work that had been performed by the contractor on a project that was
never totally completed ($160,773); and (3) 75% FFP for the development
of a Request for Proposal (RFP) ($2,125). The State decided not to
appeal the part of the disallowance relating to the development of the
RFP, and HCFA has withdrawn the disallowance relating to (2) above
because HCFA says it misunderstood the proper application of one of the
sections enumerating the prerequisites for receiving FFP for the
development of an MMIS. 42 CFR 450.90(b)(1)(ii)( C). The amount of the
contract was $460,270; the contractor completed 69% of the contract
work. Therefore, the State was entitled to $460,270 approved contract
price x 69% completion x 90% rate of FFP or $285,828. Since it was
reimbursed $398,166, it received $112,339 excess reimbursement, which is
the amount in dispute.

According to the Audit Report (Audit Control Number 03-80221), in August
1974, the State advertised for bids by furnishing an RFP approved by the
Social and Rehabilitation Service (SRS) to more than 50 prospective
contractors. Only two proposals were received by September 20, 1974, the
date of the bid opening; one was from the State's own Information
System Service Division (ISSD), the other from a privately-owned firm. A
five-member selection committee ranked the bidders and chose the private
firm as the lowest bidder. A firm fixed-price contract for $460,270 was
awarded by the State on November 1, 1974, with work to commence on
November 6, 1974 and to end on December 31, 1975.

According to the Audit Report, the contract terms required that the
contractor provide periodic progress reports (every 30 to 60 days) so
that the proper amount of payment could be determined. Work progressed
on schedule until April 1975 when work began to get behind schedule. At
that point, the contract had been in effect for six months, and the
contractor had received 37.3% of the contract price. The contractor
complained that the required progress reports were too time-consuming,
and the Department relieved it of the responsibility

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of preparing them; weekly meetings were to be held instead. The State
continued to pay the full amounts of the submitted invoices even though
it knew of additional schedule delays. As of November 30, 1975, the
total amount of the contract had been paid although less than 50% of the
work had been completed. A supplemental contract dated December 12,
1975, increased the scope of work at an additional cost of $163,890.

In May 1976, the contractor submitted a revised schedule, showing a new
completion date of October 8, 1976, nine months after the original
target date. The schedule was accepted by the Department, but it
requested that brief weekly reports be submitted-. Three of these
reports were submitted; the last was dated June 30, 1976 and showed that
69% of the contract had been completed. No additional work was done
after that date. The Department notified the contractor on January 5,
1977, that the contract and supplemental agreement were being terminated
because of contractor non-performance; West Virginia says that the
contractor "left the State" (Application for Review, p. 1).

Relevant Statutory and Regulatory Provisions

Under Title XIX of the Social Security Act (Medicaid), amended in 1972,
a state may receive Federal reimbursement of 90% for the costs of
designing, developing and installing Medicaid mechanized claims
processing and information retrieval systems.

The disallowance in question and our decision are not based on the MMIS
regulations, but rather on several sections of 45 CFR Part 74, Appendix
C.

Appendix C is applicable in this case which involves a state government.
45 CFR Part 74, Appendix C Part I, A.3 states that, "these principles
will be applied in determining costs incurred by State and local
governments under Federal grants..." 42 CFR 450.90(b)(l)(B) also states
that "methods and procedures for properly charging the costs of all
systems...shall be in accordance with 45 CFR Part 74..."

The relevant sections of Appendix C will be discussed in the next
section.

Issues Raised by the Parties

The State asserts that it was in the process of discussing additional
funds for completion of its MMIS with the Regional Office when the
contractor left the State. It argues that had the contractor not left
and had the additional funds been provided, there would have been a
complete, functional system (Application for Review, p. 1). If this had
been the case, HEW would still be paying more than it originally would
have, because of the State's management practices.

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The State notes (Application for Review, p. 1) that a number of the MMIS
implementations in other states had encountered time and cost overruns,
as have other projects throughout the Federal government. But these
situations, if they exist, do not necessarily absolve the State of its
responsibility; West Virginia does not assert that the Federal
government has approved FFP for work never completed because of a
grantee's poor management, nor that, if it had done so, it would have
acted properly.

The State did Dot properly and efficiently administer its grant program
in accordance with 45 CFR Part 74, Appendix C, Part I, C.I.a because it
made advance payments that added up to the entire contract price. 45 CFR
Part 74, Appendix C, Part I, C.I.a states that:

To be allowable under a grant program, costs must . . . be
necessary and reasonable for proper and efficient administration
of the grant program...

The State's system of advance payments reflects a lack of the "sound
management practices" required by 45 CFR Part 74, Appendix C, Part I,
A.2.a, which states that:

The application of these principles is based on the fundamental
premises that... State and local governments are responsible for
the efficient and effective administration of grant and contract
program through the application of sound management practices.

It would not necessarily have been unreasonable or poor management for
the State to make some advance payments, especially if they had been
based on progress made on the job. Here, however, with no regard for the
amount of work performed, the State paid the entire contract price in
advance.

West Virginia also contravened Appendix C. Part I, A.2.b; that section
states:

The grantee or contractor assumes the responsibility for seeing
that federally assisted program funds have been expended and
accounted for consistent with underlying agreements and program
objectives.

The State was not free to release the contractor from its obligation to
furnish progress reports and still claim Federal reimbursement.

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The State, in its Application for Review, page 2, mentions Senate
hearings on MM1S. Although these hearings illuminate the events leading
up to the awarding of the MMIS contract in West Virginia (Hearings on
Medicaid Management Information Systems Before the Subcommittee on
Investigations of the Senate Committee on Government Operations, 94th
Cong., 2nd Sess. (1976)), they are not directly relevant to the
disallowance in question.

Conclusion

In view of the foregoing discussion, it is our opinion that the State's
payment of the contractor for work not done and its failure to maintain
normal and reasonable controls violated the requirements of 45 CFR Part
74, Appendix C, Part I, A.2.a, A.2.b and C.I.a.

Accordingly, we deny the appeal and affirm the determination of
disallowance in the sum of $112,339. This decision constitutes the
final administrative action on this matter. D11 May 15, 1992