GAB Decision 147
January 29, 1981 Family Health Care, Inc., Omaha, Nebraska; Docket No.
78-148 Ford, Cecilia; Settle, Norval Garrett, Donald
Grantee, Family Health Care, Inc., appeals from a determination of
the Regional Administrator, Region VII, subsequently affirmed by the
Public Health Service (PHS) Regional Appeals Board (Docket No. PHS 78-6,
decision undated, but transmitted to Grantee by letter dated 11/ 1/78),
disapproving its choice of a marketing consultant to be employed on a
grant for a Health Maintenance Organization feasibility study. This
Board has jurisdiction in the case under 45 CFR 16.5(a)(3).This decision
is based on Grantee's application for review dated 11/10/78 and
subsequent submissions to this Board supplementing the application for
review, PHS's response to the appeal, and Grantee's response to an Order
to Show Cause issued by the Panel Chair. In its response to the Order,
Grantee stated that it did not dispute the facts as represented in the
Order, although contrary to the Order's summary of the facts, Grantee
indicated that it did not request reimbursement of $1,910.20 expended
from its own funds for consulting services. Grantee did not comment
specifically on the Order's analysis of the issues. Accordingly, we
issue this decision in substantially the same form as the Order,
upholding PHH's determination.
The grant was awarded for the period 3/1/78 to 2/28/79 pursuant to
Section 1303 of the Public Health Service Act (Pub. L. 93-222, 42 USC
300e-3.) Section 1303 authorizes the Secretary to make grants to public
or nonprofit private entities "for projects for surveys or other
activities to determine the feasibility of developing and operating or
expanding the operation of health maintenance organizations." A health
maintenance organization (HMO) is an entity which provides health
services to a defined population on a prepaid basis in accordance with
certain Federal standards. Grantee, an established health care
provider, submitted an application, which was approved, for funding of a
study to determine the feasibility of its becoming an HMO.
In accordance with Grantee's application, $5,000 was budgeted for a
marketing consultant. The Notice of Grant Award required that all
consultants proposed by Grantee be approved by the Regional Office.
The record does not show an explicit request by Grantee for approval
of a marketing consultant. Grantee did, however, advise the Regional
Office in a letter dated 5/11/78 that it had made the following
arrangements for a marketing consultant. Grantee would contract with
Dutton & Associates, a CPA firm with which Grantee already did business,
which would in turn subcontract the consultant services from Management
Design Associates, a management advisory services corporation owned by a
number of CPA firms, including Dutton & Associates. Management Design
Associates would then select the principal marketing consultant. Other
correspondence in the record indicates that the principal marketing
consultant was employed by a fourth organization, Medical Administration
Resources Center. (Letters from Management Design Associates to
Grantee, dated 4/25/78.) Grantee's 5/11/78 letter identified the
individuals involved as Mr. Dutton of Dutton & Associates, Mr. Bengston
of Management Design Associates, and Mr. Patterson, the principal
marketing consultant selected by Mr. Bengston.
The Director, Division of Health Care Systems, in the Regional Office
responded to Grantee's 5/11/78 letter by letter dated 6/5/78, which
stated that the Region could not approve the proposed consultant
arrangement for several reasons, discussed later in this decision. When
Grantee requested that this determination be reconsidered, the Regional
Administration by letter dated 8/2/78, stated, with some additional
explanation, that the consultant arrangement was not acceptable, and
advised Grantee of its right to appeal pursuant to 42 CFR Part 50,
Subpart D. Grantee requested review under Subpart D, and following
receipt of the decision of the PHS Regional Appeals Board affirming the
Regional Administrator's determination, Grantee appealed to this Board.
Grantee's consultant arrangement was disapproved by the Regional
Office on a number of grounds. Its first objection was that Mr. Dutton
was a member of Grantee's board of directors, and that a contract
between an organization and a member of its board of directors was not
permissible unless the organization had adopted a conflict of interest
policy in its bylaws, which Grantee had not. The second objection was
that Dutton & Associates was to function primarily as a go-between in
securing consulting services, thus depriving Grantee of the opportunity
to develop its own capability for securing such services. The third
objection was that Mr. Bengston and Management Design Associates did not
have any HMO development experience. The fourth objection was that Mr.
Patterson did not have any qualifications as an HMO marketing
consultant.
The Regional Office did not cite any established criteria for the
employment of consultants as the basis for its disapproval of the
marketing consultant. The PHS Regional Appeals Board, however, in
affirming the Regional Office's determination, concluded that the
Regional Office "acted appropriately and reasonably in applying the
criteria for approval contained in Chapter PHS: 1-430." (PHS Regional
Appeals Board Decision, p. 2.) The chapter cited by the PHS Board is
part of the PHS Grants Administration Manual, which was made applicable
to the grant by the Notice of Grant Award. Chapter PHS: 1-430-15B1
requires that grantees obtain prior written PHS approval to contract for
the performance of project activities, defined as substantive activities
that are central to the purposes of the grant. Chapter PHS: 1-430-20A
provides that contracting of activities shall not be approved by PHS
unless each of six criteria is met. Those criteria are, as pertinent
here, that--
1. The contracting will not reduce the intended role of the grantee
in having been selected as the direct recipient of the grant.
2. The contracting is not inconsistent with the intent and purposes
of the governing legislation.
3. The contractor, if known, is considered capable of performing the
activities.
4. The grantee is considered capable of managing the contracted
activities.
Chapter PHS: 1-430-20C further provides, however, that the approval
criteria enumerated above "are advisory only and do not limit the right
of PHS to disapprove contracting even where the . . . criteria are met."
PHS thus clearly had broad discretion in deciding whether to approve
Grantee's consultant arrangement. This Board has held that it will not
substitute its judgment for that of an agency official where that
official's discretion was exercised reasonably and in accordance with
the rules explicitly applicable. (Oregon State-wide Cost Allocation
Plan, DGAB Docket No. 75-7, Decision No. 22, June 25, 1976; Harrison
County Community Action Agency, Inc. DGAB Dociet Nos. 75-5 and 76-7,
Decision Nos. 35 and 36, March 14, 1977.) The issue in this case is thus
whether the Regional Administrator's determination disapproving the
consultant arrangement constituted a reasonable exercise of his
discretion.
Grantee has advanced a number of arguments regarding the disapproval
of its consultant arrangement. In specific response to the grounds for
disapproval stated by the Regional Office, Grantee noted first that the
Regional Office had not objected on the basis of conflict of interest to
its legal consultant, who, like Mr. Dutton, was a member of Grantee's
board of directors. (Letter from Grantee to Regional Office dated
6/12/78, p.1; Letter from Grantee to Director, Division of Grants and
Contracts, PHS, dated 8/29/78, p. 2.) The Regional Administrator in his
letter to Grantee dated 8/2/78 drew some distinction between the legal
consultant and Mr. Dutton with respect to the conflict of interest
problem; however, the basis for the distinction is not clear. Even if
the Agency failed to enforce the conflict of interest requirement with
respect to the legal consultant, however, that would not excuse
Grantee's lack of compliance in Mr. Dutton's case, since a conflict of
interest policy was clearly required by the terms of the grant. The PHS
Grants Policy Statement, revised October 1, 1976, which was made
applicable to the grant by the Notice of Grant Award, provides, in a
section entitled "Conflict of Interest," that-
Grantees must establish safeguards to prevent employees, consultants,
or members of governing bodies from using their positions for purposes
that are, or give the appearance of being, motivated by a desire for
private gain for themselves or others, such as those with whom they have
family, business, or other ties. Therefore, each institution receiving
grant support must have written guides for staff members
(administrators, faculty members, professional staff, or employees) and
other associated individuals (such as consultants) indicating the
conditions under which outside activities, relationships, or financial
interests are proper or improper, and providing for notification of
these kinds of activities, relationships, or financial interests to a
responsible and objective institution official. (p. 47.)
In the instant case, there was at least the appearance of impropriety
in the awarding of the consultant contract to a firm headed by a member
of Grantee's board of directors. A conflict of interest policy, while
not necessary to disclose the existence of the relationship, might have
provided, for example, that a contract could only be awarded under such
circumstances if no other qualified firm were found. In the absence of
such a policy, the propriety of the relationship is subject to question.
In response to the Regional Office's objection to the "go-between"
function of Dutton & Associates, Grantee noted that it had offered to
contract directly with Management Design Associates and that the
Regional Office had not responded to its offer. Grantee nevertheless
justified its use of Dutton & Associates on the ground that it was using
the firm for purposes not connected with the grant, and wished to
"provide continuity for the overall development of the corporate
entity." (Leetter from Grantee to Regional Office dated 6/12/78, p. 1;
Letter from Grantee to Board's Executive Secretary dated 11/10/78, p.
1.) Despite Grantee's arguments, the Regional Office's objection has
substantial merit. As noted previously, one of the criteria for
approval by PHS of contracts for the performance of grant activities is
that "(the) grantee is considered capable of managing the contracted
activities." Under Grantee's arrangement, it did not have a direct hand
in the selection or, apparently, the supervision of the principal
marketing consultant. Thus, the Regional Office's disapproval of the
arrangement is consistent with this criterion. Even if Grantee had
contracted directly with Management Design Associates, the arrangement
would be subject to the same objection, since there would still have
been an intermediary between Grantee and its principal marketing
consultant. It should be noted, moreover, that the Regional Office
asserted as the basis for its objection to the "go-between" arrangement
that one of the purposes of the grant was to enable an organization to
develop its own capabilities in the marketing area. Since the
authorizing legislation seems clearly directed at encouraging the
proliferation of HMO's, and marketing is apparently central to the
formation and continued existence of an HMO, the Regional Office's
disapproval is consistent also with the criteria in Chapter PHS:
1-430-20A1 and 2.
As noted previously, the Regional Office also disapproved the
marketing consultant arrangement on the ground that the individuals
involved did not have specific experience with HMO's. In response,
Grantee argued that Mr. Bengston and Mr. Patterson both had related
experience, Mr. Bengston as a "management consultant from the financial
standpoint," and Mr. Patterson in "marketing activities related to
human
service organizations," which qualified them as consultants on the
grant. (Letter from Grantee to Regional Office dated 6/12/78, p. 2;
Letter from Grantee to Director, Division of Grants and Contracts, p.
1.) Grantee also indicated that it did not want a consultant whose
primary experience had been with HMO's because such a person would have
a "hidden bias" for HMO's and might not consider whether it was in
the
best interest of Grantee, already an established health care provider,
to becomee an HMO. Grantee argued further that it planned to convert
its present practice to a prepayment basis gradually, and thus did not
need a precise marketing strategy which could be provided only by
persons with a high level of expertise. (Letter from Grantee to
Director, Division of Grants and Contracts, dated 8/29/78, pp. 1-3.)
Grantee also asserted that it had asked the Regional Office in March and
April of 1978 for advice in choosing a consultant, and proceeded to find
its own consultant only when it did not receive any assistance. (Letter
from Grantee to director, Division of Grants and Contracts, dated
8/29/78, p. 1; Letter from Grantee to board's Executive Secretary dated
11/10/78, p. 1.) Grantee argued finally that it should have been free to
make its own mistakes as part of the process of developing its own
capabilities, and that it could have chosen another consultant should
the initial arrangement have proven unsatisfactory. (Letter from
Grantee to Director, Division of Grants and Contracts, dated 8/29/78, p.
2.)
One purpose of the grant condition requiring approval of all
consultants would appear to have been to assure the consultant, if a
contractor, was capable of performing the activities, in accordance with
Chapter PHS: 1-430-20A3. Although Granteee's consultants might have
rendered satisfactory services in this case despite their lack of
specific HMO experience, the Regional Office's judgment that they were
not qualified is not unreasonable. The fact that Grantee planned to
grow slowly as an HMO does not on its face bear any clear relationship
to the level of experience required of a consultant. With respect to
Grantee's argument that it should have been free to make its own
mistakes, it should be noted that Grantee was in fact rely-ing on a
third party to choose its principal consultant, and furthermore, that a
purpose of the grant condition requiring approval was to prevent costly
mistakes.
Grantee's assertion that it asked the Regional Office for advice in
choosing a consultant and received no assistance has not been
documented, although Grantee was given the opportunity to do so. We
note, in any event, that it is not clear that Grantee would have
accepted any advice since it has stated that it did not want a
consultant whose primary experience had been with HMO's. Moreover,
Grantee has conceded that its own efforts to locate qualified
consultants were "minimal." (Letter from Grantee to Regional Office
dated 6/12/78, p. 2.) Thus, we find that the Regional Office was
justified in disapproving the consultant arrangement on the ground that
the consultants were not qualified.
Conclusion
For the reasons set forth above, we conclude that the Regional
Administrator's determination disapproving the consultant arrangement
constituted a reasonable exercise of his discretion, and we uphold that
determination.
OCTOBER 04, 1983