Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division

DATE: May 27, 1998

SUBJECT: Cincinnati Health Network, Inc.

Docket No. A-98-25
Control No. A-05-96-00040
Decision No. 1662

DECISION

The Cincinnati Health Network, Inc. (CHN) appealed a decision by the Ad Hoc Grant Appeals Review Committee of the Health Resources and Services Administration (HRSA) of the Public Health Service (the PHS Review Committee). The decision was issued pursuant to 42 C.F.R. Part 50, Subpart D. The decision upheld a determination by HRSA disallowing $14,275 in federal funds claimed by CHN for the costs of fringe benefits and salaries. These federal funds were paid to CHN pursuant to grants under sections 330 and 340 of the Public Health Services (Act) and the HIV Early Intervention Services program and were expended between January 1 and December 31, 1993. The disallowance was based on an audit performed by the Office of the Inspector General (OIG), Office of Audit Services.

As explained in the decision below, (1) we uphold $1,021.32 of the disallowance of fringe benefit costs on the ground that the benefits were not paid pursuant to established written organization policies, (2) we reverse $6,386.68 of the disallowance of fringe benefit costs on the ground that the benefits were paid pursuant to established written organization policies, and (3) we uphold the entire amount of the disallowance involving salaries and wages, $6,867, on the ground that the salaries were not paid pursuant to established and consistently applied organization policies.

I. Background

CHN is a non-profit organization whose mission is to improve access to care and enhance the overall health status of the people in the greater Cincinnati area, particularly that of medically underserved and high-risk populations. It was established in 1986 to replace the city of Cincinnati as the administrator of a section 330 grant for the administration of Community Health Centers in the Cincinnati area. In 1988, CHN began receiving funds under section 340 of the Act to support several sub-grantees that provided health care and support services to homeless people. In 1991, CHN added an HIV early intervention services program.

In 1996, the OIG conducted an audit of CHN. The objective of the audit was to determine if CHN was operating its programs in accordance with the terms of its grants and federal requirements. At the conclusion of the audit, the OIG recommended to HRSA that it disallow $29,367 of CHN's expenditures for calendar year 1993. HRSA Ex. 4, at unnumbered 3. Pursuant to HRSA's review of the audit and additional documentation provided by CHN, HRSA disallowed $14,667 ($7,408 fringe benefit costs, $6,867 salaries costs, and $392 travel costs). HRSA Ex. 8, at 5. CHN reimbursed HRSA for the travel costs and appealed the remaining $14,275 of the disallowance to the PHS Review Committee. CHN Ex. A. The PHS Review Committee sustained the disallowance and CHN appealed to the Board.

II. Applicable Authority

Section 16.12(d)(1) of 45 C.F.R. Part 16 provides that in cases involving $25,000 or less where there has already been review by an independent reviewing authority, such as the PHS Review Committee, the Board's review will be restricted to whether the decision below was "clearly erroneous." Section 16.12(d) further provides, however, that this standard does not apply if the Board determines that the record is inadequate. Since the record on which the PHS Review Committee based its decision did not contain information regarding whether CHN consistently applied the policies at issue, the Board determined that the record was inadequate and gave the parties an opportunity to develop the record. Therefore, the "clearly erroneous" standard does not apply, and we review this case on a de novo basis.

Federal funds administered by non-federal organizations are subject to federal cost principles. Cost principles identify types of allowable and unallowable costs and also set forth general principles for determining the allowability of costs.
Cost principles for non-profit organizations receiving federal funds are set forth in Office of Management and Budget Circular A-122 (OMB A-122). For the time period at issue, OMB A-122 was made applicable to Department of Health and Human Services grants to non-profit organizations by 45 C.F.R. . 74.174. Also, 42 C.F.R. . 51c.107 specifically provided that section 330 grants were subject to the cost principles set forth in 45 C.F.R. Part 74, Subpart Q, which included 45 C.F.R. . 74.174. Finally, the Notices of Grant Award of these grants expressly provide that the grants are subject to 45 C.F.R. Part 74. HRSA Ex. 5.
Attachment B of OMB A-122 sets forth principles concerning selected items of costs.

Attachment B, paragraph 6.f. addresses costs for fringe benefits. Subparagraph (2) provides in relevant part:

(2) Fringe benefits in the form of employer contributions or expenses for . . . employee insurance . . . are allowable provided such benefits are granted in accordance with established written organization policies.
(Emphasis added.)

Attachment B, paragraph 6.b.(1) addresses costs for personnel services and provides in relevant part:

b. Allowability. Except as otherwise specifically provided in this paragraph, the costs of such compensation are allowable to the extent that:

(1) Total compensation of the individual employees is reasonable for the services rendered and conforms to the established policy of the organization consistently applied to both Government and non-Government activities. (Emphasis added.)

Additionally, the Notices of Grant Award provide that these grants are subject to the PHS Grants Policy Statement. HRSA Ex. 5. It provides that "organizations must have procedures for determining the allowability of costs . . . ." PHS Grants Policy Statement at . 7, 7-1. The PHS Grants Policy Statement provides further that compensation for personal services is allowable if it conforms to the established, consistently applied policies of the organization. (Emphasis added.)

III. Analysis

The PHS Review Committee upheld HRSA's disallowance of two types of costs: $7,408 paid to reimburse employees for health insurance [fringe benefits] and $6,867 in salaries and wages. The PHS Review Committee concluded that CHN did not incur these costs pursuant to established and consistently applied policies. Below we discuss these two categories of costs.

A. Health Insurance

As to health insurance, CHN's personnel policy provided:

CHN will pay seventy-five (75%) of the health/medical insurance premium for all full-time employees, single, or family. Premium limitation is that billed on the group policy, or as outlined in the approved federal grant award budget.
CHN Personnel Policies Manual, January, 1992 Revision at Section V(E)(1), CHN Ex. A at A-29.

During 1993, CHN did not have its own group policy for health insurance. CHN represented, and HRSA did not dispute, that CHN had been unable to acquire a group policy because of its small size and because of a pre-existing condition of the spouse of one of its employees. In order to provide health insurance, CHN offered the employees one of two options. First, employees could elect to enroll in the group policy of one of CHN's affiliated organizations (although this option was not available to the employee whose spouse had the pre-existing condition). Under this option, CHN would pay 75% of an employee's premium under the affiliate's group policy. The majority of CHN's employees chose this option. Second, employees could secure insurance outside the group policy and receive cash reimbursement for the cost of that insurance. Four employees elected this option.

The PHS Review Committee upheld HRSA's disallowance of CHN's payment of $7,408 to these four employees. HRSA disallowed these costs on the grounds that "[i]t is our position that CHN's established policy does not provide for cash reimbursement in lieu of CHN providing 75% of an employee's health/medical insurance coverage obtained under the organization's group plan." HRSA Ex. 8, at 2. Neither the PHS Review Committee nor HRSA addressed the problem that CHN could not secure a group policy open to all employees either by itself or in conjunction with its affiliate.

The first question presented is whether CHN, under its personnel policies, could reimburse employees for privately secured health insurance. We conclude that CHN could do so for the following reasons:

Therefore, offering employees an option between a group policy or reimbursement for privately secured insurance was consistent with the terms of the personnel manual, addressed the problem created by the fact that a group policy for all employees could not be obtained, and was consistently applied to all employees. Under these circumstances, we conclude that payment of a part of employees' privately secured health insurance costs was reasonable and consistent with CHN's established policy and that the costs were not properly disallowed simply because they were incurred for private insurance.

While CHN's personnel manual does not limit the source of insurance, however, it does limit the amount of insurance reimbursement. Therefore, we are presented with a second question as to whether the amounts CHN paid to employees for private health insurance were granted in accordance with established written organizational policies.

The limitation on amount is set forth in the second sentence of the health insurance provision. It states:

Premium limitation is that billed on the group policy, or as outlined in the approved federal grant award budget.

CHN reimbursed employees 75% of the amount they paid for private insurance. This practice resulted in a payment to one employee which exceeded the amount that CHN would have paid for that employee had he been insured under the affiliate's group plan.

CHN argued that it regards this excess as appropriately paid because CHN construes the second clause concerning its budget to expand rather to limit employees' rights to health insurance reimbursement. CHN letter of March 2, 1998, at 3. Under CHN's construction, there would be no limit on how much one person could be reimbursed for privately secured health insurance as long as CHN remained within its budget projection for health insurance.

We reject CHN's construction of this manual provision for the following reasons. First, CHN provided no evidence that, when it adopted this policy, it intended to provide disparate amounts of reimbursement to similarly situated employees. Therefore, CHN's position here lacks contemporaneous explanation or documentation to support its construction of the policy. Second, the plain language of the policy does not support CHN's construction. The second sentence of the health insurance provision established two qualifications on the amount to which an employee was entitled as reimbursement for health insurance: that billed on the group policy or as outlined in the budget. The first qualification is easy to establish. An employee would be entitled to 75% of what CHN would have to pay to insure that employee and his/her family under its group policy -- in this case the affiliate's group policy which was available to all but one of CHN's employees. While the second qualification about the budget is ambiguous, we think the more reasonable reading of that clause is as a limit rather than as a mechanism for expanding an employee's entitlement to health insurance reimbursement. Therefore, we conclude that the second qualification would become relevant only if the insurance premiums under the group policy rose unexpectedly and exceeded what CHN had budgeted for health insurance. In that case, CHN would reimburse employees for less than 75% of the rate of the group policy because to reimburse everyone at 75% would exceed the budget line item. This reading is preferable for the following reasons.

Therefore, we conclude that when an employee purchased private insurance, CHN could not reimburse that employee more than he/she would have been entitled to under its group policy. In this case, the record establishes that one employee was reimbursed $4,112.10 for private insurance. Under the relevant category of the group policy (i.e., employee/spouse) he would have been entitled to $3,090.78. CHN Ex. 1. Therefore, $1,021.32 of these costs were not expended in accordance with established written organizational policies as set forth in CHN's personal manual.

Finally, CHN argued that these costs should be considered reasonable because its overall health insurance expenditures did not exceed its budget line item for health insurance expenditures. CHN letter of March 2, 1998, at 2. However, a budget merely reflects an estimate of what costs will be in a given period. Simply because the budgeted amount would not be exceeded does not make a cost reasonable. Rather, the cost principles discussed above ultimately determine whether a claimed cost is allowable.

Based on the preceding discussion, we uphold $1,021.32 of the disallowance of health insurance costs and reverse $6,386.68 of that disallowance.

B. Salaries and Wages

The PHS Review Committee also upheld the disallowance of $6,867 in salaries and wages. The majority of this amount was disallowed because two employees, who elected not to receive health insurance, were paid additional compensation above their salary scale in lieu of insurance. The remainder of the amount concerns a wage payment which did not reconcile with the salary rate reflected in the employee's personnel folder.

As explained below, we uphold the entire amount of this portion of the disallowance because we conclude that these costs were not incurred pursuant to established and consistently applied policies. First, we discuss the wages in lieu of insurance, and then we discuss the salary rate discrepancy.

As to the two employees who received wages in lieu of insurance, CHN represented that these employees "received payment in lieu of health insurance in order to bring their overall compensation into line with others." Declaration of H. Randall Garland at 4. Mr. Garland stated that --

[e]ach employee when interviewed indicated a desire to work for CHN noting, however, that the established salary level was less than that being offered in the market place. In each case they indicated that they would waive the health insurance benefits if the salary level was adjusted. We did so, based on what we would have paid at the rates which would have applied in our affiliated entity's group policy and obtained the services of each employee. Id.

HRSA based its disallowance on the following grounds.

CHN's organizational policy does not provide for the direct payment of salary and wages to employees for indirect expenses normally incurred by the employer in its attempt to provide employees benefits. Moreover, the salary payments in lieu of health care insurance coverage were not consistently applied and available to all employees. CHN Ex. A at A-5.

CHN agreed that its personal policies did not expressly provide for the direct payment of wages in lieu of an employee receiving health insurance. However, CHN complained that the auditors informed it that if it had had a "cafeteria provision" in its policies, it could have paid wages in lieu of health insurance. CHN letter of March 2, 1998, at 5. CHN asserted that the PHS Review Committee disallowed these costs, not because CHN had not consistently applied its own policies, but solely because it failed to have a cafeteria provision. CHN stated that it has since adopted such a provision.

For the following reasons, we conclude that the disallowance of this cost was proper. First, contrary to CHN's assertions, the inclusion of a cafeteria provision in the personnel manual is not merely a meaningless technicality. Rather, expressly stating an option to elect additional compensation rather than insurance goes to whether CHN had an established policy to allow such an option, whether its employees were informed that such an option was available, and whether CHN consistently applied this option. The fact that CHN has subsequently adopted a cafeteria provision is irrelevant.

Second, CHN did not demonstrate that wages in lieu of health insurance was a consistently applied policy available to all employees. In a Request to Develop the Record, the Board attempted specifically to determine whether this option was universally available and communicated to employees. As to the issue of wages in lieu of health insurance, the Board asked, "Were all employees offered the option of receiving cash rather than an employer contribution for the cost of health insurance?" Rather than directly answer this question, CHN replied that "all employees who asked for reimbursement for health insurance costs were given consideration prior to 1993 when the arrangement was established between CHN and its affiliate."

Declaration of H. Randall Garland at 6.

This answer is unresponsive to the question and ambiguous. First, the Board was asking about wages in lieu of health insurance and not whether CHN offered all employees reimbursement for health insurance costs. Second, even assuming CHN was addressing wages in lieu of insurance, it is unclear whether by "all employees who asked . . . were given consideration," CHN means that some requests were allowed while others disallowed and on what basis. Third, if wages in lieu of health insurance was a true option, it is not clear why it would be an option for existing employees only prior to 1993. Finally, it does not seems probable that employees who elected to be reimbursed for their spouses' health insurance deductibles would choose such reimbursement if given a chance to receive considerably more under a wages in lieu of insurance option. (For example, one employee received $635.92 in health insurance reimbursement; however, under the affiliated entity's group policy she would have been entitled to over $3,000. See CHN Ex. 1.)

Therefore, we find that CHN has failed to prove that it had an established, consistently applied policy of allowing all employees to choose between additional compensation and health insurance, and we uphold this portion of the disallowance.

The second component of this salaries and wages disallowance involves a payment of "salary that did not reconcile with the rate reflected in the personnel folder." PHS Review Committee letter dated November 24, 1997, at 2. According to the personnel folder, the employee was entitled to $17.36 an hour but she was reimbursed at $24.31 an hour. HRSA Ex. 5, at unnumbered 4. The PHS Review Committee upheld the disallowance of the difference between the employee's salary at these two rates because CHN failed to provide documentation to show that the excess salary payment was in accordance with its personnel policies.

CHN asserted that "[t]his employee was paid at a higher rate than indicated on personnel records in an attempt to retain the employee's services, i.e., a merit-based assessment." CHN letter dated March 2, 1998, at 6. CHN pointed out that under the personnel manual, the Executive Director has the authority to make interim salary adjustments. The manual provides:

Salary adjustments are considered on an annual basis. Interim salary adjustments (based on merit or change of responsibilities) may be made any time at the discretion of the Executive Director. CHN Personnel Policies Manual at III(D), CHN Ex. A at A-24.

We conclude that the disallowance of this cost was correct for the following reasons. While it appears that the Executive Director could have authorized a merit-based mid-year salary increase under the personnel policies, the record as presented to the Board was devoid of any documentation indicating that this is in fact what had happened. The only information directly on this point in the record is the preceding statement by CHN's lawyer in a letter to the Board. In developing the record, the Board therefore requested CHN to produce supporting evidence showing that the additional salary was a merit raise rather than a bookkeeping error. The Board asked CHN the following question:

Please supply any existing supporting documentary evidence that the employee, whose compensation rate did not match the rate in her folder, was paid the higher rate in an attempt to retain her services. If there is no existing supporting evidence in the personnel records, please supply a statement by knowledgeable management employees as to the circumstances surrounding the decision to pay this employee an interim salary adjustment.

CHN answered:

As explained in .9 above, this individual received additional compensation in order to bring her overall compensation into line with other employees.

Declaration of H. Randall Garland at 7.

Paragraph 9 of the Declaration concerns the CHN's hiring of this employee and why it paid her additional wages in lieu of health insurance. It has nothing to do with a decision to pay her an interim merit-based adjustment to retain her services.

Since CHN failed to provide any evidence concerning a decision to pay this employee above the rate in her personnel folder, there is no basis for finding that the excess payment was an interim salary adjustment pursuant to CHN's consistently applied personnel policies. The excess payment could simply be an error. We therefore uphold this portion of the disallowance.

IV. Conclusion

For the preceding reasons, we conclude that HRSA's disallowance of $1,021.32 in health insurance expenditures and $6,867 in salaries and wages expenditures was correct, and we uphold that portion of the disallowance. We also conclude that HRSA's disallowance of $6,386.68 in health insurance expenditures was erroneous, and we reverse that portion of the disallowance.

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Judith A. Ballard

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M. Terry Johnson

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Cecilia Sparks Ford
Presiding Board Member