GAB Decision 201
July 31, 1981 Family Health Program, Inc. Docket No. 78-150 Settle,
Norval; Teitz, Alexander Garrett, Donald
The Pubic Health Service (PHS or Agency) is attempting to recover
from Family Health Program, Inc. (FHP) interest earned on funds held by
predecessors in interest to FHP.
By letter dated November 22, 1978, Family Health Program, Inc.
requested review of the October 24, 1978 decision by the Audit Appeals
Committee of PHS to uphold the June 16, 1978 decision of the Chief,
Grants Management Branch, Health Services Administration, PHS, directing
the Utah Family Health Program (UFHP, predecessor in interest to FHP) to
return interest in the amount of $62,170 earned on funds during the
period 1971 to 1978. The original Agency decision was based on a report
prepared by the HHS (then HEW) Regional Audit Director dated April 25,
1978, captioned Audit Control Number 08-814549
Our decision is based on FHP's application for review and
accompanying briefs, the agency's response thereto, and submissions by
both parties in response to a telephone conference held by the Board on
December 30, 1980 and to the Board's Order to Show Cause dated May 15,
1981.
Building Reserve
Neighborhood Health Center (NHC or Grantee), predecessor in interest
to UFHP and FHP, accumulated almost exclusively from funds collected in
1972, a building reserve of $1,069,979 to construct a health services
facility. PHS alleges that $736,498 of the reserve was derived from
unspent funding received from Office of Economic Opportunity (OEO) Grant
No. 80015. After NHC's health services facility had been constructed
(no later than March 31, 1975), the reserve fund had accumulated $56,558
in interest. Also, on April 1, 1975, with completion of the facility
and the subtraction of funds for the building and site, there was a
residue in the reserve fund of $180,477. For reasons that will be
explained herein PHS as successor agency to OEO found that the Federal
government had an interest in the portion of the building reserve
atributable to OEO funds such that PHS should collect (1) $27,148 of the
$56,558 in interest that had accrued up to March 31, 1975 and (2)
$35,022 of imputed interest on the $180,477 residue for the period
between April 1, 1975 and March 31, 1978.
(2) (1) $27,148 of Accrued Interest
OEO awarded a Comprehensive Health Services Grant for 1972 to the
Community Health Center Foundation (CHCF). As contemplated by the grant
award, CHCF contracted with NHC to provide health services to recipients
at a rate of of $33.33 per person served per month up to a maximum of
1,875 persons in a month. The grant budget included a total of $750,000
for the contract with NHC. The Grant Award statement specifies an
extensive list of hospital and out-of-hospital care services that must
be provided for "designated entrollees in the NHC Plan who are below
poverty guidelines, but not eligible for Title XIX (Medicaid)." The
total operations of NHC, however, were by no means limited to OEO grant
activities. /1/
During the first half of 1972, NHC determined that it would cost only
about $21.00 per person served per month to provide the required
services under the OEO grant. On June 5, 1972 it requested permission
of PHS to consider the remaining $12.33 per person of the OEO money as
grant-related income and to accumulate it for the purpose of a building
reserve. This request was made in view of PHS' role in administering
its own grants to NHC. /2/ NHC indicated that it would be applying the
$21.00 of each $33.33 in OEO funds received to program expenditures
before using any PHS funds. On June 13, 1972 PHS approved the method of
accounting for OEO premiums "as outlined in (NHC's) letter of June 5."
PHS now asserts that the $21.00 per person component of the OEO funds
can not be considered to have been spent for providing health services
and must instead to imputed to NHC's building reserve and subjected to
interest charges. The Agency applies the following analysis in reaching
this conclusion.
The Agency found initially that revenues from NHC's operations as a
whole exceeded expenditures before counting the OEO grant funds for the
period in question. The Agency then determined that the $21.00 per
person component of the OEO grant funds retained its Federal nature.
The Agency cited Special Condition 1(b) of the OEO grant as authority
for this. Special Condition 1(b) states:
(3) (Funds) received in connection with the operation of the program
must be recorded in a separate account in the accounting records and
proper support documents must be retained. The account shall be used to
meet current operating expenses of the program and the OEO grant funds
shall be used for expenses only to the extent that the funds in the
account are insufficient.
Having determined that the $21.00 per person component of the funds
remained Federal property under Special Condition 1(b), the Agency then
concluded that the funds necessarily became part of NHC's building
reserve and that the Federal government should be entitled to any
interest that would have accrued up to the point that obligations for
building constructon were paid. The Agency claimed only interest that
would have accrued on the "Federal funds" in the reserve and made
no
claim on the reserve itself. /3/
In disputing the Agency's position, FHP maintains that all of the
funds in the building reserve were non-Federal because (1) NHC was a
contractor to whom the special conditions of the grant did not apply,
and (2) since NHC's compensation was on a capitation risk basis rather
than a cost reimbursement basis, NHC is not accountable to the Federal
government for the funds as long as the services provided for under the
contract were performed.
The Agency considers NHC a delegate agency of CHCF and therefore
subject to the special conditions of the grant. The general conditions
governing the Comprehensive Health Services Program under OEO, effective
December 1968, state that any condition applying to the grantee shall
apply to the delegate agency. Furthermore, the approved grant award
uses the term "delegate agency" in a number of sections, including
Special Condition 1, indicating that OEO envisioned such an entity
participating in the grant. NHC appears to be the only organization
involved in the project to which that status could apply and is
specifically cited in certain special conditions applicable to the
grant. Moreover, NHC rather than CHCF was providing health services to
the program beneficiaries. Consequently, FHP's claim that NHC was
merely a contractor in this case and therefore not subject to special
conditions of the grant is not persuasive.
Even though NHC may be considered to be a delegate agency to which
special conditions are applicable, however, the Board concludes that PHS
incorrectly applied Special Condition 1(b) to NHC in this instance.
The Agency's disallowance decision interprets Special Condition 1(b)
to mean that the grantee may use OEO funds for OEO grant activities only
to the extent that excess funds do not exist to pay for these activities
(4) from any other source providing revenues to NHC. Thus, PHS
concludes that OEO funds must be viewed as "unused" so long as NHC's
total operating revenues minus OEO funding exceed NHC's total program
expenditures.
We believe that this interpretation of Special Conditon 1(b) is
unreasonable. First, the interpretation does not comport with the plain
meaning of the special condition. When Special Condition 1(b) refers to
a separate account for "(funds) received in connection with the
operation of the program," it means funds received specifically for the
grant program being funded by OEO. When used elsewhere in the grant
award materials, the term "program" is limited to the activities
contemplated by the grant award. Indeed, the applicable general
conditions governing OEO grants define an "approved program" as "only
.
. . those activities described in the grant funding request for which
funding is approved in the Statement of OEO Grant and its attachments."
Accordingly, under the plain meaning of Special Condition 1(b), the
condition only requires separation of funding from other sources when
that funding is specifically available for project activities
encompassed by the OEO grant. Here, OEO project activities consist
solely of providing health care services for designated enrollees who
are below poverty guidelines, but not eligible for Title XIX. Thus, the
separate account required by Special Condition 1(b) should only contain
substitute funding that is specifically available for these enrollees.
Moreoever, the plain meaning of the special condition comports with
what must have been the purpose behind its adoption by OEO. This
purpose is brought to light by General Condition 17, governing all OEO
grants made under the Comprehensive Health Services Program (Revised --
January 1972), which closely parallels the language of Special Condition
1 and ostensibly was a source for the special condition. /4/
General Condition 17 provides:
INTEGRATION OF FEDERAL, STATE AND LOCAL SOURCES OF FUNDS. Each
Comprehensive Health Services program is responsible for making and
fully implementing agreements to obtain from public or private agencies
which purchase or provide health services or supplies to low-income
individuals in a ciommunity served by the program all reimbursements
available under Federal, state or local law. OEO funds are the last
dollar source. Program funds may not be used for health care costs
which would otherwise be the (5) responsbility of other agencies unless
adequate arrangements for reimbursements on an equitable basis are made.
All reimbursements shall be treated as program income. (Emphasis
supplied.)
It is likely, then, based on the clear intent of General Condition
17, that Special Condition 1(b) was designed to prevent OEO funds from
being used when some other source was available specifically for
activities encompassed by the OEO grant. Thus, the special condition
prevents the grantee from receiving duplicate funding for particular
grant activities and places an affirmative responsibility on the grantee
to obtain available alternative funding for health services on behalf of
OEO enrollees.
The Agency interpretation goes well beyond these purposes and
prevents the grantee from receiving grant funds whenever it has excess
revenues from other sources even though the revenues are not
specifically intended to cover activities of the OEO grant. The
Agency's interpreation greatly limits the grantee's capacity to retain
excess revenues from other sources when it receives substantial OEO
funding and thereby prevents the grantee from achieving financial
stability through the creation of reserves for building funds, emrgency
contingencies, etc. Indeed, the Agency's interpretation effectively
prevents the grantee from knowing whether it can make use of OEO funding
for the intended grant activities until it has completed its annual
balance sheet for all of its operations.
We also believe that the Agency's interpretation is unreasonable as
applied here because OEO did not contemporaneously identify this
interpretation of the special condition for NHC and because PHS has been
unable, in response to Board questions, to identify OEO policies or
guidelines that support the interpretation. Indeed, in administering
its own grants to NHC, PHS appears to have approved procedures that
conflict with its inerpretation of Special Condition 1( b). On June 13,
1972 PHS approved a procedure whereby the $21.00 of OEO capitation funds
would be applied to OEO grant expenditures before any PHS funds.
Special Condition 1(b), as here interpreted by PHS, would require OEO
funds to be applied after PHS funds. Thus, PHS' approval of procedures
relating to its grants on June 13, 1972 conflicts with its current
interpretation of OEO Special Condition 1( b).
Finally, we note that the HEW Audit Report that is the basis for the
disallowance here sets out three "options" for the Agency in treating
the grant funds at issue. These options represent internally
inconsistent applications of Special Condition 1(b). PHS has not
attempted to rationalize these inconsistencies nor to explain
specifically how it reached the interpretation of Special Condition 1(
b) reflected in the option it selected. Thus, the selection of the
option used by the Agency is tantamount to an arbitrary action.
(6) Accordingly, on the basis of the foregoing analysis the Board is
unable to sustain the Agency's charge of accrued interest for the period
up to March 31, 1975.
(2) $35,022 of Imputed Interest from Residue
On March 31, 1975, after the NHC's health services facility had been
paid for in full, thre was a residue of $180,477 left in the building
reserve. The auditors stated that in light of Special Condition 1(b),
the total $180,477 amount was Federal in nature and so all the interest
earned on it between April 1, 1975 and March 31, 1978 should be
recovered by the Federal government. The auditors decided that since no
records had been kept on the interst earned by those funds, an interest
rate of 6% compounded semiannually would be imputed. The interest on
$180,477 at a rate of 6% compounded semiannually yields $35,022. (See
letter dated April 25, 1978 from the Regional Audit Director to the
Regional Health Administrator, p. 4.)
FHP does not dispute tht 6% interest compounded semiannually is a
reasonable rate of interest. However, FHP raises two arguments
regarding why it it should not owe any interest. First, inasmuch as NHC
was paid on a capitation risk basis, the funds lost their Federal nature
when NHC received them and accordingly none of the $180,477 residue
could have been Federal. Second, during the period April 1, 1975
through March 31, 1978, FHP and its predecessors in interest suffered
losses in their grant funded programs greater than the $180,477, s that
even if the $180,477 were judged to be Federal it was entirely used to
offset losses of grant funded programs. /5/
On the basis of our analysis of the interest charges for the period
up March 31, 1975, the Board concludes that Agency's position with
respect to the residue is also without support. The residue of the
building reserve may only be viewed as Federal in nature if Special
Condition 1(b) had been properly applied at the outset with respect to
the 1972 OEO grant funds. Since that was not the case, we would be
unable to conclude that any funds in the residue retained their Federal
character.
(7) Further, even if a portion of OEO funds had remained unused
through operation of Special Condition 1(b) for the period before April
1, 1975, FHP and its predecessors appears to have suffered losses in
their program operations after that date such that this money would have
been "used" during the subsequent period even under the Agency's
application of Special Condition 1(b). For this reason too, no interest
could properly be imputed on the residue.
Conclusion
For the reasons discussed above, the Board reverses the Agency's
decision concerning interest charges on OEO funds received by NHC. /1/
Although, the Board has never received a precise breakdown of
the other grant projcts administered by NHC, or of its privately funded
projects, various documents in the record indicate that NHC received
funding from PHS and Medicaid for projects larger than the OEO project.
There may also have been privately funded projects such as an "Employees
Plan." See Attacment E of the opinion by the HHS (then HEW) Office of
the General Counsel dated July 8, 1977 submitted to the Board by PHS on
February 17, 1981. /2/ The record indicates that the OEO grant
project became the responsibility of HEW and thus PHS pursuant to a
Memorandum of Understanding in July, 1972. Page 2 of the General
Counsel opinion, dated July 8, 1977. /3/ Presumably, since the
Agency permitted NHC to consider the $12.33 component of the original
funds to be grant-related income, it has never attempted to collect
interest on that component. /4/ Part (a) of Special Condition
(1) provides similar evidence of purpose. For example, Special
Condition 1(a) focuses on reimbursements for project services provided
by the health center (NHC) that would ordinarily be the responsibility
of other agencies. Part (a) begins by indicating that its requirements
are "(in) line with General Condition 17." /5/ The memorandum
accompanying the decision by the PHS Audit Appeals Committee indicated
that the Committee would have reversed this portion of the disallowance
if FHP had provided "conclusive evidence of a loss of funds in operating
the program for the period in question." On February 20, 1981, FHP
provided to the Board Reports of Revenue and Expenses for the period
January 1, 1976 through May 31, 1978 and asserted that grant funded
programs suffered losses during a 16-month period beginning January 1,
1976 such that the entire $180,477 would have been spent for grant
funded programs during that period.
OCTOBER 22, 1983