GAB Decision 360
November 30, 1982 Bullock County Health Services, Inc. Union Springs,
Alabama; Docket No. 82-84 Garrett, Donald; Teitz, Alexander Settle,
Norval
Bullock County Health Services, Inc. (BCHS) appealed a decision by
the Public Health Service (PHS) Grant Appeals Board to disallow $25,685
in costs pertaining to BCHS's Rural Health Initiative (R.H.I.) grant for
the period from September 1978 through June 1980.
There are six items of cost involved; each will be discussed
separately below. Based on the record, which includes a summary of a
conference held by telephone, we uphold the disallowance of all the
costs.
I. Background
The Bullock County Ambulance Service was originally awarded a R.H.I.
grant for the period from September 1, 1977 through August 31, 1979.
During this period, the owner of the Bullock County Insurance and Realty
Company and president of the ambulance service was also the Project
Director for the grant. In mid-1979, PHS approved a change in grantee
to BCHS for the period from September 1, 1979 through August 31, 1980.
A different project officer was employed, but the owner of the Insurance
and Realty Company was also Chairman of BCHS and manager of the
ambulance service. BCHS has admitted that a number of the same people
simultaneously sat on the boards of directors of the ambulance service
and BCHS as well as the local hospital and nursing home. See, cover
letter to appeal file, p. 2.
II. Documentation of Allowable Costs Generally
As will be seen below, many of the issues in this appeal hinge on
BCHS's inability to document the allowability of its costs despite
numerous opportunities to do so during this appeal. BCHS argued that it
provided the required services and that it was not "documentation
oriented" (Conference call, October 29, 1982) because in its rural
environment, such conduct was neither the norm nor necessary.
It is a fundamental principle of grant administration that a grantee
have documentation to support the fact that claimed expenditures were
incurred to further the purposes of the grant project and were
reasonable. (2) See, e.g., Urban Indian Health Board, Inc., Decision
315, June 28, 1982; New York State Department of Social Services,
Decision No. 204, August 7, 1981. The responsibility to support costs
with documentation begins at the time the cost is incurred and charged
to the grant and continues throughout any appeal process that may take
place. See, cases cited supra.
Standards to be applied in establishing the allowability of certain
specific items are set out in 45 CFR Part 74, Appendix F, Section G and
the PHS Grants Policy Statement (1976), but in addition, all costs must
be shown to be reasonable, allocable, and necessary. A discussion of
these terms is found in Appendix F, Section B.
Whether the grantee was providing grant-related services to its
community is, of course, an important concern. In this appeal, PHS did
not argue that BCHS has not done so. But this is not the federal
government's only concern. A grantee has a responsibility to account
for public funds and to show that they have been used effectively. Good
fiscal and management practices are demanded of all grantees, whether in
a rural or urban environment. This is where PHS found BCHS to have
problems.
III. Rent on Two Houses
PHS disallowed $14,175 paid to the ambulance by BCHS for rent on two
houses used for medical and dental clinics for the period from September
1978 through June 1980. PHS determined that the rental arrangement
represented a less-than-arms-length transaction that BCHS had not
documented what its "ownership" costs were, and that BCHS had paid
$14,175 in rent not $9,525 as it had asserted.
1. Less-Than-Arms-Length Lease
PHS argued and BCHS acknowledged that the rental arrangement was a
less-than-arms-length transaction as defined both in 45CFR Part 74,
Appendix F, Section G. 38 (d) and the HHS Grants Administration Manual
Chapter 6-10. Both provisions define such a transaction and state that
if such a transaction occurs, rental costs are allowable only up to the
amount that would be allowed had legal title to the facility been vested
in the lessee.
BCHS's arguments were three-fold: (1) although many of the same
people managed and directed both BCHS and the ambulance service, no one
profited from the arrangement; (2) BCHS and the ambulance service were
two separate corporations; and (3) the PHS project officer knew of and
approved the rental arrangement. (3) There has been no argument by PHS
that individual board members or managers gained financially from the
rental arrangements. While the federal requirements pertaining to
less-than-arms-length transactions were certainly meant to prevent
individual pecuniary gain, they clearly also have a broader purpose.
Underlying the limitations is the idea that there should be no
possibility that decisions made in management of a grant-supported
project could be influenced by conflicts of interest and concerns not
related to the best interests of that proeject.
While BCHS and tha ambulance service may have been separate
corporations, both corporations were certainly under common control
through common officers, directors, and members, so that the provisions
cited above are relevant. /1/
Neither party has argued with any specificity the issue of whether
the rental arrangement was "approved" by the Regional Office. Even
if
BCHS had proved this to be the case (which it has not), however, the
result of PHS approval would not be that all rental costs would become
allowable. Nothing prevents a grantee from entering into a
less-than-arms-length arrangement; indeed, some of the costs are
allowable if there is such an arrangement (see below), but not all
costs. BCHS did not prove, nor even allege, that in approving the
arrangement, the Regional Office assured BCHS that all rental costs
would be allowable.
2. Allowable Rental Costs for the Two Houses
In less-than-arms-length transactions, rental costs are allowable up
to the amount that would be allowed had legal title to the facility been
vested in the lessee. PHS asked BCHS to document such costs, but for
the most part, BCHS has been unwilling or unable to do so, arguing
conclusorily that the costs are clearly reasonable.
Some documentation was presented in connection with BCHS's attempt to
show that there was a $25,000 mortgage on the property at issue used to
(4) purchase the property as well as a $15,000 loan for renovation.
BCHS offered the mortgage and loan as evidence to show that the rental
costs charged to the grant were reasonable in light of the ambulance
service's ownership costs.
The evidence related to the mortgage was a bank note which merely
shows that $25,000 was borrowed by the ambulance service using the
property as collateral and a resolution by the ambulance service Board
of Directors that $25,000 be borrowed to purchase certain property.
BCHS admitted that it could present no contemporaneous documentation,
such as a real estate contract, to specifically show that $25,000 was
paid for the property at issue. The ambulance service resolution
identifies the property to be acquired for health services purposes as
"three lots with the houses thereon situated in the City of Union
Springs, Alabama." BCHS's Exhibit #11. The bank loan document lists the
collateral as being "two lots and buildings on W. Conecuh Ave., U. S."
BCHS's Exhibit #11. There is no explanation in the record as to the
relationship of these two descriptions, e.g., whether the "two lots"
are
a subset of the "three lots", and if so, whether the third lot was
used
for R.H.I. purposes. The evidence is inadequate for us to find that
BCHS should be able to charge to the grant its $238.92 per month
payments to the bank as mortgage payments for the purchase of property
used for R.H.I. grant purposes.
The bank note for the $15,000 loan merely indicates that it is an
additional advance and becomes a part of the other loan. There is a
handwritten note in the lower left which says "Renovating one of houses
to Doctor's office." BCHS's Exhibit #11. There has been no evidence
presented to show that the $15,000 was actually used to renovate one of
the houses, and that these costs were allowable unde the PHS Grants
Policy Statement.
Even BCHS's evidence for showing that the costs were reasonable
(alothough this is not the only measurement for allowability in this
instance) indicates that at least some disallowance was approriate.
BCHS's Exhibit 12 contains a real estate broker's appraisal of fair
rental value of the clincis. Using those figures (and depending on what
the total rental charge to the grant was (see discussion below)), the
grant was charged either $632 or $5,282 in excess of the fair rental
value of the facilities. In the conference, BCHS's representative
agreed with these figures. /2/
(5) 3. Amount of Rent charged to Grant
BCHS argued that only $9,525 was paid by BCHS to the ambulance
service for rent; PHS stated that the correct figure is $14,175. PHS'
calculation is based on figures taken from BCHS's disbursements and
payroll journal during site visits, according to the two people who made
those visits. Only checks marked "rent" made out to the ambulance
service were counted. Conference call, October 29, 1982. BCHS stated
that the ambulance service books and the clinic's office manager's books
showed only $9,525 was paid in rent. but it could supply no
documentation for its claim besides its Exhibit #10 which is a list of
checks by number, date, and amount supposedly pertaining to rent. PHS
has also submitted such a list. The combination of the unrebutted
statements of Regional Office personnel as to the PHS list's generation,
the lack of evidence by BCHS to refute PHS's evidence, and BCHS's
failure to repsond to PHS's reasonable list of documentation that would
be sufficient (Memorandum to Board, October 21, 1982, p. 2)) leads us to
conclude that BCHS has not shown that only $9,525 was spent on rent, and
that the Agency's disallowance amount has not been successfully
challenged.
4. Conclusion on Rental Costs
In summary, we find that (a) the rental arrangement was a
less-than-arms-length transaction; (b) BCHS has not documented what its
"ownership" costs were; (c) BCHS has not shown that only $9,525 was
paid in rent. Therefore, we uphold PHS's disallowance of $14,175. We
recognize that this decision results in BCHS, in effect, not being able
to recover any of the costs of maintaining its property used for grant
purposes. But the nature of the rental arrangement is inherently
suspicious, and a burden is placed on BCHS to show that its rent
payments were equal to (or more than) the costs it would have incurred
had it been the owner of the property. It has not done so, and the
disallowance, therefore, must be upheld.
IV. Ambulance Service Contract
During the period from September 1979 through June 1980, BCHS charged
to the grant $2,700 in ambulance service costs. This amount was accured
(6) through a contract with Bullock County Ambulance Service (BCAS) at a
flat monthly rate of $300. PHS found that there was a conflict of
interest involved in this transaction because the person who managed
BCAS also was Chairman of the Board of BCHS. While this arrangement
contravened the PHS Grants Policy Statement's admonition against
conflicts of interest (p. 47), PHS recognized that BCAS was the only
ambulance service available to provide this service within a reasonable
distance. It did find, however, that while costs of transporting
patients are allowable charges to the grant, BCHS had not provided
sufficiently detailed information to document that the costs were
reasonable and included only charges for R.H.I. patients. Such
information should be available in BCAS's log and BCHS's patient log
(e.g. date of service, name of clinic patient, address responded to and
destination, amount of charge and party billed), according to PHS.
BCHS argued that during the life of the contract, BCAS provided an
average of eight local and three out-of-town runs for R.H.I. patients
per month. Payment would have totaled $660 per month on an "as needed
basis." Later in the appeal process, BCHS argued that it would cost an
"independent" person $275 to go by ambulance to Birmingham which is
150
miles away, and that the contract price was one-half of what a
Montgomery ambulance service would charge.
BCHS has not provided any evidence in support of its assertions to
show that the costs were reasonable. The assertions about the costs of
comparable ambulance service, in addition to being merely conclusory
statements, are largely beside the point because BCHS has not shown that
only R.H.I patients were transported under the contract. Therefore, we
must uphold the disallowance.
V. Car Rental/Lease Costs
During the period from October 1979 through May 1980, BCHS charged to
the grant $4,356 in car rental/lease costs. The sum represents payments
made to the ambulance service for two cars.
The Notice of Grant Award for the period from September 1, 1979
through August 31, 1980 contained a number of special provisions, one of
which one stated "B. Delete rental care (sic) costs $3,600." PHS's
Exhibit D.2, p. 3. /3/ The PHS Grant Administration Manual 1-67 states
that all terms and conditions contained in a notice of grant award are
binding until they are modified by a revised notice of grant award or
other document.
(7) BCHS argued that the project officer knew about the rental costs and
had stated that they were allowable to provide physician and patient
transportation. If BCHS had provided evidence of written revision of
the special provision, then the car rental/lease costs would probably be
an allowable charge to the grant.
BCHS has provided no evidence of such oral approval and no evidence
of written modification of the notice of grant award. PHS denied the
allegation. In addition, the PHS site visit reports (see, e.g., PHS
Exhibit B.3, p. 4) indicate that while PHS knew that BCHS was using cars
for grant purposes, it thought that the cars were going to be donated to
the project.
PHS's disallowance is upheld because BCHS spent grant funds for a
purpose specifically prohibited in its notice of grant award.
VI. Bookkeeping Fees
During the period from September 1978 through June 1980, $1,100 ($50
per month) was spent from grant funds for bookeeping services rendered
by the son of the chairman of BCHS on an "as needed basis." There
was no
contract agreement or record kept on the services provided. PHS
concluded that BCHS used poor judgment in hiring the son of the
chairman, clearly leading at least to the appearance of a conflict of
interest.
BCHS argued that the PHS Regional Office, when it made its first site
visit, agreed that the accounting and bookkeeping records were in
disarray and that the son should be hired to do the job. BCHS contended
that the job was indeed done well and that the amount paid was
insignificant. BCHS also asserted that the some was the only C.P. A.
in the county.
PHS did agree that the accounting system was found to be inadequate
when it was first investigated. PHS did recommend that BCHS hire a
qualified person to set up the system, but denied specifically agreeing
that the son would be an appropriate person to do the task. PHS also
agreed that at the second site visit, "the books were in good shape."
Conference Call, October 29, 1982. PHS asserted that a bookkeeper was
hired shortly after the first site visit, and PHS believed that she was
the qualified persion who would set up the system. PHS's Exhibit C.7.
Even if BCHS was correct that the son was the only available
qualified person to do the job, it still had an obligation to document
how the money was spent, e.g., whether the son worked once a week for
several hours each time. The answer to these questions would lead to a
determination of the reasonableness of the cost. BCHS has provided no
such information; therefore, the disallowance is upheld. (8)$TVII.
Commissions on Insurance Premiums
For the period from September 1978 through August 1979, BCHS charged
to the grant $730 in insurance commissions paid to the chairman of BCHS
and the ambulance service, who also owned and operated the Bullock
County Insurance and Realty Company. The commissions were paid on
$7,300 in insurance premiums. During the period from September 1, 1979
through June 30, 1980, according to PHS, the record indicated that
$8,243.58 in grant funds was used to pay insurance premiums to companies
represented by the chairman. No inforation was avaiable on the amount
of commissions charged to the grant, so PHS disallowed $824 as
commissions for this period. This figure was arrived at based on the
assumption that the commissions would represent 10% of the amount paid
for premiums (as in the earlier period).
PHS considered that the arrangement represented a clear conflict of
interest in contravention of the PHS Grants Policy Statement (p. 47) and
that BCHS should have sought coverage from an agent not associated in
any way with BCHS.
BCHS argued that the premiums were reasonable; that the Regional
Office knew about the arrangement; and that there was no conflict
because the insurance agency did business with the ambulance service
only and not BCHS.
PHS did not argue that the premiums were unreasonable, but rather
that it cannot condone conduct that was clearly a conflict of interest.
The record does not support the contention that the insurance agency
did business only with the ambulance service. PHS's Exhibit C.2 is a
letter from Employers Life Insurance Company which indicates that at
least one policy was issued to BCHS, and that the chairman was the agent
on record. In addition, the ambulance service was the grantee until
mid-1979 so that if the insurance agency only dealt with it, there still
would be a conflict of interest. Finally, for the period after
mid-1979, to whom the policies were issued is irrelevant. That they
were paid for with grant funds while the chairman was involved in
management of both the ambulance service and BCHS is the contrlling
factor.
The disallowance is upheld because there was a clear conflict of
interest.
VIII. postage Costs
During the period from September 1978 through June 1980, BCHS charged
to the grant $4,760 in postage costs. The usual clinic policy was to
purchase $100 for the clinic postage meter and $150 in postage stamps
(9) for the project director/chairman per month. PHS disallowed $1,800
of these costs as an excessive charge to the grant. This figure was
arrived at in the following manner. PHS did not consider the funds used
to purchase stamps each month for the project director/chairman to be a
reasonable or proper clinic expenditure. Based on that premise and the
Regional Office's review of BCHS's cash disbursement ledger, it listed
all entries which exceeded $250 a month for postage and disallowed $150
a month or the amount that was occasionally referenced as "stamps for
(the project director/chairman)." See, PHS's Exhibit B. 10, p.7.
BCHS stated that the stamps were used for extensive physician
recruitment and public relations efforts for the clinic. According to
BCHS, there was a mailing list of 60 names of people in the community
who received mail every day relating to the clinic. It has also
provided two sworn statements from people who worked with the project
director/chairman (BCHS's Exxhibit #27), one of which states that an
average of 100 pieces of correspondence per day were mailed pertaining
to clinic business. The other statement was more general. BCHS has
also provided evidence that it was involved in a difficult and
protracted effort to attract and keep doctors in Union Springs, Alabama.
PHS acknowledged that recruitment and public relations efforts can
constitute a legitimate part of the responsibilities of a project
director or board chairman. It found, however, that BCHS had provided
no documentation to show that the costs were reasonable.It suggested
that such documentation would include: a description of specific
recruitment and public relations efforts; samples of corresondence and
enclosures; a description of how the mailing list was developed; and
an explanation of why daily mailings were needed. Memorandum to Board,
October 21, 1982, pp. 5-6.
BCHS offered to provide a copy of the mailing list but nothing more.
BCHS has not shown that it was necesary to mail in large volume every
day or that the mailings were grant-related. The tests of
reasonableness and allocability has not been met, and the disallowance
must be upheld.
IX. Conclusion
For the reasons stated above, the disallowance is upheld in the
amount of $25,685. /1/ There is some indication in the record that from
September 1978 to September 1979, the clinic set up by the
ambulance service was renting its office space from the ambulance
service, so that in effect, as BCHS stated, "the Ambulance Service
leased property from itself." BCHS's Exhibit #13, p. 2. If this was the
situation, then the rental transaction wold not have involved even the
minimal spearation of two corporations under common control. Elsewhere
in the file, however, there is evidence that BCHS rented office space
from the ambulance service from as early as September 1, 1978. BCHS's
exhibit #15. Our determination as to the presence of a
less-than-arms-length transaction would be the same no matter which was
in fact the situation. /2/ Even if BCHS had shown satisfactorily that
it paid $25,000 for the purchase of the property, rental payments equal
to the mortgage would not necessarily be allowable. Interest on
borrowed capital is not an allowable cost under 45 CFR Part 74, Appendix
F, Section G.18, and the cost of capital expenditures for buildings are
unallowable except as provided for in the grant, under Section G.7.
Only rental payments equal to the documented amount of such costs as
taxes, alteration, depreciation, insurance, and maintenance and repairs
would be allowable. See, Appendix F, Section G. /3/ The
typographical error was corrected in a letter from the Grants Management
Officer on October 11, 1979. PHS's Exhibit C.1.
OCTOBER 22, 1983