GAB Decision 409
Docket No. 82-253
April 28, 1983
Indiana Area II PSRO;
Ford, Cecilia; Garrett, Donald Teitz, Alexander
The Indiana Area II Professional Standards Review Organization
(grantee) appealed the disallowance by the Health Care Financing
Administration (HCFA) of $2,592 in fees paid to two of the grantee's
employees. On the basis of a close-out audit report, HCFA determined
that the fees were paid on the basis of custodial care of the grantee's
records for five years, when the applicable regulations required only a
three-year retention of records.
The major issue presented is whether the two employees performed
reasonable and necessary services that merited the fees in question.
For reasons stated below, we find that, while HCFA is correct in its
position that only a three-year retention of records is required, the
agreement between the grantee and the employees in question covered
other duties besides record custody and retention that merited
compensation. We therefore reverse the disallowance.
This appeal was reviewed under the Board's expedited procedures set
forth at 45 CFR 16.12. Our decision is based on the parties'
submissions and a telephone conference held on April 15, 1983.
Factual Background
In May 1981 the grantee notified HCFA that it wished to cease its
Professional Standards Review Organization (PSRO) activities and that it
would not attempt to renew its grant. The grant had been for the period
April 1, 1981 through September 30, 1981. On July 2, 1981 HCFA
acknowledged the termination of the grant, informing the grantee that
its grant authority would end as of September 29, 1981 and directing the
grantee to "submit a description of the scope of work, including a time
schedule, and a detailed budget outlining all costs needed to effectuate
a smooth and timely close-out." (HCFA Ex. 2) Additionally, HCFA advised
the grantee to comply with the provisions of 45 CFR Part 74 relating to
the close-out of the grant, enclosing copies of pertinent regulations,
including 45 CFR Part 74 Subpart D dealing with record retention
requirements.
Prior to receiving HCFA's July 2, 1981 acknowledgment, the grantee,
on July 1, 1981, entered into an agreement with two of its employees,
its Chairman and Medical Director, for the payment of a "custodian fee"
for (2) the care of the grantee's records for a five-year period and
other responsibilities. For their services the employees received
$3,240 each, based on an estimate that each employee would have to spend
one hour per month for five years for records management and other
responsibilities.
Subsequent discussions between the grantee and HCFA led to the
establishment of August 22, 1981 as the close-out date of the grant.
Basis for the Disallowance
On March 19, 1982 private auditors issued a close-out audit report
for the grant period April 1, 1981 through August 22, 1981. (HCFA Ex.
8) Among its findings, the audit report stated that the agreement with
the two employees assumed that they would be engaged in custodial care
of the grantee's records for five years, when it was subsequently
discovered that the records need be retained for only three years. The
audit report concluded, "Therefore payments have been made for record
retention and continuing consultation which may not in fact be performed
in the future." (pp. 4-5)
The notification of disallowance adopted the recommendation of the
audit report and disallowed $2,592, an amount representing the
difference in custodial fees between five years and three years (2/5 of
$6,480). The notification of disallowance further stated that the
grantee was responsible for documenting the amount of custodial work
actually performed during the three-year period should HCFA later elect
to reexamine these costs.
The Parties' Arguments
HCFA's position is that the grantee was adequately informed of the
record-retention requirement and that 45 CFR 74.21(a) expressly limits
that requirement to three years. Therefore, the partial disallowance of
the custodial fees was proper.
The grantee did not dispute that the record retention requirement is,
in fact, three years. The grantee argued however, that the two
employees engaged in numerous other activities related to the closeout
of the grant after August 22, 1981. The two employees stated that they
received no compensation from the grantee in their capacities as
Chairman and Medical Director after August 22, 1981. They estimated
that they devoted 140 hours of their time after August 22, 1981 in such
activities as answering and sending correspondence, payment of bills,
meeting with auditors, etc. They also claimed that they used their own
money for office supplies, secretarial expenses, and long-distance
telephone calls. They alleged that HCFA's decision to terminate the
grant prematurely, in August 22, 1981 rather than on September 29, 1981,
resulted in the early dismissal of the grantee's administrative (3)
staff which should have handled these activities. The two employees
stated that they were unaware of how much time or the types of
activities required when they agreed to take responsibility for the
grantee's records. The employees considered it unfair that HCFA now
wishes to take back some of the compensation for custodial fees when
they have devoted an equal, if not greater, amount of time and
out-of-pocket expenses to other grant-related close-out activities.
Discussion
In this appeal we have the situation of a relatively unsophisticated
grantee confronted with the complications of closing out its grant. At
the outset, we find that HCFA is clearly correct in its position that 45
CFR 74.21(a) mandates only a three-year period of record retention. We
also find that, in addition to the grantee being imputed with prior
knowledge of this express requirement, HCFA gave the grantee actual
knowledge of this regulatory provision in its July 2, 1981 letter which
included an enclosure dealing with record retention information. (HCFA
Ex. 2) We have received no indication from the grantee as to why it
thought that its records had to be maintained for five years.
While concurring with HCFA on the duration of the record retention
requirement, we also find that there is no indication that the two
employees involved here in any way abused their positions as officers of
the grantee organization or enriched themselves from their agreement
with the grantee. In its brief HCFA may have implied this by alleging
that the agreement was not negotiated at arm's length and that the
employees could be said to have engaged in self-dealing. There is no
evidence to support this view. On the contrary, what the record does
show is that, at a grantee's Board of Directors meeting, it was
established that grantee representatives and records custodians were
needed and the two employees were selected. It appears to us that this
was a reasonable approach, given the employees' familiarity with the
grantee organization. HCFA did not contend that the hourly fee for the
employees' services was not reasonable. We conclude, then, that the
employees did not engage in any action that could be termed improper.
If the issue were solely one of custodial fees for record retention,
we would sustain the disallowance. We believe, however, that more than
the issue of record retention is involved here. In the telephone
conference held on April 15, 1983, the two employees whose fees were
questioned represented the grantee. The grantee, as such, has been
defunct since August 22, 1981. In that conversation the two employees
stated that the grantee had received little or no guidance from HCFA's
regional office on how to properly terminate a PSRO and close out a
grant. The situation at issue apparently arose from a combination of
this lack of guidance from HCFA and the grantee's own inexperience in
grant close-out matters.
(4) The dispute essentially comes down to the question of whether the
employees should be compensated for non-record retention activities.
HCFA's position is that these activities were outside the scope of the
employees' agreement with the grantee. HCFA has not been able to
delineate the scope of the agreement because the "agreement" was
apparently oral in nature. The only actual description of the
"agreement" in the record before the Board is contained in the minutes
of the grantee's July 1, 1981 Board of Directors meeting:
The Board of Directors also discussed the fact that Drs. Dodd and
Dacquisto will be responsible for access to and eventual destruction of
the information stored by our corporation for the five-year period. In
view of these responsibilities and Drs. Dodd and Dacquisto's acceptance
of the responsibility for negotiations with various Federal
representatives following the termination of our grant, the Board of
Directors approved the payment of a custodian fee to Drs. Dodd and
Dacquisto.
The wording of this "agreement" is somewhat ambiguous, but we find
that it is not unreasonable to conclude that the employees' obligations
under the agreement were not limited to custodial care of the grantee's
records. The employees also were to negotiate with HCFA officials,
presumably tying up any loose ends concerning the close-out of the
grant. The minutes of a previous grantee Board meeting, held on May 27,
1981, also indicate that the two employees would have continued
responsibilities after September 29, 1981. From these minutes, it is
evident to us that, although the fees were paid on an estimated charge
for five years of service, the grantee's Board of Directors intended
that the employees be compensated for the actual hours spent on
grant-related activities. Furthermore, HCFA acknowledged, in a August
26, 1981 letter, that the two employees would represent the grantee
after the close-out of the grant. (HCFA Ex. 7)
As stated above, the grantee submitted a list detailing 140 hours of
activities the employees performed in closing-out the grant. Further,
HCFA did not dispute that the employees actually performed these
activities. We find that the majority of the activities listed are
reasonably related to the close-out of a grant. Grant close-out
expenses are generally allowable under the principles set forth at 45
CFR Part 74, Appendix F, Paragraph G-42. The basis of the audit
report's finding was that the employees might not perform in the future
the activities for which they were compensated. We find that the
submitted list of activities already performed is sufficient to support
the amount disallowed.
(5) It is evident that the employees acted in good faith in
performing those functions necessary for the close-out of the grant.
Since the grantee organization had been dissolved and the regular
employees dismissed, there was no one else available to perform these
activities.While it would have been more prudent for the grantee to have
drawn up a more detailed agreement outlining the specific
responsibilities for the grant close-out, we believe that this is
attributable to the grantee's and employees' relative inexperience in
grant matters. We do not think that the employees should be denied
compensation for the necessary work that they performed. Accordingly,
we reverse the disallowance.
Conclusion
For the reasons stated above, we reverse the disallowance in the full
amount of $2,592.
JULY 07, 1984