GAB Decision 411
Docket No. 82-246
April 28, 1983
Morris Family Health Care System;
Garrett, Donald; Settle, Norval Teitz, Alexander
The Morris Family Health Care System (Grantee) appealed a Public
Health Service (PHS) decision to disallow $4832 in costs incurred by the
Grantee during the first year of its Community Health Center grant. The
items disallowed were: (1) compensation to two members of the Grantee's
Board of Directors, for emergency part-time work for the clinic -- $748;
(2) a quality performance award for the Executive Director -- $3600;
and (3) an inter-office communications system -- $484. We uphold the
disallowance for the Board members' compensation and for the quality
performance award, and reverse the disallowance for the inter-office
communications system.
The Board's Standard of Review
The Board's procedures, found at 45 CFR Part 16 (1982), provide for a
special expedited review for appeals of $25,000 or less in which there
has already been a preliminary review process resulting in a written
decision based on a record. 45 CFR 16.12(d). That process applies to
this appeal. /1/ Under the special expedited process, the Board
generally restricts its review to whether the decision of the
preliminary reviewing authority was clearly erroneous. Section 16.11(
d)(1). Here, the Board based its decision on a review of the PHS
decision and the underlying record, and on a telephone conference call,
in which the parties discussed their positions. /2/
(2) Analysis
I. Board members' salaries
Two of the members of the Grantee's Board of Directors were
reimbursed for their services to the Grantee, under the following
circumstances. Both the secretary and receptionist quit without notice
in September 1981. At that time the number of patients visiting the
Grantee was increasing. Replacements hired by the Executive Director
did not know how to file insurance claims and the Executive Director
claimed that that he was unable to find part-time help to prepare the
claims. Furthermore, there was a large backlog of insurance claims that
had not been filed for some months. (Affidavit by Agnes Hayes) The
President of the Board and another Board member volunteered their
services to keep the insurance claims up to date in order to ensure a
proper cash flow for the clinic. The President of the Board apparently
had knowledge and expertise about how to file insurance claims. Between
October and December 1981 the two Board members worked nights and
weekends to keep the insurance claims up to date. In December 1981 the
Board, concerned about the amount of time the two Board members had
devoted to helping the clinic, voted to compensate the two members for
their efforts.(Letter of June 1, 1982 from D. Goolsby; Affidavit by
Palmer Norris) The Board voted to compensate the two Board members at a
minimum wage on a temporary basis, and the two Board members were paid
$748 for their time. (Board Minutes, December 17, 1981) The Board asked
the advice of their attorney at the Board meeting in which the vote was
taken. The record of the PHS decision states that the Board acted in
good faith and believed that payment to the two Board members of a
minimum wage for their voluntary services during a time of emergency
would not be a conflict of interest.
The controlling regulations for grants to community health centers
are found at 42 CFR Part 51c (1980-81). Section 51c.304(b)(4) provides
that no member of the board of a community health center shall be an
employee of the center. Sections 51c.107(b)(3) and (4) provide that
board members may be reimbursed for reasonable expenses incurred in
connection with board activities and for lost wages, where the board
member's family income is under a certain level. The PHS Grants Policy
Statement (Rev. 1976), at p. 47, provides that grantees must establish
(3) 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.
The Policy Statement requires that grantees must have written guides
indicating the conditions under which outside activities, relationships,
or financial interests are proper.
The PHS decision stated that the Grantee had violated section 51c.
304 and that it had no written guidelines concerning conflicts of
interest or other situations involving private gain. The PHS decision
stated that the Grantee should have contacted the Regional Office before
deciding to compensate the Board members for their services, so that the
Grantee could have avoided the appearance of private gain to those
persons. Supporting that decision were the PHS Board's findings that
the Grantee had not documented its attempts to hire other persons to
perform the work, and that the Grantee's Board of Directors voted to
compensate its members through a contract beginning after the work was
performed, without benefit of written guidelines.
Although there is no evidence that the Board members acted out of a
desire for private gain, it is clear that the grantee violated sections
51c.304 and 51c.107, regarding employment and reimbursement of Board
members; that the Grantee did not have any written guidelines to cover
such situations; and that the Grantee did not consult the Regional
Office, or otherwise attempt to establish controls which would prevent
an appearance of private gain. Thus, even if the Grantee acted in good
faith, it did not conform to PHS policies, and we cannot say that the
PHS decision is clearly erroneous. Therefore, we uphold the
disallowance of $748 for the salaries paid to two Board members.
II. Quality performance award for the Executive Director
The circumstances leading to the Board's vote to give the Executive
Director a quality performance award, as indicated by the record, are as
follows. The Board of Directors conducted a salary review for the
Executive Director after six months of employment and promoted him. /3/
When the Board promoted the Executive Director, they raised his salary
to $26,000 and indicated that amount on the grant application submitted
to PHS in February 1981.
(4) In May 1981 the PHS Regional Office of Grants Management notified
the Executive Director by telephone that the Grantee would receive a
reduced level of funding, and the reduced amount would include a salary
for the Executive Director of $24,000. The written record does not show
why this reduction was made, but in the telephone conference call the
Regional Office representative explained that the reduction in the
Executive Director's salary was made by a review committee in Atlanta,
based on their knowledge of what a center of that size in Alabama
generally pays its director. Both parties agreed that the telephone
call concerning the reduction in salary also included a discussion about
the allowability of performance awards, but they did not agree about who
initiated that conversation, or whether the PHS Regional Office approved
any action to provide a performance award to the Executive Director. On
May 27, 1981, the Board of Directors amended the Grantee's personnel
policy to provide that all employees could receive performance awards.
(Previously, the policy had provided that the Executive Director could
offer merit salary increases to employees who had demonstrated
outstanding job performance. Personnel policy, February 1981, p. 12.)
At that same meeting, the Board of Directors awarded the Executive
Director a quality performance award of $3600, which constituted 15% of
his reduced salary. (Board minutes, May 27, 1981)
Section 51c.113 provides that the standards of 45 CFR Part 74 apply
to the centers. /4/ Part 74 includes provisions about compensation for
personal services, including bonuses. Appendix F., G.6. The cost
principles at Appendix F provide that all types of compensation for
personal services are allowable to the extent that the compensation is
paid in accordance with policy and procedures that "relate individual
compensation to the individual's contribution to the performance of
grant or contract work, result in internally consistent treatment of
employees in like situations, and effectively relate compensation paid
within the organization to that paid for similar services outside the
organization." Appendix F, G.6(b)(1). The total compensation paid to an
individual must be reasonable. G.6(b)(2). Finally, while the
compensation of each individual is not normally subject to review and
approval, G.6.(d), changes in an institution's compensation require
special consideration and possible limitation on allowability where
amounts appear excessive.G.6(e).
(5) The PHS Board decision stated that the Grantee provided
insufficient information about the reasonableness of the bonus paid to
the Executive Director, and about whether the bonus policy was
consistently applied for other professional staff members. The Regional
Office took the position that the award was unreasonable and
circumvented the earlier salary reduction. The Regional Office
acknowledged that it had advised the Executive Director that performance
awards were allowable under the conditions set out by PHS policy (Part
74 and the PHS Grant Policy Statement). Memorandum of July 15, 1982
from Region IV. The Grantee contended that the Regional Office had
actually approved the percentage of the award, but the Regional Office
denied that.
The cost principles found at Part 74, Appendix F. G.6. provide that
PHS may review an individual's compensation where the institution
changes its compensation policy so that a substantial increase in the
compensation level results. That review must consider whether the
compensation level is reasonable, whether the Grantee has treated its
employees consistently, and whether the compensation is comparable to
that outside the organization.
Here, the Grantee argued that the Executive Director deserved the
performance award because he had worked many hours overtime to prepare
the grant application, to look for a qualified physician for the
Grantee, and to keep the Grantee's clinic running. The Grantee provided
no evidence to support this argument. An affidavit from the Executive
Director was also included in the record, but since it could reasonably
be considered self-serving, we do not give it dispositive weight. The
Grantee's personnel policy provided that salary scales would be based on
salaries at comparable agencies, and the cost of living increases in the
Birmingham, Alabama area, as measured by the U. S. Department of Labor.
The Grantee has not submitted any evidence that the total amount paid to
the Executive Director ($27,600) is within the standard articulated in
their personnel policy.
Neither the PHS decision nor the underlying Regional Office decision
indicated why they believed the performance award was unreasonable,
other than that they believed it was made as a substitute for the
promotion which PHS refused to recognize. The Regional Office
representative indicated, during the telephone conference call, that its
opinion was based on the review committee's decision that $24,000 was
adequate compensation and that $26,000 was too much. The Grantee has
not submitted any information which would contradict the review
committee's conclusions about the adequacy and comparative
reasonableness of the Executive Director's total compensation. Thus,
while there is no evidence in the record that the total amount paid to
the Executive Director was in fact excessive, there is inadequate
evidence to show that it was reasonable. We do not know whether any
other employees other than physicians were considered "professional
staff members." There is no evidence in the record that other employees
(6) deserved performance awards and did not receive them. PHS had the
authority to review and approve changes that result in substantial
increases. We consider a bonus of 15% a substantial increase, and there
is no evidence in the record about either comparable salaries or
percentages for bonuses. We conclude that the Grantee has not provided
adequate evidence that the award was reasonable, or that it was based on
the standards set out in the Grantee's personnel policy. We cannot find
the Agency decision clearly erroneous. We uphold the disallowance for
$3600.
III. Inter-office communications system
On January 10, 1981 the Grantee submitted a written request to the
Regional Office for approval to purchase three items whose costs were in
excess of $300 each. The letter stated that the Grantee's Board of
Directors had approved the purchase of the items and that the Grantee
had obtained bids and price quotations from three or more vendors. One
of the items listed was a "Music System -- and AM/FM tuner with 11
speakers, when a cost of $495." The letter contained a justification for
the items, stating that it was to provide background music in the
clinic. The Regional Office did not respond to the Grantee's request to
purchase the item. A memorandum from the Regional Office dated July 15,
1982 to PHS indicates that the Grantee paid for the receiver on June 17,
1981, and that, had the Regional Office responded to the request, it
would not have approved the cost of the receiver but would have allowed
$125 for the cost of speakers for an office intercom system. /5/ An
affidavit from the Executive Director stated that the system was used to
prevent confidential conversations between patients and physicians from
being heard, because the interior walls of the clinic provided little
sound insulation. The Grantee also alleged that the system was used for
an office intercom system.
The PHS Board decision stated that the Grantee did not receive
written or verbal approval in response to its request of January 10,
1981. The decision then said,
Such purchases are not unusual for this type of clinic setting and
the cost was not unreasonable. However, purchases of general-purpose
equipment at $300 or more per unit require prior approval from the
awarding office which was not obtained in this case.... PHS (7) policy
indicates that if no response is received within 30 days after the date
of grantee's request, the request shall be deemed as disapproved (GAM
PHS: 1-510-80A). /6/
During the telephone conference call, the Regional Office
representative stated that they believed the stereo receiver was
unallowable because it was for the employees' entertainment. However,
the PHS Board decision does not refer to that reason, and, in fact, the
PHS Board decision stated that the item was an acceptable one at a
reasonable cost, and that it disallowed the cost because the Grantee
never received approval to purchase the item, and should have taken that
silence to mean disapproval.
Applicable regulations found at 45 CFR 74.102(c) require the agency
to review a request for prior approval and notify the recipient of the
decision within 30 days from the receipt of the request. If the agency
is going to be delayed in its response, the regulation requires the
agency to notify the recipients in writing about when to expect the
decision.
Here, PHS failed to follow the applicable procedure for responding to
the Grantee's request. It simply never responded to the request. No
other basis for the disallowance except lack of approval was included in
the PHS Board decision. The PHS Board decision acknowledged that the
purchase was not unusual nor unreasonable. Although the Regional Office
believed the stereo receiver was unallowable if used solely for
entertainment, they acknowledged that they had no knowledge about its
use as a conversation muffler. The PHS Board indicated that the
system's use in a health clinic is acceptance. We do not agree that the
item should be technically disallowed for lack of approval when PHS has
given no programmatic reason for denying approval, and indeed might not
have had one. PHS' own procedures call for a response to the Grantee,
and had the Grantee appealed the failure to respond, PHS would have had
to provide a programmatic reason for denying the request. Cf. Kent
Community Mental Health Center Services Board, Decision No. 138,
December 1, 1980. The HHS Grants Administration Manual, Chapter 1-105,
B.1, provides that the Agency may grant retroactive approval if, inter
alia, "the transaction would have been approved had the organization
requested approval in advance." Here, the Grantee requested approval in
advance, and although the Regional Office stated that originally it
would have disapproved the request for the stereo receiver had it
responded, the Regional Office representative acknowledged that had they
known that the system would be used for sound insulation, it might have
made a difference. The PHS Board acknowledged that the system was a
reasonable purchase. The Agency (8) must state a programmatic basis for
its decision to deny retroactive approval and may not deny approval
based on unsubstantiated conclusions or bases so insubstantial as to be
capricious. Economic Opportunity Atlanta, Inc., Decision 313, June 24,
1982. Therefore, we believe that the PHS decision is clearly erroneous
on this element of the disallowance.
Conclusion
For the above-stated reasons, we uphold the disallowance in the
amount of $4348, and reverse in the amount of $484. /1/ A regional
official made the decision to disallow the costs, after three
regional office employees visited the Grantee to discuss its policies
and practices. The Grantee appealed that decision to the PHS Grant
Appeals Board, which issued a written decision upholding the
disallowance. The Grantee then appealed the PHS decision to this Board.
/2/ The Board's special expedited procedures provide that the appellant
shall submit a statement why the decision was clearly erroneous. 45 CFR
16.12(d)(2)(i). The Grantee made its only submission to the Board after
the date a submission was due, and just prior to the telephone
conference call. That submission duplicated the earlier record for the
most part. It did add a complete set of Board minutes, an affidavit, a
copy of a memorandum from the Board President dated 11/16/81 with an
attachment, and a copy of the position description for the Executive
Director. The submission also included the Grantee's summary of its
reasons for the costs incurred, but these added nothing new to the
record. The Grantee did not indicate that it submitted copies of those
materials to PHS, but the Board's decision here does not rely on
anything that the Agency has not seen. /3/ The Grantee argued
that this was allowed under the Grantee's personnel policy, which
provided that employees would receive a salary review after six months.
(Morris Family Health Care System, Inc. Personnel Policies, February
1981, pp. 11-12) The policy states, at p. 10, that the terms and
conditions of employment are applicable to all employees. /4/ In
1981 certain Appendices to Part 74, including Appendix F, were dropped.
Section 74.174(1981) provides that the principles to be used in
determining allowable costs for nonprofit organizations are contained in
Attachment C to OMB Circular A-122. The principles found previously at
Appendix F are substantially the same as those found in Attachment C.
We refer to Appendix F throughout this decision since it was in effect
at the beginning of the grant involved here. /5/ In the
telephone conference call the Regional Office representative stated that
the Grantee made a separate request for an intercom system and that that
request had been approved. When the Grantee claimed the cost of the
intercom system and the stereo receiver, the Regional Office disallowed
the amount they believed represented the stereo receiver only.
/6/ We note that the provision cited in that decision, GAM PHS:
1-510-80A, says that for purposes of appeal to a PHS Board on the basis
of a disapproved request for purchase, a grantee may consider a failure
to respond to a request as disapproval and may appeal.
JULY 07, 1984