GAB Decision 509
Docket No. 83-136
January 31, 1984
North Valley Community Health Association, Inc.;
Teitz, Alexander; Ballard, Judith Ford, Cecilia
The North Valley Community Health Association, Inc. (NVCHA, or
grantee) appealed the determination of the Public Health Service, Region
X (PHS, or agency) denying grantee's application for a noncompeting,
continuation grant under the migrant health program. Our decision is
based on the written record, which consists of the parties' arguments
and whatever letters, memoranda, and other documents they submitted, and
a conference call between the parties and the Board held on December 16,
1983. We retained a tape of the conference call for the record.
The issue is whether PHS had justifiable reasons for denying the
continuation award. We conclude that PHS acted reasonably in
determining that NVCHA demonstrated inadequate management capability.
Grantee failed to abide by certain terms of the grant: federal dollars
were not available to offset providers' services for a full 12 months
even though grantee was specifically notified of a probable need to
limit services and payments due to limited monies; and grantee did not
maintain current records so as to better track grant expenditures.
Grantee also failed to be attentive to how quickly grant funds were
being used so that six months into the grant, when funds had been
largely exhausted, the NVCHA Board of Directors could only attempt to
justify the rapid expenditure. In addition the record shows that the
Oroville Clinic had numerous financial and management problems. As this
clinic was grantee's only other active management endeavor, problems
there were certainly pertinent to a decision about whether grantee could
successfully manage the migrant health grant. We agree with the agency
that these factors show that grantee violated the terms of the grant,
demonstrated inadequate stewardship of federal funds, and that, in
general, continuation funding was not in the best interests of the
federal government. Accordingly, under the PHS policies for denial of
continuation funding, there were justifiable reasons for the PHS action.
(2) The Board notes that grantee did not challenge the regulatory or
policy bases for the denial. We also note that, as far as we can tell
from the record, PHS acted to mitigate any harm to the community from
the lack of grant funds since it issued an emergency continuation award
to another grantee pending this decision.
While it is clear that grantee had good intentions and may feel it
did the best it could, it is also clear that PHS acted reasonably and
within its authority in denying the funding. In the future, should PHS
again award migrant health funds to NVCHA, the Board trusts that NVCHA
will be more aware of its obligations to monitor and manage federal
funds.
Background
Annually since 1976, PHS had awarded grants to NVCHA for a migrant
health program (North Okanogan Rural Health Improvement Project) to
provide health services to migrant and, at some point after initial
funding, seasonal workers in Okanogan County, Washington. /1/ NVCHA
acted essentially as a third-party payor, reimbursing the providers
according to a set fee scale for health services for eligible persons.
NVCHA is a non-profit corporation formed to promote and improve health
care in the county. NVCHA has been involved in other health-related
projects, including the purchase and operation of a medical clinic in
Oroville. PHS denied continuation funding for the budget period July 1,
1983 -- June 30, 1984 based on grounds that NVCHA lacked adequate
management capability.
With respect to the migrant health grant for the budget period July
1, 1982 -- June 30, 1983, NVCHA received a total federal share of
$127,381. (NVCHA's submission, December 9, 1983) Of this amount, $5,463
was exclusively for health promotion and disease prevention, leaving
$121,918 as the federal share for the total approved budget. (PHS's
brief, p. 6)
(3) On September 14, 1982, PHS conducted its first site visit to
NVCHA to review records and interview members of the Board of Directors
and staff. PHS found no major problems. (PHS's brief, p. 7)
On December 8-10, 1982, PHS conducted its second site visit. PHS
found that the general ledger had not been kept current and requested
that it be brought up to date. /2/ The general ledger, when updated,
revealed that through October 31, 1982, grantee had spent $90,188 of the
$121,918 in grant funds, that is, 75% of the total grant funds were
spent in the first four months of the budget year. The amount of
outstanding obligations for November and the first nine days of December
could not then be determined. (PHS's brief, p. 8; Conf. call) This
was because it took NVCHA 30 to 90 days to receive bills from providers
who first sought 3rd party reimbursements. (NVCHA's brief, p. 6)
By letter dated December 14, NVCHA notified providers that they would
not be paid for services rendered after December 15. NVCHA stated that
it was closing the grant for a period of time because funds were low and
requested that all providers submit outstanding bills so that NVCHA
could get an accurate accounting of current funds. (PHS's Ex. L)
Thereafter, NVCHA continued to operate the migrant health grant on a
limited basis, merely keeping the main office open in an administrative
capacity providing, among other things, translation and liaison services
between migrant and seasonal workers and providers.
PHS conducted a site visit of NVCHA's Oroville clinic from January 31
through February 2, 1983. The site report revealed many financial and
management problems (PHS's Ex. U); in June, 1983 NVCHA closed the
clinic. (NVCHA's brief, p. 8)
By letter dated June 13, 1983 and revised by letter dated June 28,
1983, PHS denied continuation funding of the grant. /3/ PHS later
awarded an emergency migrant health program grant to another grantee
pending the outcome of this appeal.
(4) Applicable Provisions
With respect to funding of noncompeting, continuation grants, the PHS
Grants Administration Manual provides, at Chapter PHS 1-85, Section
30-C. - 2. (GAM), that: /4/
2. Funding of a noncompeting continuation grant within a previously
approved project period may be withheld for justifiable reasons, which
include:
c. A grantee fails . . . to meet the terms and conditions of the
award;
d. A grantee's management practices fail to provide adequate
stewardship of Federal funds; or
e. Any reasons which would indicate that continued funding would not
be in the best interests of the government.
In support of its decision to deny continuation funding, the agency
argued that the performance of NVCHA during its 1982-1983 budget period
was characterized by two of the deficiencies specifically set forth in
the GAM, as well as others which clearly indicated that continued
funding was not in the best interests of the government. (PHS's brief,
p.17) The agency argued that any one of the deficiencies would have been
a sufficient basis for disapproval, and that the numerous deficiencies,
when considered together, compelled disapproval. (PHS's brief, p. 17)
Discussion
PHS stated that it found the management capability of NVCHA to be
inadequate. It found the inadequacy to have been demonstrated both in
the migrant health grant and the Oroville clinic. With regard to the
migrant health grant, PHS found that NVCHA failed to monitor or control
funds effectively. With regard to the Oroville Clinic, PHS found
financial and management problems which PHS deemed relevant to NVCHA's
ability to effectively manage the grant in question.
(5) The Board examined the record with regard to these matters to
determine whether PHS had justifiable reasons for denying the
noncompeting continuation award.
A. Grantee's Failure to Monitor or Control Migrant Health Grant
Funds Effectively
In its decision letter, PHS enumerated three specific examples of
grantee's failure to monitor or control migrant funds effectively: (1)
grantee spent all funds available for health services in 5-1/2 months;
(2) its obligations were not posted to the accounting ledger in a timely
manner; and (3) its Board of Directors, even after being advised of the
problem, took no action to conserve funds until they were almost all
gone. (NVCHA's Appeal File, Ref. B-5, hereafter referred to as NVCHA's
Ex. B-5)
(1) Grantee spent all funds available for health services in the
first 5-1/2 months of the 12 month budget period.
The agency argued that, by spending virtually all the funds in 5-1/
2months, grantee both violated a basic term of the grant, i.e., to
provide "support for health care . . . throughout the entire 12 months
of the grant's budget period" and demonstrated inadequate stewardship of
grant funds. (PHS's brief, p. 18) PHS concluded that violating a term
of the grant and providing inadequate stewardship of grant funds were
justifiable reasons under the GAM for funding disapproval. (PHS's
brief, p. 18)
NVCHA did not dispute that all grant funds were spent during the
first 5-1/2 months of the budget year or that supporting health services
for 12 months was a basic term of the grant. Rather, NVCHA argued, in
effect: (1) that it fulfilled the 12 month requirement since it
remained open, providing translation and liaison services between
migrant and seasonal workers, providers, and other agencies, and since
providers continued to provide health care as needed with no
reimbursement from the grant; and (2), that grantee acted reasonably in
making money available for health care as the services were requested.
(Conf. call; NVCHA's brief, pp. 4,6)
(6) Neither the grant application nor the award document explicitly
stated what the grantee was required to do during the 12 month budget
period. During the conference call the agency attorney argued certain
contract principles, by way of analogy, to explain what was required.
The agency attorney stated and the grantee's representative did not
dispute that the past practice of grantee since 1976 had been to provide
federal grant dollars for providers' services throughout a particular
budget period. The agency attorney also pointed out and grantee's
representative did not dispute that when the grantee ran out of grant
funds a month too soon during the previous budget year, the agency
informed the grantee that such action was considered a deficiency. The
agency attorney argued that the practice in the industry generally was
that all migrant health grants provided federal dollars for services for
12 months. The agency attorney also noted that when, in December, PHS
realized that there were problems, it informed grantee that the grant
was "to support health services to eligible families for 12 months."
(PHS's Ex. N) The agency attorney argued that grantee never took issue
with that.
The Board finds these points persuasive and concludes that the
parties intended "support health services" to mean using federal dollars
to pay providers for a full 12 months. It follows that by not doing so
the grantee violated a term of the grant.
Grantee argued, in effect, that it spent the funds appropriately
because the demand was greater during the first 5-1/2 months of the
1982-83 budget period than in the same period the previous year.
Grantee argued that it was reasonable to provide help to people as they
"needed" it.
The agency responded that grantee's action demonstrated inadequate
stewardship because grantee had reason to believe there would be an
increased demand for services and should have planned some way to
provide services, given the limited grant resources, for the rest of the
year. The agency pointed out that people had as legitimate a "need"
for
care during the rest of the year as during the first 5-1/2 months.
(7) The record reflects a 25% increase in patient encounters
(provider visits) during the first 5-1/2 months of the grant year in
question over the first 5-1/2 months of the previous grant year. /5/
Despite this increase, the Board finds the agency position persuasive
that the grantee had reason to expect the increase and should have
planned for it. The cover letter attached to the notice of grant award
for the 1982-83 budget period stated:
Please reassess your revenue projections in the light of current
local conditions and those expected to prevail over the next nine to
twelve months. Adjustments, presumably downward, in anticipated
revenues and in services should be made now if necessary to avoid
financial difficulties later in the year. Actual collections should be
monitored at a minimum on a monthly basis to detect actual trends, and
further adjustments should be made if required.
(PHS's Ex. D, p. 3) Grantee never argued that it did not receive this
letter or was not aware of its caution. Under the circumstances grantee
was obliged to plan some way of decreasing its covered services, if (8)
necessary, to assure that funds would be available for the full 12
months. /6/ Clearly, those requesting service later in the year were as
deserving of help as those requesting it during the first 5-1/2 months.
Although deciding who should receive grant supported services indeed
would have been difficult, it was grantee's responsibility. /7/
The Board conludes that the grantee's action demonstrated inadequate
stewardship.
(2) Obligations were not posted to the accounting (general) ledger in
a timely manner for at least three months.
PHS argued that grant recordkeeping requirements of both the migrant
health program and general grant administration regulations required the
general ledger to be kept current and that it was a violation to let it
go for one month, not to mention two or three months.
(9) PHS cited to 42 CFR 56.603 and 45 CFR 74.61. /8/ PHS argued
further that since the regulations were incorporated by reference into
the grant they were "terms" of the grant and failure to abide by them
was thus a violation of the terms of the grant. (PHS's brief, p. 21)
NVCHA argued that posting the general ledger was not as important as
it may have appeared to PHS because grantee had another system for
keeping track of expenditures. NVCHA described a system whereby checks
written each month were totaled to provide the grant year budget "to
date." NVCHA noted that the general ledger was really just to assist the
tax accountant and was posted from the check register only after the
bank statement was received and reconciled from the previous month.
NVCHA stated that one reason it had not posted the ledger sooner was the
heavy workload from the peak season and the small staff size.
(10) Section 56.603 of 42 CFR specifies that migrant health grantees
must: develop an overall financial management plan, in accordance with
generally accepted accounting principles, which anticipates current
income and expense items; and establish other reporting systems to meet
the basic management needs of the grant and make information available
to the Secretary as frequently as the Secretary may reasonably require.
In addition, PHS's June 14, 1982 letter informing NVCHA of the grant
award for the 1982-83 budget period specifically stated:
Actual collections should be monitored at a minimum on a monthly
basis to detect actual trends, and further adjustments (of anticipated
revenues and services) should be made if required.
(PHS's Ex. D, p. 3) Grantee was clearly required to maintain records
that would allow it to determine its current financial position. Thus,
maintaining records of its current financial position was a term of the
grant.
Moreover, grantee had a clear duty to closely monitor its expenditure
of program funds. We conclude that implicit in the requirement that
grantee "(establish) monitoring systems which will meet the project's
management needs" is the requirement that it actually use the system it
established. Even if the general ledger was only a part of grantee's
system for tracking program expenditures, /9/ grantee violated a term of
the grant by failing to post the general ledger on a current basis
during the 1982-83 budget period.
(11) (3) The Board of Directors, when advised of the rapid rate of
expenditure, took no action until the funds were almost entirely
obligated.
The agency argued that after PHS pointed out the problem in December,
the Board of Directors seemed indifferent, willing just to shut down,
never looking for alternatives or demanding a full accounting from the
project director. (PHS's brief, pp. 22, 23) PHS noted that minutes of
meetings of the Board of Directors prior to December reflected this
general lack of concern over the project's finances. In support of its
decision to deny the award, PHS argued that such management practices
clearly demonstrated inadequate stewardship of grant funds, a
justifiable reason for denial under the GAM. (PHS's brief, p. 23)
Grantee argued that the Board of Directors was aware that demand was
greater than in previous years but felt it was fulfilling its obligation
to provide services as they were required. The grantee pointed to a
December 17, 1983 letter from the President, NVCHA, to the PHS Regional
Project Director, addressing the concerns expressed at the December site
visit referred to above. Grantee argued that this letter was evidence
of its willingness to work with PHS. As further evidence of its efforts
to find a solution to the problem, grantee pointed to a letter it wrote
to medical providers requesting suggestions for stretching the budget.
(NVCHA's Ex. C-1)
The record does not support the PHS position regarding the Board of
Directors' alleged "indifference" after the problem was pointed out
during the PHS site visit in December. To the contrary, the letter from
the President, NVCHA, reflects concern. The letter contains a complete
explanation, a full accounting of the first four months (as complete as
possible at that time), and suggested alternatives regarding how to
handle the problem. The President was a member of the Board of
Directors and the first paragraph makes clear that his letter reflected
the Directors' feelings, as he understood them.
On the other hand, the record does support the PHS argument regarding
the Directors' general lack of concern for project finances before the
December site visit. The October 14 minutes show $35,401 spent through
August (28% of the funds spent 1/6 of the way through the grant). The
November 11 minutes show $58,828 spent through September (48% spent 1/4
of the way through the grant). Despite this apparent rapid rate of
expenditure the minutes do not show any discussion of how to conserve
funds. Grantee argued that it did discuss its (12) financial situation
at the November 11 meeting. (Conf. call; NVCHA's Ex. M, p. 2) Assuming
this to be true, the grantee still demonstrated inadequate stewardship
and poor management by neither devising a plan of action to conserve
funds nor demanding a current and full report on project finances to
date. The Board of Directors' actions seem particularly inappropriate
given that they knew the figures did not include expenditures for
October or November, the months grantee admitted it knew to be the
busiest. (NVCHA's Ex. E-6, p. 2) Moreover, the mismanagement is all the
more clear given the agency's earlier caution about keeping track of
finances.
B. Lack of Management Capability Was Also Evidenced at the Oroville
Clinic.
As noted above, although the Oroville clinic was separate from the
migrant health grant, NVCHA managed both projects. PHS argued that
since operating the clinic demanded the same basic management skills as
operating the migrant health grant, how NVCHA managed the clinic was
relevant to how NVCHA would manage the grant. NVCHA disagreed on
grounds that the organizations had nothing to do with each other.
NVCHA did not dispute that it managed both the clinic and the grant.
NVCHA did not assert that the same basic skills were not required in
managing the clinic and the grant. Indeed, the record indicates that
certain ones were, including the important skill of financial
management. (PHS's Ex. U, p. 2) We conclude that while all the problems
outlined in Exhibit U, a PHS site visit report, may not have had a
direct bearing on NVCHA's ability to manage the grant, the agency acted
reasonably in considering Oroville's management problems to be relevant
to NVCHA's ability to manage the grant. /10/
PHS argued that there were numerous financial and managerial problems
at the Oroville Clinic. PHS did not specifically outline these
problems, but referred the Board to PHS's Exhibit U. (Conf. call) PHS
argued that an award of continued funding to a grantee with such
demonstrated managerial problems would not be in the best interests of
the government and should be denied in accordance with the GAM.
(13) NVCHA admitted that it made errors in managing the Oroville
Clinic. (NVCHA's brief, p.8) Nevertheless, grantee argued that if PHS
considered these management deficiencies relevant to NVCHA's ability to
administer the migrant health grant, PHS should also have considered as
relevant that the Oroville clinic, before closing down, met NVCHA's
overall goal of "promoting health care." Grantee also argued that
many
of the problems were there before it took over. Grantee said that it
took over anyway because "the need was there." (NVCHA's brief, p.8;
Conf. call)
PHS did not argue that the Oroville clinic did not meet NVCHA's
overall objective of "promoting health care." We have no reason to
doubt
that it did. The question, however, is not whether NVCHA met its
overall objective at the clinic, but rather whether NVCHA demonstrated a
lack of management capability at the clinic. That certain management
problems were there when NVCHA took over and that NVCHA took over anyway
out of good intentions does not change the focus of this underlying
question. The record, including grantee's own admission, shows that
NVCHA did not manage the clinic well. Accordingly, we must conclude
that NVCHA demonstrated a lack of management capability at the clinic.
Conclusion
Based on the foregoing, we conclude that PHS had justifiable reasons
for denying the continuation award and uphold the PHS decision. /1/
NVCHA received discretionary grants on a project period basis
whereby NVCHA's program was approved for a project period made up of
several 12 month budget periods. Applications for grant funds for a
budget period within an approved project period are considered
noncompeting because the grantee is not evaluated against other possible
grantees seeking the same funds. Current statutory authority for
migrant health programs is at 42 U.S.C. 254b. /2/ Although the
parties do not agree on the exact number of months the general ledger
was not updated, it is clear from the record that it was at least two
months (PHS claimed three months and grantee claimed two months). The
Board did not find it necessary to make a specific finding of fact on
this discrepancy since, as discussed below, the important point was that
the ledger was not kept current. /3/ The Board considered only
those factors stated in the June 28, 1983 letter as the agency's grounds
for the denial. /4/ These standards are also set forth on page
38 of the PHS Grants Policy Statement. Both the GAM and the Policy
Statement are referenced on the notice of grant award for the 1982 -
1983 budget period. /5/ In its brief, NVCHA spoke in terms of
the funds being spent during a "peak" season when the "need"
was greater
because more migrants were in the area. NVCHA referenced a letter from
a U.S. Representative, stating that the number of "users" had doubled
during the first 5-1/2 months of budget year 1982 (the period in
question) as compared to the same period during the previous budget
year. (NVCHA's brief, Ex. D-4) The parties engaged in an extended
discussion of these points during the conference call. The parties
agreed that during the comparable 5-1/2 month periods, there were 25%
more requests for care in budget year 1982. They disagreed on whether
this showed an increased "need" and whether that "need"
was due to an
influx of migrants. The Board does not find it necessary to resolve
those disagreements since what is significant is that more services were
requested and provided during the first 5-1/2 months of budget year 1982
and what the Board must decide is whether it was inadequate stewardship
to spend almost all the funds to meet the increased demand. /6/
PHS pointed out during the conference call that program regulations
found at 45 CFR 56.603 specifically set forth minimum services required
under the grant. Under that regulation grantee was required to provide
only one of the four types of service: either emergency health care,
primary care, primary services other than primary care, or other
services to improve the health of individuals. Thus, grantee could have
eliminated, for example, all but emergency care. Grantee argued that
PHS did not point out 42 CFR 56.603 until after the funds were gone.
This is not a mitigating factor. Part 56 of 42 CFR, Grants for Migrant
Health Services, contains the applicable program regulations; this part
is specifically cited in the notice of grant award. (Grantee's
submission, December 9, 1983, item 16, Notice of Grant Award) Thus,
grantee should have been aware of it. Moreover, grantee admitted that
it never requested technical assistance from PHS. /7/ During the
conference call, PHS argued that it was grantee's responsibility to
decide how to cut back services. Grantee did not dispute the point,
and, in fact, admitted that at several meetings of the Board of
Directors grantee discussed where to make cuts but could not decide.
/8/ Part 56 of 42 CFR is referenced on the notice of grant
award, as is 45 CFR Part 74. Respondent cited both 42 CFR 56.603 and 45
CFR Part 74.61. Subpart H of 45 CFR Part 74, which contains 74.61, is
not included in the listing in 42 CFR 56.114 of the subparts of Part 74
which apply to migrant health grants. Part 56 of 42 CFR was published
in 1977 (42 Fed. Ref. 60406, November 25, 1977), prior to the 1978
amendments to Part 74 (43 Fed. Reg. 34076, August 2, 1978) which changed
the applicability statement in 45 CFR 74.4 (1977) from "to the extent
made applicable" by the granting agency to general applicability to all
grants. It is arguable, then, that the specific listing in 42 CFR
56.114 was superceded and that 45 CFR 74.61 applies by virtue of the
general reference to 45 CFR Part 74 in the notice of grant award and
Part 74's own statement that "(except) where inconsistent with Federal
statutes, regulations, or other terms of a grant, this part applies to
all HHS grants." (PHS's brief, p. 21; Conf. call) We find it
unnecessary to resolve this question here, given the financial
management provisions in 42 CFR Part 56 which clearly do apply, and
consequently we do not rely on subpart H of Part 74. /9/ If
grantee was simply too busy with program concerns to complete its
financial records on a current basis, then the grantee was obliged to
seek assistance from PHS. PHS was not notified of such a problem during
the fall of 1982 when most program funds were expended. /10/ Since we
find the management problems at Oroville to be relevant, we need not
reach the broader question of whether PHS could consider any factual
information in its possession relating to the background of the grantee.
NOVEMBER 14, 1984