GAB Decision 527
Docket No. 83-275
March 30, 1984
Dooly Health Care Association, Inc.;
Ford, Cecilia Sparks; Settle, Norval Teitz, Alexander
Dooly Health Care Association, Inc. (Grantee) appealed the decision
of the Public Health Service (PHS) Grant Appeals Board to uphold $15,481
of the Region IV PHS Executive Officer's disallowance of $31,889. The
disallowed amount represented Grantee's claim for supplies under its
Community Health Center grant for the period July 1, 1981 through
September 30, 1982.
The PHS Board upheld $15,481 of the disallowance based on its finding
that (1) Grantee purchased supplies with grant funds in excess of the
amount budgeted, and (2) Grantee purchased the supplies for use after
the close of its grant in violation of prescribed closeout procedures.
Grantee argued that the costs should not have been disallowed because
(1) the supplies were used to assist the doctor and dentist serving the
center to make the transition from grant-assisted to private practice,
(2) Grantee believed that it had Agency approval, and, in the
alternative, (3) obtaining the Agency's approval would have been a mere
formality.
Since the dispute concerns an amount under $25,000, and Grantee
received a review of the dispute by the PHS Grant Appeals Board before
coming to this Board, the Board's special expedited review procedures
apply. 45 CFR 16.12(d) (1982). Thus, we reviewed the record in this
case to determine whether PHS' determination was clearly erroneous. Id.
at 16.12(d)(1). Grantee was advised of this standard in the Board's
acknowledgment of the notice of appeal. For the reasons discussed
below, we uphold the disallowance.
Background
Grantee was the recipient of a Community Health Center grant
authorized by Section 330 of the Public Health Service Act (2) (42 U.S.
C. 254c). The purpose of the program was to establish facilities
providing medical services in areas where such services would not
otherwise be available. During Grantee's fiscal year ended June 30,
1982, Grantee decided that it would not seek continuation of its grant.
Grantee sought, and received, a 90-day extension of its grant to conduct
an administrative phaseout from July 1, 1982 through September 30, 1982
without additional federal funding.
The audit conducted by an independent CPA firm indicated that, for
the twelve month period ending June 30, 1982, Grantee had purchased
$42,892 in supplies as compared to $10,300 budgeted for this period.
After a site visit, the Agency's regional office concluded that $27,968
of the $42,189 /1/ for supplies was expended during the last three
months of the grant (April-June 1982). The Executive Officer, Region
IV, found that Grantee purchased supplies in excess of budget figures
for the entire grant period. The Executive Officer, therefore,
disallowed $31,889 ($42,189 - $10,300 = $31,889), the amount by which
Grantee overspent the budget for supplies.
Grantee's explanation before the PHS Board for the large
overexpenditure of supplies was that the doctor and dentist were
prepared to operate the facility on a private basis after the phaseout
of the grant, provided that initial take-over expenses were kept low
through the stocking of several months of supplies. Grantee stated that
Agency officials gave permission to obtain these supplies in a meeting
with Grantee but that, in fact, Grantee had no written approval from the
Agency for the action.
The PHS Board decided that the federal share of the fair market value
of unused supplies remaining at the end of the grant must be returned to
the federal government. But the PHS Board did not uphold the entire
disallowance. It allowed Grantee credits of (A) $1,000 for unused
supplies (3) (45 CFR 74.141), (B) $4,650 for supplies for the
three-month ($1,550 per month) phaseout of grant, and (C) $10,758 for
non-federal share of the disallowed costs. /2/
Discussion
Phaseout Procedure
It is undisputed that Grantee had supplies on hand at the close of
the grant. The Agency's assertion that Grantee purchased nearly $28,000
of supplies in the last three months of the grant period was uncontested
by Grantee. According to the budget, Grantee's average monthly use of
supplies from July 1, 1981 through June 30, 1982 should have been
$858.33 or $2,575 for 3 months. /3/ In fact, Grantee admitted that
these large expenditures were for the purpose of presenting the doctor
and dentist with a few months of supplies to start their private
practices after the end of the grant.
The regulations require an accounting for supplies left on hand at
the end of a grant project, whether retained or sold. Section 74.141 of
45 CFR Part 74 (1980) provides that if the unused supplies excess $1,000
in fair market value and are not needed for any federal program, Grantee
may either retain or sell the supplies. In either case Grantee must
credit the grant. If the supplies are retained, the credit is computed
by multiplying the federal share of supplies times their current market
value. In addition, the PHS Grants Policy Statement (1976) states on p.
73 that (4) with regard to the disposal of the expendable personal
property "no longer needed on federally supported activities, the
grantee may retain or sell the property as long as the Government is
compensated for its share in the acquisition cost." Grantee violated the
above-mentioned regulation and Policy Statement provision in not making
an accounting of supplies on hand at the end of the grant period and
crediting the grant for the federal share. Therefore, we find that the
Agency was not clearly erroneous in making the disallowance.
Allocability of the Supplies
In addition to finding that Grantee failed to comply with phaseout
procedures, we uphold the disallowance because we find that the
questioned costs were not allocable to the grant. The Board has
previously upheld the PHS disallowance of a claim for equipment
purchases which would have been virtually unused during the period of
federal support. In Metropolitan Beaverbrook Mental Health and
Retardation Services, Inc., Decision No. 291, April 30, 1982, the Board
found that the questioned items were properly disallowed because they
could not be allocated to the grant since these items did not benefit
the grant. In this appeal, although we are concerned with supplies
instead of equipment, we follow the reasoning of Decision No. 291
because the supplies in this case were not used during the grant period
and, therefore, did not benefit the grant.
Grantee has not demonstrated that costs which would benefit only
activities conducted after the expiration of a grant can be properly
charged to the grant. We find that the supplies purchased for use after
the expiration of the grant should not have been claimed by Grantee
because they were not properly allocable to the grant.
Prior Approval
Grantee claimed that it thought that it obtained Agency approval for
the purchase of supplies to be used after the expiration of the grant.
Grantee submitted letters from the doctor and the dentist to support its
assertion that it had Agency approval for its action. We do not find
support for this assertion in the record.
(5) The Agency stated that Grantee's former PHS Project Officer said
that he did not give permission to obtain supplies that would last
several months after the end of the grant, only that approval was given
for Grantee's purchase of supplies for use during the 90-day extension
of the grant. (PHS Grant Appeals Board decision, p. 2)
The doctor's letter to Grantee's attorney stated that when he started
providing services to Grantee's patients supplies "were down to a
minimum." The letter stated that the doctor had "a heavy patient load
and this required ordering much more supplies because the more patients
you see the more supplies it takes." The letter also stated that:
(We) had three people come down from Atlanta to check on the
operation. At that time I told them that we were going to order some
extra supplies so that when we went into private practice even though we
would be losing money for the first few months we could continue to give
the type medical care that the people should have here in Unadilla and
the Dooly County area. Some extra supplies were ordered with that in
mind and were used many times without charge to the patient.
(August 15, 1983 letter from Jack A. Butler, M.D. to Tom W. Daniel,
Grantee's attorney.)
The doctor's letter does not specifically identify the three people
from Atlanta even to the extent of whether they were federal or state
employees. Nor does the letter state that any of those people gave
approval for the purechase of supplies with federal funds for use after
the completion of the grant. It, therefore, cannot be given much weight
as support for Grantee's contention.
The dentist's letter stated:
At a Dooly Health Care meeting in early 1982, Alex Watson, Z.C.
Clay, and other state officials, were invited for a site visit and to
advise us on closing out our clinic operation. I told the board of
Dooly Health Care Association and the visitors, that our clinic was not
seeing many patients and that it might not be financially possible to
operate it on a private basis. Dr. Butler and I were willing however;
to take (6) on the operation of our respective practices, providing our
initial takeover expenses were low enough we could still survive
financially with such a low patient volume until we could build our
practices. This was discussed with our visitors from grants management
and we were told it would be permissible to equip our offices so they
would be ready for private practice, and to obtain supplies to last
several months.
* * *
I have spoken with the board members of Dooly Health Care Association
and all remember being assured by the grants management representatives
that these purchases were in order and proper.
(August 2, 1983 letter from Stephen R. Byrd D.D.S. to Director, PHS
Division of Grants and Contracts.)
Although the dentist's letter does identify an Agency official who
attended a meeting with grantee in "early 1982," the letter says merely
that "grants management" told Grantee "it would be permissible
to equip
our (the doctor and dentist) offices" to last several months. There
were state grants management officials at the meeting with Grantee and
the letter does not say that approval came from the federal Agency
official. Furthermore, the Agency official told PHS that the Agency
only gave approval for the use of supplies during the three-month
phaseout period. (PHS Grant Appeals Board decision, p. 2)
In addition, although it is not clear from the dentist's letter
exactly when the meeting between Grantee and the Agency occurred (other
than that it was "early 1982"), it may be that he was referring to
the
May 24, 1982 meeting of Grantee's Board of Directors. The minutes of
that meeting are in the record and indicate that Mr. Watson and Mr.
Clay (both mentioned in the dentist's letter as having attended the
meeting with Grantee in early 1982) attended the meeting of the Board of
Directors. The minutes of the meeting indicate that the retention of
equipment with a cost of less than $1,000 was discussed. The minutes do
not indicate that the retention of supplies was discussed. (see
discussion in footnote below)
Finally, the dentist's letter says only that permission was granted
to obtain supplies to last several months. It is (7) not clear that
this amount of time extended beyond the three month extension of the
grant for which PHS has allowed supply costs. /4/
There was no requirement that Grantee receive approval to purchase
supplies over the amount budgeted for supplies if the supplies are
reasonable, necessary, within the scope of the grant program, are
otherwise allowable, and the purchase of them does not cause a need for
additional federal funding. (PHS Grants Policy Statement (1976), p.
65) See, University of Tennessee College of Pharmacy, Decision No. 144,
January 29, 1981. However, the Agency could not give approval for
Grantee claiming expenses for supplies used after the expiration of the
grant. Such expenses did not benefit the grant and therefore were not
allowable. In this context, Grantee has not shown why obtaining prior
approval would have been a mere formality.
(8) Conclusion
We find that the PHS Board's decision to disallow $15,481 in supplies
was not clearly erroneous and, therefore, we uphold the disallowance of
$15,481. /1/ Although the audit showed $42,892 in supplies purchased as
of June 30, 1982, after the site visit the Agency concluded that the
correct total was only $42,189 and made the disallowance based on that
figure. /2/ (A) The PHS Board found that 45 CFR 74.141 allowed a
credit to grantee of $1,000 in supplies at closeout. (B) The PHS Board
decided that the average monthly budget figure over the entire grant
program was approximately $1,550. It allowed three months of supplies
at this rate for the three-month extension of the grant. (C) The PHS
Board stated that the non-federal contribution was 41%. It allowed that
percentage of the remaining questioned costs ($26,239). n3 The budget
called for $10,300 to be spent for supplies for the grant year. The
monthly rate equal to that yearly rate is $10,300 divided by 12
($858.33). /4/ In a telephone conference on February 23, 1984,
Grantee claimed that a representative of the Agency had stated at a
meeting (or at least had led Grantee to believe) that at the end of the
grant period Grantee could retain any items which had a cost of less
than $1,000 each without having to account for them. The Presiding
Board Member pointed out the unlikely nature of such a position, which
could theoretically permit retention of 500 items with a cost of $900
each. However, recognizing that Grantee was perhaps trying to articulate
an estoppel argument, the Board asked for a copy of the minutes at which
the representation was presumably made. The minutes furnished, of a
Board meeting of Grantee on May 24, 1982, show the discussion of
retention of items under $1,000 pertained only to equipment; there is
no mention of supplies. We therefore do not consider this point
further.
NOVEMBER 14, 1984