GAB Decision 327
June 30, 1982 Louisiana Department of Health and Human Resources;
Docket No. 81-185-LA-PH Ford, Cecilia; Teitz, Alexander Garrett,
Donald
The Lousiana Department of Health and Human Resources appealed a
decision by the Associate Administrator for Management, Health Services
Administration (respondent), that a disallowance in the amount of
$735,135 should be taken for the year ending September 30, 1978. The
appellant claimed, under a Title V Maternal and Child Health (MCH)
grant, the costs of services provided by the appellant's MCH office for
the Early and Periodic Screening, Diagnosis and Treatment program
(EPSDT) run by the appellant's Title XIX office. The auditors
determined that the costs could not be claimed under the Title V-MCH
grant because the same costs had also been claimed under Title XIX of
the Social Security Act, and because the costs were not allocable to the
Title V-MCH program once they had been offset by a reimbursement from
the Title XIX proram.
We conclude that the disallowance should be upheld under the cost
principles of 45 CFR Part 74 and 42 CFR 51a.138.
I. Background
This disallowancde involves a formula grant under Title V of the
Social Security Act, section 503. The monies were awarded from Fund A,
which provides that a state must match dollar for dollar federal funds
received. The Office of Health Services and Environmental Quality
(OHSEQ) administers the Title V-MCH program for the appellant. In
addition, this office provides, through regional health units, early and
periodic screening services and diagnostic services (EPSDT) for the
Title XIX single state agency, the Office of Family Security (OFS).
Both of these offices are within the Department of Health and Human
Resources, but maintain separate office structures. The appellant has
stated that transactions between the two offices are carried out at
arm's length and that the EPSDT services are provided through an
interdivisional agreement. This agreement is incorporated in the MCH
state plan.
For the year ending September 30, 1978, the appellant included, as
its share of matching under the Title V-MCH grant, the costs OHSEQ
incurred for providing the EPSDT services to OFS. The actual cost
incurred was $2,298,108; this amount had also been claimed by OFS for
federal financial participation (FFP) under Title XIX. The federal
auditors (2) reviewed the MCH claims, and deducted the costs of
providing the EPSDT services from the total costs incurred by the MCH
program ($8,084,581 less $2,298,108). The auditors then deducted the
amount of federal funds received under Title V from the revised total
costs ($5,786,473 less $3,628,371) to reach the amount contributed by
the appellant for matching purposes. They determined that this amount
was $735,135 less than the amount necessary for the state to meet its
matching requirement.
The billing and payment procedure has been established as follows;
OHSEQ provided the services for the EPSDT program, and then billed OFS
for the actual cost incurred in providing the services. OFS reimbursed
this cost to OHSEQ from state funds. OFS then claimed these costs when
it submitted its expenditures for FFP under Title XIX. When OFS
received the FFP for these costs, the funds were placed in the State
General Fund. OHSEQ then claimed these same costs when it reported its
total expenditures under the MCH program.
In June 1978 the appellant's fiscal office had inquired of the
respondent's Regional Office whether EPSDT (Title XIX) funds could be
used to match Title V-MCH funds. The Regional Office, on July 27, 1978,
responded, quoting the PHS Policy Statement (Rev. October 1, 1976), p.
59, and stating, "Title XIX funds received as reimbursement for services
provided under your approved MCH State Plan Program may, therefore, be
utilized for matching purposes." The appellant asserted that it relied
upon this letter when it claimed the EPSDT costs for matching under
Title V.
II. The basis for the disallowance
The federal auditors reviewed the appellant's reported MCH
expenditures to determine if the appellant had properly matched federal
funds. The found that the OHSEQ office had claimed the $2,298,108 in
costs incurred for EPSDT services but had not reported the reimbursement
it received from state funds for these costs. The auditors determined
that because OFS had also included the costs in its expenditure claims,
the costs were improperly claimed without reporting the reimbursement of
the funds made by OFS to OHSEQ. The audit report and disallowance
letter cited 42 CFR 51a.138 and 45 CFR Part 74, Subpart Q, Appendix C,
Part I, section C.1.g.
42 CFR 51a.138(b)(1977) stated:
The State plan shall incorporate by reference such written fiscal
control and fund accounting procedures as are necessary to assure the
proper disbursement of and accounting (3) for funds paid to the State
under this subpart . . . . In addition, such procedures must:
1( Provide for the determination of allowability and the allocation
of costs in accordance with Subpart Q of 45 CFR Part 74, and
2( Provide adequate information to show exclusion from expenditures
claimed for Federal participation of those costs for which payments have
been received or are due under other Federal grants or contracts or
which are required or used to match other funds.
45 CFR Part 74, Subpart Q, Appendix C, Part I, Section C.1.g. (1977)
stated:
1. Factors affecting allowability of costs. To be allowable under a
grant program, costs must meet the following general criteria:
g. Be net of all applicable credits.
When the appellant submitted its arguments to the Board, it relied in
part on the correspondence between the appellant's fiscal office and the
Regional Office regarding the PHS Policy Statement. Furthermore, its
arguments addressed the disallowance letter sent on September 2, 1981,
which contained references to the PHS Policy Statement and which stated,
in part, "Had the EPSDT services costs been paid for from State fund
they would have been allowable matching costs."
During the course of this appeal, the respondent has augmented and
clarified the basis for the disallowance. It has added a reference to
45 CFR Part 74, Subpart Q, Appendix C, Part I., section C.1.f. (1977),
which stated that to be allowable, a cost must --
Not be allowable to or included as a cost of any other federally
financed program in either the current or a prior period.
The respondent has pointed out that there is a significant difference
between costs and funds, as those terms apply to this appeal. The
respondent's concern here is with the allowability of expenditures
claimed as costs; the respondent has stated that the important point is
that the appellant included the same costs for matching with the federal
government under both Title XIX and Title V, and that they could be
allocable only to one program (42 CFR 51a.138 and 45 CFR (4) Part 74,
Subpart Q, Appendix C, Part I, section C.1.f.). The respondent
explained that the correct process for determining what costs may be
claimed under Title V is to calculate the total allowable costs, using
the cost principles enunciated in Subpart Q, Appendix C of 45 CFR Part
74, and then claim these net costs for matching. Under this process,
the PHS Policy Statement regarding cost participation and matching
requirements applies only to the allowable costs and, futhermore, refers
only to the financing of these costs. The respondent emphasized that
the Policy Statement does not define which costs are allowable. It has
also clarified that it is not concerned about the source of the funds
used to pay for the EPSDT costs at the outset, or about what the federal
funds paid to OFS as FFP in the costs were used for after they were paid
to the appellant.
III. Appellant's arguments
The appellant argued that the disallowance should not be taken
because the EPSDT costs were in fact paid from state funds since the
EPSDT program is a reimbursement program, in which the state is
reimbursed by the federal government for funds already expended. The
appellant argued that the reimbursement is earned income, and is
deposited in the State General Fund; under this reasoning, the
appellant argued, earned income need not be deducted from the costs of
the MCH program. The appellant also argued that the reimbursement
received by OHSEQ from the state funds need not be deducted from the
costs because the reimbursement was not an applicable credit. The
appellant asserted that 45 CFR 51a.138 did not apply to this appeal
because it referred to the MCH funds, and the monies involved here were
state funds, or, in the alternative, EPSDT funds. The appellant further
argued that section 74.45(b)(1) conflicted with Subpart Q, Appendix C,
Part I, section C.1. and, therefore, under section 74.170, Subpart Q did
not apply. The appellant asserted that the PHS Policy Statement allowed
the appellant to claim the EPSDT costs for matching under Title V.
Finally, the appellant argued that the respondent is estopped by its
actions from disallowing these costs.
IV. Analysis
We conclude that the respondent has adequately clarified the issue
and that the regulations cited by the respondent do support the
disallowance. the issue here is whether the EPSDT costs are allowable
and allocable when claimed as an expenditure in order to meet the
State's required share under the Title V-MCH program. The source of the
monies paid to OHSEQ as reimbursement under Title XIX as reimbursement
for the EPSDT costs were subsequently used are only incidental to the
basic questions. (5) In relying upon section 51a.138 and Appendix C,
Part I, section C.1., the respondent's basic concern appears to be that
the appellant not benefit more by providing the EPSDT services through
its MCH program than it would be if the services were provided directly
by OFS or another contractor. An analysis of the situation as it was
explained in this appeal shows what would happen as a result of the
appellant's claiming the EPSDT costs under two federal programs. In
this instance, the appellant received FFP (presumably 80%) as well as
Title V matching (50%) for the costs, making the total amount received
well over 100% of the costs. This is certainly more than was
contemplated under either program. * The appellant thereby profits from
the arrangement that neither Title XIX nor Title V contemplated that the
States should profit from participation in these programs.
The appellant has made several arguments about the applicability and
interpretation of certain regulations and the above-mentioned PHS
policy, and has also argued that the respondent should be estopped by
its actions. We address these arguments below.
The applicability of 42 CFR 51a.138
The appellant argued that 42 CFR 51a.138 is not applicable because
the funds received by OHSEQ as reimbursement were state funds rather
than federal, and because the regulation refers to the MCH program
rather than EPSDT. We believe that the appellant argued this because it
was not clear as to which monies are at issue in this appeal. the
disallowance concerns federal funds received by the appellant under the
MCH grant.The disallowance does not directly concern or affect the funds
received by the State as reimbursement under Title XIX for the EPSDT
costs. The disallowance was taken because the appellant did not show
that it had incurred adequate allowable costs to earn the amount it had
received under the statutory formula. The unallowable costs (which are
not the same as the disallowed funds), even though incurred for EPSDT,
were claimed under the MCH grant as costs incurred by the program for
MCH purposes. If they were not incurred for MCH purposes, they could
not be allocable to the Title V program. Therefore, 42 CFR 51a.138, an
MCH program regulation, does apply to these costs and the resultant
disallowed funds. (6) Conflicts between Subpart Q and Subpart F, and
the consequent applicability and interpretation of these Subparts
The appellant also argued that Subpart Q does not apply here because
Subpart Q conflicts with 45 CFR 74.45 (b)(1), and therefore, under 45
CFR 74.170, Subpart Q cannot apply. Both Part 51a and the PHS Policy
Statement make Part 74 applicable to this grant generally. The
respondent did not contest the appellant's assertion that the reimbursed
funds were program income and we do not reach the issue in this appeal
because it is unnecessary under our analysis. In this appeal, the
allowability of the costs is at issue. The section cited by the
respondent, Part 74, Subpart Q, Appendix C, Part I., section C. 1.,
concerns allowable costs. Even if we apply the section on program
income, however, we find no conflict in the applicable principles. 45
CFR 74.45 (1977) says:
a) This section applies to all program income earned during the grant
period except royalties and proceeds from the sale of real property or
tangible personal property.
b) All such income earned during the grant period shall be retained
by the grantee. The terms and conditions of the grant shall provide
either:
1) That such income shall be used by the grantee for any puposes
which further the objective of the legislation under which the grant was
made, or
2) That such income shall be deducted from total project costs for
the purpose of determining the net costs on which the Federal share of
costs will be based.
c) The grantee shall elect either of the alternatives specified in
paragraph (b) of this section if the terms and conditions of the grant
do not specify which is to be followed.
The appellant conceded (Conference Call, May 26, 1982) that the
meaning of section 74.45(b)(2) and section C.1.g. of Subpart Q appears
to be the same, that is, the reimbursement received by OHSEQ for the
EPSDT costs it incurred should have been deducted from the total costs
incurred before matching occurred. The appellant argued, however, that
under section 74.45(c), the appellant had a choice between applying
(b)(1) and (b(2), and that the appellant had complied with (b(1). The
appellant asserted that the funds received by OFS as reimbursement for
the EPSDT services were retained by the State and used to further (7)
the objectives of the MCH program. It has offered to provide proof of
this assertion. The proof offered is basically an accounting trail
showing that the same funds received under Title XIX were used for MCH
costs. The respondent stated that in this appeal it is not necessary to
show that the specific funds received by OFS were applied to the MCH
program, but simply that the Title V-MCH program incurred enough costs
for purposes related to MCH to justify, under the matching requirements,
the amount of federal funds received by the program. The respondent
stated that the total allowable costs claimed by the Title V-MCH program
would be proof as to how much money the appellant applied to purposes
furthering the objective of the grant; therefore, the appellant would
have to show additional costs of $1.4 million in order to show that it
had complied with section (b)(1) and that it has matched the amount of
federal money received.
The respondent stated that compliance with section C.1.f. would be
shown in the same manner, that is, if the appellant could show that it
had additional allocable costs, the disallowance would not be necessary.
The respondent offered the appellant a choice of repaying $735,135 in
unmatched federal funds or showing that it had incurred $1.4 million
additional costs. (Final Audit Report, February 23, 1981, page 4,
Exhibit I, Appellant's Submission) The appellant did not claim
additional costs then nor has it stated that it could provide evidence
of any such costs during this appeal. Both parties agreed that it would
now be difficult to find evidence of any such costs, if there had ever
been such costs. (Conference Call, May 26, 1982).
In summary, then, the requirements and effects of sections 74.45(b)(
1) and C.1.f. were the same, except that one applied to income and the
other applied to costs. Application of either regulation results in the
same amount of money being disallowed.
The appellant also argued that, under Subpart Q, the reimbursed funds
were not the type of funds contemplated by the examples provided in
section C.3.a., which defined applicable credits. Section C.3.1.
stated:
a. Applicable credits refer to those receipts or reduction of
expenditure-type transactions which offset or reduce expense items
allocable to grants as direct or indirect costs. Examples of such
transactions are: purchase discounts; rebates or allowances;
recoveries or indemnities on losses; sale or publications, equipment,
and scrap; income from personal or incidental services; and
adjustments of overpayments or erroneous charges.
We believe that the circumstances presented here, of one program
contracting with another program for services, may not have been (8)
contemplated when the examples were inserted in this regulation. We do
believe, however, that because the expenditures made by the MCH program
for the EPSDT services were reduced or offset by the state's
subsequently repaying OHSEQ for the costs, the reimbursement to OHSEQ
may be considered an applicable credit. This is borne out by the PHS
Policy Statement, page 35, under Refunds and Credits. This stated:
When refunds or rebates result from the expenditure of grant funds,
they should be treated as offsets to the particular expense item in the
grant account, not as grant-related income . . . (See Applicable Credits
under "Costs.")
The Policy Statement, under Costs, at page 32, stated:
The term "applicable credits" refers to those receipts or negative
expenditure types of transactions that operate to offset or reduce
expense items that are allocable to grant-support projects as direct or
indirect costs.
The applicability and interpretation of the PHS Grants Policy
Statement
The applicable portion of this Policy Statement, entitled Matching
and Cost Participation Requirements, stated:
Costs used to satisfy grantee's matching or cost participation
requirement may be financed from the following:
Funds derived either directly or indirectly from Federal sources that
are received as fees, payments, or reimbursements for providing a
specific service, such as patient care reimbursements received under
Medicare or medicaid.
As indicated in the Background section above, the appellant's fiscal
officer had inquired about whether the above policy allowed the
appellant to use EPSDT funds as matching for Title V-MCH funds, and he
received a written response from the Regional Office which indicated
that the PHS policy did allow this. The appellant argued that this
Policy Statement applies to this situation and that it allows the
appellant to claim the costs incurred for providing the EPSDT services
in order to receive matching funds under Title V. (9) It should be
noted at the outset that the fiscal officer's question and the Regional
Office's response were both phrased in terms of funds. The respondent
has clarified that its concern in this disallowance is not with the
funds received by OHSEQ as reimbursement but with the allowability of
the costs claimed. The PHS policy clearly stated that it referred to
the financing of costs used to satisfy a grantee's matching requirement.
Under that wording, and that of the question and answer, the appellant
would have had to spend, in addition to the expenditures already made,
an amount equal to the federally-reimbursed funds for purposes of the
MCH grant, which, as discussed above, would involve claiming costs over
and above those already claimed.
The respondent, when it clarified the basis for the disallowance,
stated that because only allowable costs may be claimed for matching,
the first step is to determine which costs are allowable. The
respondent stated that the PHS policy pointed to by the appellant did
not define allowable costs but merely allowed grantees to finance
allowable costs from certain types of federal funds.
The appellant may not have understood this principle by reading in
isolation the portion of the Policy Statement set out at page 59. We
believe, however, that the respondent's explanation of the relationship
between Part 74 and the Policy Statement is reasonable, and in fact, is
contained in the Policy Statement itself. Furthermore, we conclude that
the question and response made by the Regional Office did not refer to
the claiming of the EPSDT costs, which are what we are concerned with
here.
Estoppel
The appellant has also argued that the respondent should be estopped
from taking this disallowance because the approval provided by the
Regional Office led the appellant to claim these costs. The appellant
asserted that the Regional Office knew the facts when it responded to
the inquiry made by the appellant's fiscal officer, and that the
Regional Office intended that its response be relied upon.
The respondent argued that the appellant received correct advice,
based upon the inquiry made, but that the question here is not whether
the appellant used the reimbursed funds for MCH purposes. That issue
was discussed above and need not be discussed further here. The issue
here is whether the appellant may claim, under Title V, costs incurred
for another federal program.
In view of our conclusion that the inquiry and subsequent advice
provided the the Regional Office did not address the precise issue
involved in this appeal, we do not believe that the issue of estoppel
need be addressed. The facts addressed by the Regional Office in its
(10) letter are not those presented in this appeal. Our analysis of the
PHS Policy Statement bears out the argument made by the respondent that,
when it wrote the letter of July 27, 1978, it did not contemplate the
appellant's claiming and EPSDT costs without also taking into account
any reimbursement received for them. Furthermore, the appellant has not
argued that the EPSDT costs were incurred because the appellant relied
on the respondent's action. These costs would have been incurred anyway
under the interdivisional agreement, and the federal reimbursement
normally resulting from such costs was received.
The appellant has also argued that the respondent misled the
appellant in various statements made by the federal auditors in their
draft and final reports and in other contacts between the respondent and
appellant subsequent to the appellant's claiming the costs rejected by
the auditors. The record does not include any evidence that the
appellant was misled prior to claiming the costs, as we have discussed
above. This argument, then, is not one of estoppel but a question of
whether the appellant has received due process. The explanation
provided by the respondent during the course of this appeal shows a
legal basis for the disallowance, and a logical support for their
interpretation of the regulations, and for the relationship of the
regulations to each other and to the PHS Policy Statement. The
relationship of the PHS Policy Statement to the regulations contained in
Part 74 was not as clear initially as it is now, and the appellant may
have suffered a greater burden in challenging the disallowacne because
of ambiguities in the language used by the federal auditors and by the
respondent in the disallowance letter. This appeals process, however,
has provided the appellant with an opportunity to hear a clearer
statement of the respondent's position. We therefore conclude that the
appellant was not prejudiced by any ambiguities in the audit reports and
the disallowance letter.
Conclusion
We have concluded that 42 CFR 51a.138 applies to the actions of the
appellant in this case, as does 45 CFR Part 74, Subpart Q, Appendix C,
Part I, section C.1. We have also determined that the appellant did not
meet these requirements nor did it exclude the costs for which payments
were received under another Federal grant. (42 CFR 51a.138( b)(2) and
42 CFR Part 74, Subpart Q, Appendix C, Part I, section C.1. g.) We have
also concluded that, regardless of which set of regulations is applied
(Subpart Q or 45 CFR 74.45), the requirements are the same, and the
appellant has not shown that it complied with either. (11) We therefore
conclude that the disallowance should be upheld because the appellant
has provided no legal authority for claiming the same costs under two
federal programs, and becuase the factual context presented is not one
to which a claim of estoppel can be applied. * If OFS had provided the
services or contracted with a non-Title V entity to provide the
services, the only federal funds the appellant would receive would be
the FFP in these costs (less than 100%).
OCTOBER 22, 1983