GAB Decision 256
February 16, 1982 South Carolina Department of Social Services; Docket
No. 80-152-SC-HC Ford, Cecilia; Teitz, Alexander Settle, Norval
The South Carolina Department of Social Services (DSS, State,
Grantee) appealed a decision of the Health Care Financing Administration
(Agency) disallowing $34,156 in federal financial participation claimed
under Title XIX (Medicaid) of the Social Security Act. The disallowed
amount represented the federal share (90%) of the difference between two
offers /1/ for a State contract: Consultec, Inc., had offered $367,122,
and Touche Ross and Company, had offered $416,060. The contract was for
development and implementation of a "Medicaid Management Information
System" (MMIS). The State awarded the contract to Touche Ross. The
Agency determined that the State had awarded the contract without prior
Agency approval, and that Consultec could have performed the work as
well for a lower price. The Agency approved the contract, but allowed
the contract costs only in the amount of the lower offer.
There were two overlapping issues in this case: whether the award of
the contract required Agency approval, and whether the determination to
disallow the difference between the two offers was reasonable.
The Board conducted a conference in this case, and both parties
submitted briefs. The case had been joined with another case before the
Board (Docket No. 81-29-SC-HC), which involved a disallowance related to
an extension of the Touche Ross contract. The Board severed the cases
after the conference because there appeared to be additional issues in
the later case requiring further development after disposition of this
case.
We have determined that in the facts of this case, the Agency erred
in disallowing the difference in offers. Although the State did fail to
obtain required prior approval, the Agency later approved the contract,
and there was no reasonable basis substantiated in the record for
disputing the validity of the Touche Ross award amount.
Background.
Undisputed evidence in the record indicates that the State submitted
its proposed contract with Touche Ross to the Agency on June 5, 1978,
that the (2) contract was signed on June 12, 1978, and that the State
sent the executed contract to the Agency on July 3, 1978. By letter of
July 28, 1978, the Agency informed the State that it had failed to
obtain prior approval of the contract, so that "DSS proceeded at its own
risk regarding the amount of FFP that may be approved for the project."
This letter also stated concerns about the selection of Touche Ross:
. . . the DSS evaluation team concluded that either company was
qualified to perform the job. Our assessment of the information
available is that the same product could have been procured from
Consultec, Inc., using the DSS evaluation, for $367,122 rather than
$416,060 from Touche Ross and Co. Based on your statement that either
company could successfully complete the project it is likely that our
financial participation in the systems development activities will be
limited to the lower of the two bids.
By letter dated October 19, 1978, the Agency notified the State that
it had approved the Touche Ross contract, but only to the extent of the
price offered by Consultec:
In regard to your request for approval of the contract with Touche
Ross, Inc. for development of the MMIS, we have received notification of
the approval from our Central Office.
It is our opinion that the selection of Touche Ross, the competing
qualified firm offering the higher price, did not alone place FFP in
jeopardy if the State had provided the Medicaid Bureau with
justification for deviating from selecting the low offer as required by
45 CFR Part 74 (43 Fed. Reg. 34076, August 2, 1978), Sections 74.163 and
74.163(c) and 74.165(c). We feel that your explanation does not
constitute the necessary justification especially in the absence of
evidence that the Touche Ross selection would yield a superior product
or a cost relationship more favorable to the State.
The competitive procurement process itself has established that the
services and/or products sought under the contract can be purchased at a
current market price of $367,122.00. Cost in excess of $367,122.00
would be deemed unnecessary and unallowable under the provisions of 45
CFR Part 74 Appendix C, Part I, C-1 and Section 1903(a)(3) of the Social
Security Act. Therefore, we will not approve the total expenditures
required under this proposed contract with Touche Ross. In view of the
fact that the proposed contractor, Touche Ross, was a qualified bidder,
the Medicaid Bureau herewith approves the funding of the proposed
contract but only to the extent necessary for matching $367,122.00, the
amount of the qualified low bid.
Although the citations are not all correct, the Agency founded its
decision on provisions of law and regulation that generally required
costs to be reasonable, mechanized claims processing systems to be
economical and effective, procurements to be used on maximum
competition, and contract awards to be (3) made to the responsive and
responsible bidder whose bid "is most advantageous to the State or local
government grantee, price and other factors considered." /2/
The record indicates that the State responded to this Agency
determination with a four-page plea for reconsideration dated March 19,
1979, setting forth details of the State's justification /3/ for
selecting Touche Ross rather than the low offeror (we discuss this
justification on page 7). The Agency confirmed its earlier decision on
May 18, 1979, starting that --
Our regulations do not require that the low bidder be selected, but
any deviation from selection of the low bidder must be justified to the
satisfaction of the granting agency. While Touche Ross has yet to
develop and install a workable MMIS, evidence of Consultec's proven
success in numerous States refutes the contention that Touche Ross and
Company has greater capability to perform in the Medicaid environment.
It is our understanding that your MMIS is progressing on schedule,
and we eagerly anticipate its implementation within the next few months.
After the State claimed FFP despite the earlier Agency advice, the
Agency issued a disallowance on September 8, 1980, in which it
reiterated its earlier concern that the State failed to provide
convincing evidence to justify the expenditure above the amount of the
Consultec offer.
(4) The State then brought this appeal, arguing that the contract had
not required prior approval, that the extra cost was reasonable, and
that the State's procurement was in accord with HHS procurement
standards.
The requirement for approval of the contract
General regulations governing administration of grants (45 CFR Part
74 (1977)) contained an Appendix C which set forth principles for
determining allowability of costs of state and local governments. Part
II of Appendix C contained three categories of specific cost items:
allowable costs, costs allowable with grantor agency approval, and
unallowable costs. In its disallowance letter, the Agency treated the
costs of the Touche Ross contract as the type requiring grantor agency
approval, as described in the following provision:
5. Management studies. The cost of management studies to improve the
effectiveness and efficiency of grant management for ongoing programs is
allowable except that the cost of studies performed by agencies other
than the grantee department or outside consultants is allowable only
when authorized by the Federal grantor agency. Appendix C, Part II, C.
5.
The Agency later suggested that the costs in question might
coincidently or alternatively be described as costs of automatic data
processing (ADP), part or all of which also fall in the category of cost
items requiring Agency approval. Appendix C, Part II, C.1. See, Agency
response to appeal, p. 3.
Appendix C, Part I, B.1, provided that the terms "approval or
authorization of the grantor Federal agency" meant "documentation
evidencing consent prior to incurring specific cost (sic)." (Emphasis
added) /4/
(5) The State argued that the costs should be characterized as
falling under the following item, which was in the category of allowable
costs not specifically requiring Agency approval:
Accounting. The cost of establishing and maintaining accounting and
other information systems required for the management of grant programs
is allowable. Appendix C, Part II, B.1.
We conclude that the costs in question did require prior approval.
The record indicates that the MMIS did not fall neatly and exclusively
in any of the three categories mentioned by the parties, but it clearly
had major elements which fell in the two categories requiring Agency
approval. The record contains the Touche Ross contract, which has an
attachment labeled "RESPONSIBILITY MATRIX FOR MEDICAID MANAGEMENT
INFORMATION SYSTEM" detailing, on nine pages, the elements of twelve
tasks involved in developing and implementing an MMIS. It is clear that
several tasks, notably those described in paragraphs 4.1.2 through 4.1.4
and 4.1.12, can be characterized as activities integral to management
studies. It is also clear that many of the tasks, particularly those in
paragraphs 4.1.2 through 4.1.5, 4.1.7, 4.1.8 and 4.1.12 consist of or
are closely related to development and modification of computer (ADP)
programs. Task 7 deals with "implementation of all modifications or
enhancements to the MMIS computer system" and Task 2 deals with
selection of a "functioning MMIS . . . chosen so that it . . . can be
transferred to Clemson University's computer." And Agency Exhibit A is
a
1973 "general systems design" for an MMIS which describes an MMIS
as "an
integrated group of procedures and computer processing operations" as
well as a "management information system." The MMIS may also have
attributes which would bring part of it within the parameters of an
"accounting system", but we have no more than conclusory argument
from
the State to that effect. Finally, the State did not specifically
contest the applicability of PRG-31, which appeared to require approval
of the system. Thus, on balance, we conclude that the Agency reasonably
determined that the costs of development and implementation of the MMIS
required prior approval, even if part of the system was an accounting
system.
Of course, that conclusion is not dispositive of this appeal. In
fact, the issue is almost a red herring. The Agency later specifically
approved the contract, albeit for a lesser amount of FFP than the State
sought. See, Agency letter of October 19, 1978. In fact, not only did
the Agrency approve the contract after award, but it had approved the
State's Advanced Planning Document for the procurement and the request
for proposals prior to award. See, Agency letter of July 28, 1978. The
Agency, in effect, used the lack of prior contract approval only as a
collateral point buttressing the reasonableness of its determination not
to pay Touche Ross' higher price. See, e.g., Transcript (Tr.) pp.
8-10, and the disallowance letter.
Reasonableness of the disallowance of difference in offers.
The HHS procurement standards applicable to this procurement (45 CFR
Part 74, Subpart P (1977)) afforded grantees considerable discretion.
"Grantees may use their own procurement policies provided that
procurements . . . adhere to (6) the standards set forth in this
subpart." Section 74.151(a). "No additional procurement standards
will
be imposed by HEW (HHS' predecessor) upon grantees unless specifically
required by Federal law or Executive Orders." Section 74.150(a).
Contracts must be awarded --
. . . to the responsible bidder whose bid is responsive to the
invitation and is most advantageous to the State or local government
grantee, price and other factors considered. Section 74.154(e)(1)
(emphasis added).
The Agency acknowledged that there was no requirement that a State
award only to a low offeror.Tr., p. 19; Agency letter to the State
dated May 18, 1979.
While the State thus had flexibility to select an advantageous offer
which was not the low offer, this discretion was, of course, not
unlimited. The State had a duty under 45 CFR 74.155 to obtain maximum
competition, in order to increase the probability of getting the highest
quality services for the lowest reasonable price. And as discussed
under Background above, Section 1903(a) of the Act, the cost principles
in Appendix C to Part 74, and PRG-31 all gave the Agency authority and
responsibility to subject the costs of an award, and even the proposed
award itself, to a test of reasonableness in determining FFP. Thus, the
State and the Agency each had authority to make judgments which, in the
facts of this case, happened to conflict quite precisely.
The Board accords deference to Agency decisions in matters of
programmatic expertise, but that deference is not unbounded. The Agency
has a responsibility to provide a reasonable basis supported by the
record for its determination that a cost is unallowable. Moreover, in
the peculiar context here, where the State had authority under HHS
regulations to make a decision bearing on the reasonableness of costs,
the Board must look even more closely at the basis of the Agency
determination.
In a circumstance where a grantee selects the higher priced of two
technically capable offerors, and seeks federal funds for the
difference, we agree with the Agency that the grantee, in effect, has
the burden of justifying its determination. Indeed, there may be a
point at which the price difference is so substantial that selection of
other than the lower priced offeror becomes unreasonable per se. Here,
the Touche Ross offer was about 12% higher, and, while we do not find
(nor has the Agency argued) that the difference is unreasonable per se,
it is clear that the State had the burden of providing a reasonable
justification for its selection. As discussed below, we find that the
State provided a substantial basis for its determination. At that
point, given the State's authority under HHS regulations to contract
with other than the low offeror, the burden shifted to the Agency to
refute the State's justification.
In this context, the Board recognizes the responsibility the Agency
had to judge the reasonableness of costs. But the Agency did not meet
its burden; its rejection, insofar as the record in this case is
concerned, was based on mere conclusory disagreement with the State's
determination, with virtually no evidentiary basis in the record.
(7) The State's justification for choosing Touche Ross was explained
primarily in the previously-mentioned undated record of the state's MMIS
evaluation committee, and in the State's letter to the Agency of March
19, 1979. Those two documents show the process was as follows:
The State used an evaluation methodology which apparently had been
used earlier with Agency approval. /5/ Under this process, proposals
were graded with "quality points" in the categories of qualification
of
firm, qualification of key personnel, project management, and problem
understanding. Quality point totals were then mathematically related to
weighted factors in the request for proposals to give a cumulative score
for each offeror. A threshold score of 700 points eliminated two of the
four offerors, leaving Touche Ross and Consultec. The quality point
totals (before weighting) showed that Touche Ross had higher ratings
than Consultec (and the others) an all four areas; the ratings ranged
(on an apparent 100-point scale) 6 to 14.5 points higher than Consultec.
The weighted quality point totals were 886 for Touche Ross and 782 for
Consultec (the other offerors received 511 and 669). These figures were
those of the State's Department of Social Services; an independent
evaluation was also conducted by the Division of Computer Systems of the
State Auditors Office, which gave Touche Ross and Consultec 1000 and 855
points respectively. An evaluation of cost per quality point based on
total costs showed Touche Ross with $1,069.93 and Consultec with
$1,065.77. Another computation of cost per quality point based on
contractor costs using an "adjusted" basis not clarified in the record,
showed Touche Ross with $416 versus Consultec's $422, and a similar
computation based on total costs (including, apparently, the interaction
of the particular contractors with the State and with Clemson
University) showed Touche Ross with $664 versus Consultec's $673.
The State also performed a subjective evaluation of the written
proposals in the offers, and found Touche Ross superior to Consultec in
ways we will not detail here. The State also said that --
Consultec's bid was accompanied by a disclaimer that their bid was
firm only to the extend of the actions for which they were assigned the
lead in the matrix listing. This condition, of course, rendered their
bid less firm than that of Touche Ross. Letter of March 19, 1979, p.
2.
It is important to note again that the Agency stated it did "not
contend that the procedure or methodology used by DSS in its selection
process was unreasonable. Nor does HCFA contend that the eventual
selection of Touche (8) Ross was unreasonable using those criteria."
Agency response to appeal, p. 7. The specifics of the Agency's
challenge, /6/ and our analysis, follow.
The Agency noted that the undated record of the MMIS evaluation
committee contained the statement that "it was decided that both of
these companies could successfully complete the contract. However, the
committee agreed that Touche Ross & Co. would be the company recommended
to be awarded the contract." The Agency seized on this statement in its
letter of July 28, 1978 as a basis for "reservations" about application
of the otherwise approved evaluation methodology, and apparently used
the statement again as a basis for its decision in the October 19, 1978
letter than "the competitive procurement process itself has established
that the services and/or products sought under the contract can be
purchased at a current market price of $367,122.00" A similar statement
appeared in the disallowance letter of September 8, 1980. See, also,
Tr., pp. 13, 14, 16-19.
As presented at the conference, much of the Agency's case rested on
the argument that Consultec could have performed the contract as well as
Touche Ross for a smaller price; the record indicates nothing other
than that this conclusion was based solely on the few words in the
State's evaluation committee report. Id. The Agency admitted that it
did no independent analysis of the issue, but relied on the State's
analysis. Tr., pp. 14, 19. In context, the critical sentence can as
easily be interpreted to mean that Consultec merely could also perform,
although its evaluation was not as high as that of Touche Ross. We
think the Agency's determination was unreasonable because of the
following factors: the sentence was taken or observed out of context;
the State did a substantial and uncontested analysis using HHS --
approved methodology leading to an apparently reasonable determination
that Touche Ross would perform better; the Agency did no independent
analysis: the Agency provided nothing other than the conclusory and
unsubstantiated argument that Consultec was equal to Touche Ross; and
the State's analysis indicated, with no rebuttal whatsoever from the
Agency, that Touche Ross' costs may have even been lower overall when
considering the context of total costs. Against the background of a
regulation providing the Grantee with some discretion to pick other than
a low offeror if advantageous to the Grantee, the Agency's determination
cannot be sustained. (9) The Agency also stated in the May 18, 1979
letter (but not in its other correspondence or in the disallowance
letter) that "Consultec's proven success in numerous States refutes the
contention that Touche Ross and Company has greater capability to
perform in the Medicaid environment." At the conference, the Agency
acknowledged that there was nothing in the record to substantiate the
claim that Consultec was a superior performer. Tr., pp. 11, 14. When
asked whether there was evidence that the Agency had examined the offers
of the two companies to determine the alleged superiority of Consultec,
Agency counsel stated that "the agency is not contending that Consultec
is the better one." Tr., p. 13. The State argued that what Consultec
may have done in another state was irrelevant to the special
circumstances in South Carolina, and the State indicated without
rebuttal a few such alleged circumstances which it said Touche Ross'
proposal indicated the firm understood better. Tr., pp. 21-23, 26-27.
We thus find this position of the Agency unpersuasive because it is
totally unsupported by the record in this case. And even if the Agency
had offered evidence of good performance in other states by Consultec,
it would not have been a decisive factor in determining the
reasonableness of selection of Touche Ross.
Summary.
At the conference, the Agency argued generally the proposition that
the State's selection of Touche Ross was not at all unreasonable; it
was just that Consultec could have done the work also and cheaper, and
so the Agency reasonably chose to limit FFP to the amount of the lower
offer. The Agency buttressed this determination by reference to the
lack of prior approval. The Board might have been persuaded by the
Agency's argument but for the lack of anything substantial in the record
presented by the Agency to support its determination, in the face of
considerable unrebutted evidence from the State, that it had made a
reasonable and procedurally correct judgment, as permitted by HHS
regulation, that it was advantageous to select Touche Ross.
Conclusion.
Based on the foregoing analysis, the disallowance in the amount of
$34,156 is reversed. /1/ The parties sometimes used the terms "bid"
and
"bidder", and "offer" and "offeror" without distinguishing
the
terms. Since the contract itself refered to a "proposal" submitted
in
response to a "request for proposals", we use the terms "offer"
and
"offeror" as commonly used in federal procurement to distinguish this
method of solicitation from the solicitation of sealed "bids" by formal
advertising. The terminology does not affect the merits of the
controversy here. /2/ 45 CFR 74.154(e)(1) (1977). The letter
incorrectly cited the August, 1978 version of procurement standards; the
procurement here was conducted under an earlier version of 45 CFR Part
74, Subpart P, which had been in effect since October, 1976. The cited
provisions are not materially different, however. The other provisions
cited in the letter are as follows: 45 CFR Part 74, Appendix C, Part I,
C.1 provided among other things that to be allowable, costs must be
"necessary and reasonable for proper and efficient administration of the
grant program . . . ." Section 1903(a)( 3) of the Act included the
Agency's authority to pay that portion of the costs of "mechanized
claims processing and information retrieval systems" which the Agency
found "are likely to provide more efficient, economical, and effective
administration . . . ." 45 CFR 74.154(e)(1) (1977) applies, by its
contextual terms, only to advertised procurements, whereas the
comparable requirement in the later regulation cited by the Agency
applies to both advertised and negotiated procurements. It is not
entirely clear whether this was a negotiated or advertised procurement,
but neither party has continued the applicability of this principle to
the award here. /3/ This is one of two sources of justification
for the State's action in the record besides argument on appeal, and we
do not know what else may have been submitted to the Agency. The record
also contains an undated document appearing to be the minutes of the
State's MMIS evaluation committee (attachment A to the Agency's brief of
December 29, 1980), containing details of the evaluation and selection
process. /4/ Although the Agency's final decision of September
8, 1980, did not mention it, the Agency in other correspondence in the
record also referred to provisions of a program guidance document
identified as MSA-PRG-31, "Federal Financial Participation in Payments
to States for Design, Development, Installation and Operation of
Mechanized Claims Processing and Information Retrieval Systems" (June
10, 1974). This document appears to cover, among other things, MMIS
systems (see, e.g., sections 7-71-10(I) and 7-71-40). Section
7-71-25(A)(4) states: Upon selection of a contractor, but before
acceptance of a bid, the State must submit to (the Agency) for approval,
the proposed contract, the final contending proposals, and the report of
the selection committee, with criteria used. After review of the
submittals, a written response will be sent to the State agency by the
(Agency) Regional Commissioner indicating approval or disapproval. The
State was silent on the applicability of this provision to the
circumstances here. /5/ The Agency apparently knew of and
approved the methodology used by the State. See, the Agency's July 28,
1978 letter, and the State's appeal brief, p. 4. The Agency stated that
it did not find the procedure or methodology unreasonable, nor the
selection of Touche Ross unreasonable under the criteria. Agency
response to appeal, p. 7. /6/ The precise nature of the Agency's
challenge was not always clear, partly because of the ambiguous
interaction in this case between the lack of prior approval and
selection of other than the low offeror; note, for example, the absence
of any reference in the disallowance letter of PRG-31, and Agency
counsel's following response to a Board request at the conference to
clarify the Agency's position: The regulations are not crystal clear on
this point and neither is the disallowance letter. The disallowance
letter I personally found wanting in the best legal authority, I
disagree with it. I don't think the Agency is taking that position now.
As a representative of the Agency I can tell you it is not my position.
Tr., p. 9.
OCTOBER 22, 1983