Wisconsin Department of Health and Social Services, DAB No. 696 (1985)

GAB Decision 696

October 16, 1985

Wisconsin Department of Health and Social Services;
Garrett, Donald F.; Settle, Norval D. (John) Teitz, Alexander G.
Docket Nos. 85-50; 85-52; 85-53

DECISION

The Wisconsin Department of Health and Social Services (State, DHSS)
appealed three disallowances, two by the Health Care Financing
Administration (HCFA) and one by the Office of Child Support Enforcement
(OCSE). The HCFA disallowances were $6,194 and $19,164 FFP for
administrative costs under the Medicaid program, Title XIX of the Social
Security Act (Act); the OCSE disallowance was of $212,483 FFP claimed
as administrative costs under Title IV-D of the Act. /1/


All three disallowances arose out of a project known as the Wisconsin
Basic Needs Assessment and Price Index Study (Basic Needs Study). This
study was initially funded under section 1110 of the Act. Subsequently
the study was expanded, State funds were added, and eventually Wisconsin
claimed FFP for the excess of the cost of the study over and above the
1110 grant as administrative costs in several federal programs.

The dispute here concerns whether any costs of the Basic Needs Study,
over and above the section 1110 grant, could properly be claimed as
administrative costs eligible for FFP under the Medicaid and Child
Support Enforcement programs.

We uphold the disallowances in full based on the cost principles in
Office of Management and Budget (OMB) Circular No. A-87 (A-87).(2)$%
Background

Section 1110 of the Act, entitled "Cooperative Research or Demonstration
Projects," provides funding for grants to states:

for paying part of the cost of research or demonstration projects
such as those relating to the prevention or reduction of dependency, .
. . or which will help improve the administration and effectiveness of
programs carried on or assisted under the Social Security Act and
programs related thereto. . . .

Section 1110(a)(1)(A).

Subsection (a)(3) provides that grants:

shall be made in such installments and on such conditions as the
Secretary finds necessary to carry out the purposes of this subsection.

The State first applied for a grant under section 1110 in June 1978.
Proposed federal funding requested was $398,176. The original Notice of
Grant Award, for the period from October 1, 1978 through September 30,
1979, awarded $122,953 for this first year of the project.
(Respondent's Exhibit 1) The award was by the Social Security
Administration (SSA), which provides funding for 1110 grants and
supervises them.

The State and the University of Wisconsin Institute for Research on
Poverty (Institute) entered into an agreement for carrying out the Basic
Needs Study. The original agreement stated that the project was "to
determine the basic economic needs of AFDC families." (Appellant's
Exhibit 1)

In March 1980 the State submitted to the Social Security Administration
(SSA) an amended proposal for continued funding of the Basic Needs
project, now budgeted at a total amount of $747,689. (Respondent's
Exhibit 3) Of this amount, $398,177 was to be SSA funding under the 1110
grant, $290,650 was to be State funding, and $59,042 was to come from
the Institute. (Id., p. 6)

SSA subsequently approved the amended proposal for the first period, and
also continuation awards for the project from October 1, 1980 through
September 30, 1981, and from October 1, 1981 through September 1982.
The funding summary for all years in the State's last continuation
proposal showed total funding of $797,669, of which $398,177 would come
from SSA and $389,492 from the State. (Respondent's Exhibit 6, p.
9)(3)$% After the project period was over the State submitted a claim to
HCFA for $6,194 FFP for administrative costs under the Medicaid program.
HCFA deferred this claim (Respondent's Exhibit 12), and subsequently
disallowed this claim as well as the subsequent one for $19,164.
(Appellant's Exhibits 15 and 17) The State, at the same time it
submitted the first HCFA claim, submitted its first claim for FFP under
the OCSE program, amounting to $59,926. This claim, and a subsequent
one for $152,557, were disallowed originally by the OCSE Regional
Representative, and both disallowances were approved by the Acting
Director of OCSE.

Contentions of the Parties.

The disallowances are all based on provisions of the cost principles, to
be discussed in detail below. Briefly, HCFA and OCSE contended that the
State improperly attempted to shift the additional costs of the Basic
Needs study from one federal grant to others, i.e., from the research
project under section 1110 to administrative costs of the Medicaid and
OCSE programs. In any event, HCFA and OCSE argued, the costs of the
study were not allowable under those programs because they were not
necessary for the administration of the programs, and the programs did
not benefit from the study. The OCSE disallowance gave as an additional
reason that the cost, as that of a management study, was not given prior
approval by the grantor Agency, as required in this instance by the cost
principles.

The State, on the other hand, contended that it did not improperly shift
costs from the research project to the Medicaid and OCSE programs. It
argued that it always intended to claim federal matching from those
programs, in addition to the section 1110 grant. The State claimed that
the federal government had been informed of the State's intentions. In
addition, the State argued that the study clearly benefited the Medicaid
and OCSE programs, and the costs claimed were both reasonable and
necessary for those programs. As to the additional ground of the OCSE
disallowance, lack of prior approval, the State claimed this was not
necessary under the cost principles.

Analysis.

I. The Cost-Shifting Issue.

A. The cost principles involved.

Section C.2.b. of Attachment A of OMB Circular A-87 states:

b. Any cost allocable to a particular grant or cost objective under
the principles provided(4) for in this Circular may not be shifted to
other Federal grant programs to overcome fund deficiencies, avoid
restrictions imposed by law or grant agreements, or for other reasons.

Section D.9. of Attachment B of Circular A-87 states:

9. Underrecovery of costs under grant agreements. Any excess of
cost over the Federal contribution under one grant agreement is
unallowable under other grant agreements. /2/


B. The funding arrangements.

It is clear from the record that the State originally intended to fund
the Basic Needs Study entirely from the demonstration grant. The first
application for the section 1110 grant, dated June 30, 1978 (Appellant's
Exhibit 24), listed under "Proposed Funding" the sum of $398,176 in the
space provided both for federal funding and for total funding. No other
funding was contemplated, either federal or state; the study was to be
funded 100% from the demonstration grant.

It appears that the project expanded quickly in scope and cost. In an
agreement between the State and the Institute on April 27, 1979, the
total funding need was now put at $656,797. (Appellant's Exhibit 1) The
agreement stated that HEW "has already approved and allocated $398,176
to the project." /3/


As for funding sources, this contract stated that the intent was to
finance the study "through use of a federal grant(s)." This contract had
a contingency plan in case the additional federal funding was not
available. The Bureau on Aging would be the(5) source for $25,623,
leaving the remainder to be financed at $233,000. This amount would be
contributed equally by three divisions of the State Department of Health
and Social Services (Division of Economic Assistance, Division of
Community Services, and Division of Health) and by the Institute itself.
(Id.)

The revised proposed contract with the Institute called for a budget of
$672,159. (Appellant's Exhibit 2) Again, if additional federal funding
was not available over the $398,176 section 1110 grant, the excess
financing would be supplied equally by the three State divisions. The
cover letter sent with this contract to the SSA project officer made it
clear that the State would try to get additional 1110 money. If it
could not, then the State would try other federal agencies:

Should your agency fail to see the need for full funding, then H.S.
S. will seek funding from other Federal agencies, such as Aging, Health
or Community Services. /4/


On December 17, 1979, the administrators of the three State divisions
wrote the Project Officer of the agreement for State funding of the
excess cost of the study over and above the amount provided by the
section 1110 grant. (Appellant's Exhibit 3) The State cited this letter
as supporting its position, claiming that it advised the project officer
"that the Department will use administrative funds for costs outside of
the original grant." (Appellant's brief, p. 6) An examination of the
language shows this letter says nothing of the sort. The letter read as
follows:

Re: Back-up Funding of the Basic Needs Project. The Department of
Health and Social Services has agreed to underwrite the costs of the
Basic Needs project for the amounts not covered by any Federal Grants .
. . the Divisions of Health, Community Services and Economic Assistance
have reallocated Administration and Contract funds from their 1979-81
budget appropriation to cover $273,983 of costs in excess of the
$398,176 grant. . . .

We do not read the reference to "Administration" funds as indicating any
intention to claim administration costs under any federal program, let
alone either Medicaid or Child Support. The language stated simply that
if the State could not get any other federal grant for the project, it
would use its own "administration and contract funds." Nothing even
implied that federal administrative funding was intended.( 6)$% The
State intention to use State funds for the excess over the 1110 grant
appeared also in an internal memorandum the next day from the Director
of the Institute to the Administrator of the State Division of Economic
Assistance. (Respondent's Exhibit 2) This stated that the "state will
pick up $273,982 required to supplement the federal Basic Needs Study
grant of $398,177." It went on to specify that the Institute would
assume responsibility for some personnel costs, and the State divisions
would "pick up additional costs accruing from the impact of inflation."
Again, this indicated that the State did not intend to seek funding
under any federal assistance programs, let alone Medicaid or OCSE.

The State also cited as supporting its position the April 21, 1980
letter from the administrator of the State Division of Economic
Assistance to the HEW Regional Commissioner. (Appellant's Exhibit 4)
This did state that "in order to expand the scope of the project," the
State would place $145,325.50 of State general purpose revenue funds in
a project account, and "will claim $145,325.50 in federal matching
funds." If the letter had stopped there, the State's argument that it
had intended to claim administration costs under the federal programs
here might seem plausible. The letter went on, however, to say that the
matching funds would be claimed "under Sec. 403(a)(3)(B) of the Social
Security Act." The cited section is the provision for matching
administrative costs under the AFDC program. It is therefore obvious
that the State never intended during the term of the project to claim
funding from the Medicaid or OCSE programs.

This same mix of section 1110 funds and state funds (and sometimes
Institute funds) continued as the project went on. In approving the
continuation from October 1, 1980 through September 30, 1980, the
approval letter contained the following:

The total approved budget is $426,737, of which $222,721 are Section
1110 funds, $195,318 are State funds (DHSS), and $8,698 are funds
provided by the Institute for Research on Poverty, University of
Wisconsin. . . .

(Respondent's Exhibit 5)

So, again, in approving the continuation of the study for year 3, from
October 1, 1981 through September 30, 1982, the award letter stated
that: "The total approved budget is $282,548, of which $119,798 are
Section 1110 funds and $162,750 are State funds." (Respondent's Exhibit
7)

The State did finally manifest its intention to claim matching FFP on
the excess over the section 1110 grant, but only after(7) the entire
project period was over. On March 9, 1983 the State submitted revised
budgets to SSA, with a letter in which the State said:

It has always been our intent to claim federal financial
participation on the balance of the costs incurred beyond the scope of
the study which could be funded by the grant and a 5% State match.

(Appellant's Exhibit 9)

The State relied also on the reply to the March 9, 1983 letter from the
project officer (Appellant's Exhibit 11), as "in effect acknowledging
that there was no cost overrun and administrative costs are
appropriately claimed." (Appellant's brief, p. 6)

We do not read the letter to say this. The exact language is:

It is our understanding that the reduction in the State's share of
the project costs did not affect the performance of the activity as
initially approved and funded by the Social Security Administration.
Based on this understanding, the revised budgets and expenditure reports
are approved and accepted.

It is important to note that the revised budgets submitted and approved
by the SSA grants officer did not have any provision for claiming
administrative costs under any federal program, nor was there any
mention of this in the budgets. The budgets themselves (Respondent's
Exhibit 14) did not change the federal funding under the 1110 grant.
All they did was reduce the amount of the State matching funds from
approximately the same amount as the 1110 funds to 5% of the 1110 grant.

When the grants officer wrote that this reduction of the State's share
did not affect the performance of the activity "as initially approved
and funded by the Social Security Administration," nowhere is there any
approval of claiming the difference from HCFA or OCSE.

It is also significant that when the revised budgets were submitted the
first claim to HCFA had already been deferred, and the first claim to
OCSE had already been disallowed by the Regional Representative. No
unilateral revision by the State could bind HCFA or OCSE. /5/

(8)

So also, Appellant's Exhibits 12 and 13, letters from the State to
Region V of HEW and to HCFA, were nothing more than an attempt to
explain after the fact what the State claimed it had intended all along.

On the record it is clear that from the beginning the State intended to
use State funds for the excess of the cost of the study over the 1110
grant. Not until the project period was over did the State decide to
seek funding from Medicaid and Child Support funds.

The intent of the State as to financing the excess costs of the 1110
grant is of course not conclusive. If the costs were properly allocable
to the Medicaid and Child Support Enforcement programs and allowable
under those programs, they could properly be claimed under them. The
intent of the State is significant since it shows that the State
conceived of the Basic Needs Study as a research project, to be funded
originally entirely with federal funds under section 1110. When the
State decided to expand the project, it planned to use State funds for
the excess. Only after the project was completed did the State decide
to try to claim FFP from HCFA and OCSE.

Neither HCFA nor OCSE ever approved claiming the excess costs under the
Title XIX or Title or Title IV-D programs. We conclude below that the
costs were not "necessary" under those programs. The costs claimed were
the excess or overrun of the 1110 grant program as originally funded by
SSA. As such, they "may not be shifted to other Federal grant programs
to overcome fund deficiencies." (A-87, Attachment A, section C.2.B.)

Moreover, the costs were not allowable under the HCFA and OCSE programs
because section D.9. of Attachment B of A-87 provides that "(A)ny excess
of cost over the Federal contribution under one grant agreement is
unallowable under other grant agreements." The FFP claimed under the
HCFA and OCSE programs was the excess of the cost over the Federal
contribution under the 1110 grant, and as such was unallowable under the
other grant programs.

Finally, we believe it is important to view the foregoing matters in the
context of the primary structure of the statute. The study was funded
under section 1110, which specifically provides for research and
demonstration projects. The State has made no showing that the statute
or regulations otherwise specifically authorize any funding for research
and demonstration projects from funds provided for administrative costs
in the Medicaid or OCSE programs. The record does show that each grant
award to the State for the study provided for federal funding only under
section 1110.(9)

II. The costs of the study were not necessary for the Medicaid or OCSE
programs.

We found above that the costs of the study (over and above the 1110
grant) were unallowable because they were shifted to federal programs in
violation of the cost principles. Even if these excess costs were not
unallowable for this reason, they were unallowable because they were not
necessary for the Medicaid or Child Support programs.

The original purpose of the study was clearly to benefit the AFDC
program, and it was approved as such. The original grant application
gave the following description of the project:

Project to determine economic needs of AFDC recipients and develop a
basic needs inventory to determine grant size and develop an index
system in order to update grants which could be implemented in other
states.

(State's Exhibit 24)

This is emphasized in the first agreement between the State and the
Institute. The first sentence reads as follows:

The University of Wisconsin Institute for Research on Poverty has
agreed to carry out a project to determine the basic economic needs of
AFDC families.

(Appellant's Exhibit 1)

The paragraph does continue with reference to expanding the emphases of
the study "to also include the basic needs of the aged and disabled
persons as well as those on SSI and also focus on health care for all
groups." However, the original project as outlined in the grant
application and as funded was to determine the basic economic needs of
AFDC families. As pointed out above, on April 21, 1980 the State told
the Acting Regional Commissioner that federal matching funds would be
sought under the AFDC provisions of the Act; no other program was even
mentioned.

It is significant that when the State sought approval of allocation of
the excess costs from the Division of Cost Allocation in May 1982, the
only regulatory authority it cited did not include either the Medicaid
or Child Support programs. (Respondent's Exhibit 8) The State wrote
that:

(T)his study is an extraordinary effort to discharge the state's
obligations under the Requirements for(10) Federal Plans set forth in 45
CFR 233.20(1) and (2) to determine need on "an objective and equitable
basis" and "to include the method used in determining need."

The State then gave its reasoning for expecting FFP over and above the
1110 grant:

It has been our understanding from the early stages of the project
that work performed by the contractor pursuant to the requirements of
233.20(1) and (2) which was not otherwise reimbursed by the 1115 (1110)
grant is eligible for usual rates of federal financial participation.

The problem with this reasoning is that 45 CFR 233.20(1) and (2) refer
only to the financial assistance programs and do not include either the
Medicaid (Title XIX) or Child Support Enforcement (Title IV-D) programs.
Part 233 of 45 CFR is entitled "Coverage and Conditions of Eligibility
in Financial Assistance Programs." Section 233.20(a), Requirements for
State Plans, begins as follows:

A State Plan for OAA (Old Age Assistance, Title I), AFDC (Title
IV-A), AB (Aid to the Blind, Title X), APTD (Aid to the Permanently and
Totally Disabled), (Title XIV) or AABD (Aid to the Aged, Blind, or
Disabled, Title XVI) must, as specified below:

(1) General (i) Provide that the determination of need . . .

Therefore, if the Basic Needs study was in fact done to carry out the
requirements of 45 CFR 233.20, then application for matching funds
should have been made only to the financial assistance programs listed
in that section. State plans for Medicaid and Child Support are not
mentioned in the section, so the study obviously was not directly
carrying out a requirement under that regulation for those two programs.
The section cited, 45 CFR 233.20, does not in any case authorize funding
of research or demonstration projects, which are funded under section
1110 of the Act.

There is no indication in the record that HCFA gave any approval to the
study, or that it was even aware that it was going on. The State showed
that several questions in the study pertained in some way to medical
assistance, but that is no indication that any part of the program was
"necessary" for administration of the Medicaid program. The fact that
all AFDC recipients were eligible(11) for medical assistance, and that
therefore the study pertained to medical assistance, does not make it
essential for that program.

As for child support enforcement, correspondence in the record shows
that Wisconsin was at the same time making another study of the child
support system. While the State hoped that this other study would build
upon the Basic Needs study, there is nothing to show that OCSE agreed
with this.

This Board has had occasion to consider the meaning of the requirement
of the cost principles that a cost be "necessary" for the administration
of a federal program, as well as reasonable in amount. In State of
Oregon Mass Transit Assessment, Decision No. 402 - Supplementary
Decision, August 31, 1983, we said the following:

While no difinition or explanation of "necessary" appears in the
Circular (A-87), we see no reason why we cannot accept the ordinary
everyday use of the term, as something "essential," so that the grant
programs could not be run properly without it. . . .

(p. 4)

We also stated, in the same decision, that the language of this cost
principle was almost a verbatim restatement of language in statutory
funding requirements. We pointed out, for example, that certain
payments to States under the Medicaid program are based on amounts
expended "as found necessary by the Secretary for the proper and
efficient administration of the State plan," under section 1903(a)(6) of
the Act. (p. 8)

An examination of the materials submitted by both parties as to the
actual scope of the study shows that certain questions asked in the
survey had some relation to payments made for health care, and to
payments received for child support. However, the record does not show
that this was "necessary" to run either the Medicaid or Child Support
programs properly and efficiently.

This distinction between what may be of interest or even helpful in a
program, and what is necessary, is brought out very clearly in the OCSE
disallowance letter. (Appellant's Exhibit 18) The Acting Director of
OCSE stated that she had reviewed the survey questions, and found them
to be "interesting and enlightening." She went on to say that the
results would "undeniably provide a(12) wealth of important sociological
and financial data concerning AFDC families." She concluded, however,
that:

(t)his does not, in itself, indicate that the study is beneficial to
the administration of the program (IV-D) or that the costs were either
reasonable or necessary for the program. . . .

It is not necessary for us to go so far as to agree that the study was
not even "beneficial" to the OCSE program to sustain the disallowance.
The study was certainly not "necessary" for either the Medicaid or OCSE
programs, and we therefore sustain the disallowances under both
programs, based on the cost principles. /6/


III. Outside Consultants.

The OCSE disallowance had an additional reason beyond that given in the
HCFA ones. In addition to the cost of the study not being necessary for
the OCSE program, it encountered a separate prohibition in A-87.
Attachment B, section C.5., states:

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.

Since OCSE did not give prior approval to the study, and the study was
performed by "an agency other than by the grantee department" or was
performed by an "outside consultant," the cost of the study was
unallowable, according to the Agency.

The State argued a strained and unusual interpretation of the particular
section of A-87. In its brief it argued that prior approval was needed
only if the study is performed by an agency other than the grantee; no
approval was needed if the study was performed by an outside consultant.
Since the Institute was either an agent of the grantee department or an
outside consultant, no approval was necessary, according to the
State.(13)

The pertinent section of A-87 could have been written more clearly but
its meaning is obvious. It is absurd to read it not to require approval
of a study by an outside consultant. The only plausible meaning is that
the cost of a management study is allowable only with prior approval if
(1) it is performed by an agency other than the grantee department, or
(2), it is performed by an outside consultant. The Institute was either
"an agency other than the grantee department," or it was an "outside
consultant." While the State argued that the Institute was an agency of
the grantee, and as part of the State university system was a State
agency, that is not enough under the language of the cost principle.
Prior approval was required if the study was performed by "agencies
other than the grantee department." The Institute was not the grantee
department, which was in all the grants the Wisconsin Department of
Health and Social Services. Being an agent for this Department or being
another State agency did not make the Institute the "grantee
department." /7/


Since no prior approval was obtained, the costs of the study were
unallowable for this reason, in addition to being unallowable under the
other cost principles discussed above.

This particular ground was stated only in the OCSE disallowance, and not
included in the HCFA disallowances. However, this Board has permitted
federal agencies to rely on grounds not stated in the disallowance but
brought up during the course of the appeal, provided that the grantee
was given an opportunity to respond to the additional ground. /8/


Here the grantee had the opportunity to address this particular ground
for disallowance from the very beginning of the consolidated proceeding
before the Board, since it was in the OCSE disallowances, and the State
responded to it both in its opening and reply briefs. The combined
brief of HCFA and OCSE put the State on notice that HCFA was also
relying on this ground although it was not in its original
disallowances.(14)

CONCLUSION

We sustain the disallowances of both HCFA and OCSE in full on the
grounds that the costs of the Basic Needs Study were not allowable under
the cost principles. /1/ The appeals from the two HCFA disallowances
were previously before the Board as Docket Nos. 84-40 and
84-197. These cases were closed by the Board without prejudice, by
agreement of the parties, pending action by OCSE on the claim before it.
After the disallowance by OCSE, the State appealed to the Board in
Docket No. 85-50. The two closed cases were reopened at the State's
request, redocketed as Nos. 85-52 and 85-53, and by agreement
consolidated with 85-50. /2/ The HCFA disallowances did not cite
this cost principle. This is immaterial since the State had the
opportunity to respond to this issue from the beginning of the appeals
before the Board, as we state below when referring to the outside
consultant issue. /3/ The original grant award for the first
project year was only $122,953. (Respondent's Exhibit 1) No further
award had been made by July 1, 1980, when a no-cost extension was
approved. (Respondent's Exhibit 4). The State's assumption that the
entire $398,176 requested for the project had been approved was not a
relevant factor here, since this amount was in fact eventually approved
and paid to the State under the 1110 grant. /4/ There is no
indication that by referring to "Health" the State contemplated seeking
Medicaid funds. /5/ It is doubtful that the SSA grants officer
would in any event have any authority to bind HCFA or OCSE, even if he
had in fact tried to do so. /6/ The HCFA disallowances include an
additional ground, that costs that exceeded the section 1110
grants were distributed to various programs, including Title XIX, on an
"arbitrary allocation" basis. Since we uphold the HCFA disallowances,
as well as the OCSE one, on other bases, we need not reach this issue.
/7/ A-87 defines "Grantee" as the "department or agency of State . . .
government which is responsible for administration of the grant."
(Attachment A, section B.9.) DHSS was clearly the grantee department
under this definition. /8/ See, e.g., State of Oregon Mass Transit
Assessment, Decision No. 402 - Supplementary Decision, August
31, 1983, pp. 2-3.

JANUARY 14, 1986