DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: New Jersey Department of Human Services
Docket No. 87-9
Decision No. 899
DATE: September 14, 1987
DECISION
The New Jersey Department of Human Services (State) appealed
a
determination by the Health Care Financing Administration
(HCFA)
disallowing $518,692 in federal financial participation (FFP)
for
amounts claimed for administration of the State Medicaid
program.
These costs were incurred during the period of July 1, 1973 through
June
30, 1980 by several units within the New Jersey Department of
Health
(DOH), as follows:
Item
1 Rate-Setting Unit
2a Construction & Monitoring Unit
2b Construction & Monitoring Unit
3 Certificate of Need
Economic Feasibility Unit.Period
of
Service
7/1/73 - 6/30/77
7/1/73 - 6/30/77
7/1/77 - 6/30/80
7/1/78 - 6/30/80.FFP Claimed
$256,367
131,204
111,185
19,936 $518,692 The Agency disallowed Items 1 and 2a because the
costs
were allegedly undocumented and disallowed Items 2b and 3 because
these
costs were neither allowable Medicaid costs nor allocable to
the
Medicaid program.
As explained more fully below, we uphold the Agency's disallowance.
I. Rate-Setting Unit and Construction and Monitoring Unit
Costs for
the Period 1973 through 1977.
a. Parties' Arguments
HCFA disallowed the Rate-Setting Unit and Construction and Monitoring
Unit
costs (items 1 and 2a) for the period July 1, 1973 through June 30,
1977
because the State failed to adequately document these costs.
HCFA
claimed that the State did not produce evidence of salary
expenditures,
such as payroll records, despite HCFA's repeated requests for
such
documentation.
The State first argued that when the Regional Administrator takes
a
deferral action the notice must contain a request that the State
"make
available for inspection all documents and materials which the
Regional
office believes necessary to determine the allowability of the
claim."
45 CFR 201.15(c)(2). The State contended that the regulation
thus
places an affirmative obligation on the Regional Office to inform
a
state of the specific documentation it considers essential to
support
the claim. The deferral notice sent to the State did not list
specific
documents but instead requested that the State make available
all
documents and materials "which you [the State] believe support
the
affected claim." State Appeal File, Exhibit (Ex.) B, p. 2.
The State
claimed that the Regional Office not only failed to disclose to
the
State the particular documentation it required, but it
affirmatively
misled the State when the Agency representative in a
handwritten
memorandum issued January 4, 1984 indicated that no further
information
was needed for these units for the period 1973 through
1977. The State
argued that, as a result, it was not only denied the
opportunity of
presenting the specific documentation necessary to support its
claim but
also was led to believe that no further documentation was needed
to
support these costs.
Although the Agency disagreed with the State's account of whether it
had
been given sufficient opportunity to document its claim, the
Agency,
after receiving the State's brief, gave the State another
opportunity.
1/ The State indicated it could provide no
documentation. The Agency
contended that the State not only did not
have documentation now but did
not even have the documentation when it
submitted its claim.
Respondent's Brief, p. 3; Respondent's Appeal File, Ex.
1.
In its reply brief, the State did not dispute that the payroll records
for
the period in dispute had been lost or destroyed. It argued,
however,
that it provided the Agency with thorough documentation of its
methodology in
computing the retroactive costs claimed. The State
further argued that
since there was a reasonable explanation for the
unavailability of
contemporaneous documentation given the age of the
claims, other data, such
as Employee Budget Lists, could be substituted
as proof of the costs
claimed.
b. Analysis
We reject the State's arguments and find that the State had an
obligation
to substantiate its claim with appropriate source
documentation, which its
substitute documentation failed to satisfy.
The cost principles applicable to grants with state and local
governments
at 45 CFR Part 74, Appendix C, Part I, Section C (1974),
provide that in
order for costs to be allowable under a grant program,
the grantee must show
that the costs are necessary and reasonable for
the proper and efficient
administration of the grant program, are
allocable to the program, and are
incurred for the benefit of the
program. Grantees are required to meet
standards for financial
management of the grant. These standards, 45
CFR 74.61(b), (f), and (g)
(1974), require that the grantee make and retain
records of expenditures
and support these records with source
documentation. The Board has
found "[t]hese provisions clearly place
the burden of establishing
allowability of costs on the grantee." Ohio
Department of Public
Welfare, Decision No. 43, July 29, 1983, p. 8, citing
Neighborhood
Services Department, Decision No. 110, July 15, 1980.
Furthermore, in
administering the Medicaid program, a State is required by 45
CFR
205.145 (1974) to maintain an accounting system and supporting
fiscal
records to assure that claims for federal funds are in accordance
with
applicable federal requirements. Finally, the cost principles at
45 CFR
Part 74, Appendix C, Part II, Section B.10.b. (1974), specify
that:
Amounts charged to grant programs for
personal services,
regardless of whether
treated as direct or indirect costs,
will
be based on payrolls documented and
approved in accordance with
generally
accepted practice of the State or local
agency.
Payrolls must be supported by
time and attendance or equivalent
records for individual employees. Salaries and wages
of
employees chargeable to more than one
grant program or other cost
objective
will be supported by appropriate time
distribution
records.
Thus, as we have often stated, it is a basic principle of grants law
that
the grantee has the burden of documenting expenditures and
their
allowability. See, e.g., New York City Human Resources
Administration,
Decision No. 641, April 17 1985; and New York State
Department of Social
Services, Decision No. 204, April 14, 1983.
Accordingly, in order to
demonstrate that the costs incurred for the
Rate-Setting and
Construction and Monitoring Units for the period 1973
through 1977 were
entitled to 50 percent FFP as costs necessary for the
proper and
efficient administration of the State plan as required by the
cost
principles, the State had an initial burden to document these costs
to
show that the claim for reimbursement was proper.
The State cannot avoid its fundamental obligation to have
contemporaneous
documentation of its costs by claiming it was prejudiced
by the Agency's
alleged failure to comply strictly with the requirements
of 45 CFR
201.15(c). Although the deferral letter stated that the State
should
make available "all related documents which you believe support
the affected
claim," rather than stating the documents and materials
which the Regional
office then believed necessary to determine the
allowability of the claim, we
do not agree with the State that the
deferral letter did not comply with 45
CFR 201.15(c)(2). The Regional
Office specified that since the State
had not maintained an accounting
system and supporting records to assure that
claims for federal funds
conform with program requirements, the Agency
deferred the claim "until
such documentation is provided in a complete,
organized, and in readily
reviewable form accompanied by written
explanations." While this
reference to support documentation did not
name specific documents,
given that the costs in question here were personnel
costs for which the
cost principles spelled out the documentation
requirements, the State
should have known what source documentation would be
necessary to
support these costs. This is a sophisticated grantee
charged with
oversight of its Medicaid program and well aware of the
requirements for
documenting costs. We therefore conclude that the
Agency was specific
enough to meet the requirements of the regulation.
Even if we were to determine that the Agency was not specific enough
in
the deferral letter, we are not persuaded that there was any
prejudice
to the State as a result. The State has never affirmatively
stated that
it even had the source documentation at the time it submitted its
claim.
In fact, the record fails to show any relation between the loss
and
destruction of the source documentation and the lack of specificity
in
the deferral letter. Respondent's Appeal File, Ex. 1. Moreover,
the
State has not explained what happened to the source
documentation.
There is no explanation as to how and when it may have been
lost or
destroyed. Thus, there was no prejudice to the State because of
the
alleged lack of a request for specific information in the
deferral
letter.
We also cannot conclude that the Agency misled the State by issuance
of
the handwritten memo dated January 4, 1984 from the
Agency
representative (Ex. F), which indicated that no further
information was
needed. The State clearly took this remark out of the
context in which
it appeared. The record shows that the Agency
representative here asked
the State on several previous occasions for
documentation of these
costs. In fact, the Agency representative met
with representatives of
the State and their accountants on December 9, 1983
at which time the
Agency representative was informed that the documentation
necessary to
support the costs in issue here had been lost or destroyed.
Thus, the
Agency's statement that "no additional information required" must
be
read in the context that the Agency had just been informed that
the
documentation did not exist; the Agency representative indicated
no
additional information was required knowing that no information
existed.
Respondent's Appeal File, Ex. 3.
Finally, we cannot agree with the State's alternative contention
that,
under the circumstances, substitute documentation should be allowed
as
acceptable documentation of the costs claimed. While it is true
that
the Board stated in Indiana Department of Public Welfare, Decision
No.
772, August 7, 1986, that other documentation may be presented
if
contemporaneous documentation is lost and a reasonable
explanation
exists why the documentation is not available, the State has
not
established these circumstances here. The State has neither
explained
the unavailability of contemporaneous source documentation
nor
established that the proffered material documented actual
expenditures.
Other than the vague remark that the documentation was either
lost or
destroyed, or a general observation concerning the age of the
claims,
the State never offered any explanation about the missing
documents.
The age of the claims is no explanation for the documents being
lost or
destroyed here. It is the State who chose to make a retroactive
claim
in 1981 for costs incurred going back to 1973.
Furthermore, the regulations for retention of records require
that
financial records and supporting documentation be retained for a
period
of at least three years beginning from the date the State submits
its
claim for expenditures. 45 CFR 74.20 and 74.21(a). Here the
State
submitted its retroactive claim on May, 1981 and thus, was required
to
retain these records until at least May, 1984. As of December 9,
1983,
however, the State had lost or destroyed these documents. Thus,
the
State failed to retain the records for the required period.
Moreover,
in Indiana, supra, we indicated that the sufficiency
of
non-contemporaneous documentation would be carefully scrutinized.
While
the State argued that the Employee Budget Lists offered to the Agency
in
support of its claim were sufficient, the State failed to explain
why
these documents, which as their title implies are only the
budgeted
estimates of employee's salaries, should be accepted as
documentation of
actual expenditures. In fact, the State never
submitted a copy of this
documentation for the Board's scrutiny.
Therefore, we conclude that the State has not documented its claims
for
costs of the Rate-Setting and Construction and Monitoring Units for
the
period July 1, 1973 through June 30, 1977, and we sustain
the
disallowance for these costs.
II. Construction and Monitoring Unit Costs for the Period
July 1,
1977 through June 30, 1980 and
Certificate of Need Unit costs for
the
period July 1, 1978 through June 30, 1980.
a. Parties' Arguments
HCFA disallowed the costs of the Construction and Monitoring
and
Certificate of Need Units because they represent a "general
expense
required to carry out the overall responsibilities
of
State...government(s)" in the area of health care, rather than
costs
necessary for the administration of Medicaid (45 CFR Part 74,
Appendix
C, Part I, Section C.1.a. (1977), and are not costs "necessary for
the
proper and efficient administration of the State plan."
Section
1903(a)(7) of the Social Security Act; 45 CFR Part 74, Appendix C,
Part
I, Section C.1.a., presently at OMB Circular A-87, Attachment A,
C.1.a.
HCFA also claimed that the costs are not allocable to Medicaid
because
the State has not shown that the work done by these units, or
any
identifiable portion of their work, benefits the State's
effective
administration of its plan. 45 CFR Part 74, Appendix C, Part
I, Section
C.2.a. (1977), presently at OMB circular A-87, Attachment A,
C.2.a. 2/
The State explained that the Construction and Monitoring Unit
reviewed
architectural and mechanical plans of hospitals and nursing
homes
proposed to be built in New Jersey. It also allegedly
conducted
inspections which were necessary to correct life safety
deficiencies and
bring existing facilities up to conforming licensure
standards.
Appellant's Brief, p. 10. The State allocated costs to
Medicaid by
figuring the percentage of Medicaid nursing homes of the total
being
monitored by the unit together with the percentage of costs
represented
by Medicaid patient days in hospitals.
The Certificate of Need Unit's function was to determine the
feasibility
of certificate of need applications and to study the effects of
those
proposals on the health care industry and the patient
populations. This
unit served all hospitals and nursing homes (Medicaid
and non-Medicaid)
within the State. The State allocated costs to
Medicaid on the basis of
the percentage of Medicaid patient days in hospitals
and nursing homes
to total patient days in those facilities. Thus, the
State argued that
it was clear from the descriptions of these two units that
their
functions were essential to the effective administration of the
Medicaid
program.
The Agency disputed the State's assertions and argued that the costs
of
these units were unallowable for the following reasons: the costs
of
these units were not necessary for the State's Medicaid program,
the
costs of these units represent a general expense of government and
were
therefore unallowable, and the costs of these units were
unallowable
because they had not been claimed in accordance with an approved
cost
allocation plan. .b. Analysis
The record before us here fails to support the State's contentions
that
the costs of the Certificate of Need Unit and the Construction
and
Monitoring Unit were necessary for the proper and
efficient
administration of the State's Medicaid program.
First, contrary to the State's assertion, we are unable to conclude
from
the functional description of these units alone that their
functions
were essential to the effective administration of the Medicaid
program.
As the agency pointed out, Title XIX of the Social Security Act
provides
that a state is entitled to federal financial participation (FFP)
in
those expenditures "found necessary by the Secretary for the proper
and
efficient administration of the State plan." Section 1903(a)(7) of
the
Act. Moreover, the cost principles provide that in order for a cost
to
be allowable under a grant program it must "[b]e necessary
and
reasonable for proper and efficient administration of the
grant
program...." 45 CFR Part 74, Appendix C, Part I, Section C.1.a.
(1977).
In State of Oregon Mass Transit Assessment, Decision No.
402-
Supplementary Decision, August 31, 1983, we referred to the
term
"necessary" in the cost principles as meaning something "'essential,'
so
that the grant programs could not be run properly and
efficiently
without it." (p. 4). This does not mean that it would
be impossible to
run the grant program without the cost item, but that the
grant program
would not run well without it. We indicated that the
words "necessary
and reasonable" relate to whether a cost item is reasonably
required to
achieve a program objective. See, Wisconsin Department of
Health and
Social Services, Decision No. 696, October 16, 1985.
The State here has failed to demonstrate that the costs of these
units
were in any way essential to the administration of the Medicaid
program
in that the Medicaid program could not be run properly and
efficiently
without them and that these cost items were reasonably required
to
achieve any specific program objective. The purpose of the
Medicaid
program is to make medical assistance available to the
indigent. We
agree with the Agency that the function of the Certificate
of Need Unit
to determine the feasibility of certificates of need
applications and to
study the effects of those proposals on the health care
industry and the
patient population is not essential to that purpose.
Furthermore,
although the State contended that these functions are exactly
the kind
of checks on capital expenditures required under Section 1122(a) of
the
Social Security Act, the State failed to explain why the State
should
not receive federal reimbursement for the costs of performing
these
functions under that section as well as under the provisions of
the
Public Health Service Act, Pub. L. 78-410, requiring the same sort
of
functions. See, sections 314 and 604 of the Public Health Service
Act.
Thus, even if we were to find that the functions of this unit
were
essential to the proper and efficient administration of the
Medicaid
program, the costs of these functions were apparently
properly
reimbursable under other federal programs. In any event, the
cost
principles would forbid reimbursement under Medicaid if the state
was
trying to overcome fund deficiencies under these other programs. 45
CFR
Part 74, Appendix C, Part 1, Section C.2.b. and Part II, Section D.9.
If this were not the case, the State would then have to allocate
these
costs among the benefitting programs. 45 CFR Part 74, Appendix C,
Part
I, J.1. and 2; 45 CFR 205.150(b)(1) (1976). Here, where it is
apparent
that the costs of this unit's activities benefit both State and
several
federal objectives a cost allocation plan (CAP) is appropriate
because,
contrary to the State's assertions, the costs involved in this
appeal
were not exclusively Medicaid costs; other federal programs
were
involved, and the claims were for direct and indirect costs of a
state
Department other than the State Medicaid agency. The State,
however,
failed to present relevant portions of any CAP in effect during
the
major part of the time period involved and the provisions of a
CAP
(1979) applicable to the later part of the period in dispute failed
to
include the costs claimed here by the State. The computation of
the
allocation attempted by the State in support of its claim made
no
reference to any approved CAP. See, Section II.a above. In
accordance
with our prior decisions (see Pennsylvania Department of Public
Health,
Decision No. 293, April 30, 1982), we conclude that in the absence
of
evidence showing that these joint costs were included in an
approved
CAP, these costs are ineligible for federal participation.
Similarly, we find that the functions of the Construction and
Monitoring
Unit are not essential to the Medicaid program. While the
State alleged
that this unit performed inspections for life safety
violations, close
examination of the documentation submitted by the State
contradicts this
statement, at least, in part. The functional
description of this unit
indicates that this unit reviews the architectural
and mechanical plans
to determine whether those plans meet the requisite
codes. Appellant's
Appeal File, Ex. M, Appendix III. Thus, this unit
does not actually
perform surveys in the facility to assure that the facility
meets
health, safety, and other applicable standards for
provider
participation in Medicaid, a function which is admittedly
Medicaid
reimbursable. In addition, under the Act the State is required
to
designate the survey agency in its State plan. Section 1902(a)(9)
of
the Act and 42 CFR 431.115 (1979). The State here failed to provide
any
evidence that this unit is the State designated survey agency
pursuant
to the Medicaid Act and regulations. Thus, it is reasonable to
conclude
that this unit was not the designated survey unit and did not
actually
survey facilities. Consequently, since the function of this
unit is
only to review the plans for conformity with various building and
safety
codes, we do not find that this function is essential to the
Medicaid
program's work of providing medical assistance to the needy.
Therefore, we conclude that the costs of these units were not
necessary
and reasonable for the efficient administration of the Medicaid
program.
We further conclude that these costs were joint costs which should
have
been included in an approved CAP. Since we can reasonably conclude
that
these costs were not so included, they are ineligible for
federal
participation. 3/. Conclusion
For the reasons indicated above, we sustain the disallowance in the
amount
of $518,692.
_________________________ Cecilia
Sparks
Ford
_________________________ Norval D.
(John)
Settle
_________________________ Alexander G.
Teitz
Presiding Board Member
1. In a letter to the parties on April 17, 1987,
the Board asked the
Agency to indicate in its brief "whether the State may
furnish
documentation to support its claim to the Agency for review during
this
appeal process." The Agency proceeded to request documentation
directly
from the State without raising any question as to its
timeliness.
2. The cost principles for state and local
governments have remained
substantially unchanged over many years, although
their designation has
changed as the functions covered by them were
transferred from one
federal department or agency to another. OMB Circular
A-87 was
designated in 1974 as Federal Management Circular (FMC) 74-4.
The
principles were set out in 45 CFR Part 74 as Appendix C until 1980,
when
FMC 74-4 was incorporated by reference in 45 CFR 74.171. It
was
reissued under its original designation of OMB Circular A-87 on
January
28, 1981.
3. Inasmuch as we have determined that the costs are
not allowable
on these two bases, it is not necessary to discuss the Agency's
argument
that these costs are unallowable as a general expense of government
or
because these costs were not billed pursuant to an interagency
agreement
as was the State's usual practice.