DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: Metro Community DATE: September 15, 1989 Health
Centers, Inc. Docket No. 89-20 Decision No. 1098
DECISION
The Metro Community Health Centers, Inc. (Metro) appealed a Public
Health Service (PHS) determination to terminate, as of October 31, 1988,
Metro's grant under section 330 of the PHS Act to operate a community
health center (CHC) for the budget period from June 1, 1988 to May 31,
1989. PHS found that Metro had materially failed to comply with
applicable regulatory requirements and specific grant conditions stated
in the notice of grant award.
We sustain the termination of Metro's grant because we find that Metro
materially failed to meet grant terms and conditions by: not
establishing adequate management and fiscal control systems (including
property management); using grant funds for operations at an unapproved
site; and not employing sufficient staff to carry out the activities
contemplated by the grant award. While we find that other grounds
raised by PHS did not alone warrant termination, we find that these
other grounds demonstrated a pattern of disregard for federal concerns
which, overall, supported termination.
As we discuss below, the record shows that Metro had persistent program
management and fiscal problems which apparently stemmed from the
combination of a) ineffective administrative leadership from the
Executive Director, Chief Financial Officer, or governing board, and b)
the lack of adequate accounting and fiscal control procedures. Staffing
problems were both caused by these factors and contributed to them. As
a result, Metro suffered financial losses and thefts, program directives
were ignored, and program objectives were not achieved. We conclude
that PHS is not obligated to continue providing funds in those
circumstances.
Background
Metro Community Health Centers, Inc. (Metro) operated a community health
center (CHC) in St. Louis, Missouri. Metro and its predecessor
organization had received grant funds since October 1978 from the Public
Health Service (PHS) under section 330 of the Public Health Service Act,
42 U.S.C. 254C.
By letter dated May 26, 1988, PHS notified Metro that it had awarded
Metro $1,700,000 under federal grant No. 07-H-00321-11-0, to be
available during the 12-month period budget period beginning June 1,
1988 for the operation of a community health center in the St. Louis
area. PHS Ex. A. PHS awarded the disputed grant subject to: section
330 of the PHS Act, the applicable regulations at 42 C.F.R. 51c.301 et
seq., the applicable guidelines in the PHS Grants Administration Manual
and the PHS Grants Policy Statement, and the administrative requirements
of 45 C.F.R. Part 74 applicable to all HHS grants. PHS also set 13
specific grant conditions, 6 of which were listed as "administrative
requirements." PHS Ex. A.
By letter dated September 26, 1988, PHS notified Metro that PHS was
terminating this grant effective October 31, 1988 based on Metro's
material failure to comply with the terms of the grant and listed
several areas in which Metro was deficient. PHS Ex. B. By letter dated
October 26, 1988 Metro submitted a timely request for "informal" review
of the termination decision, pursuant to 42 C.F.R. Part 50, Subpart D,
by a PHS Grant Appeals Review Committee. PHS Ex. C. The PHS Grant
Appeals Review Committee issued an opinion on December 20, 1988. This
opinion sustained the determination to terminate the disputed grant.
PHS Ex. D. By letter dated January 18, 1989, Metro submitted to this
Board a timely notice of appeal of the PHS Grant Appeals Review
Committee's opinion. PHS Ex. E.
The opinion of the PHS Grant Appeals Review Committee sustaining the
termination was a final written decision of PHS which this Board has
authority to review under 45 C.F.R. Part 16, Appendix A, section C(a)2
because it constituted a "termination for failure to comply with the
terms of an award."
Standards applicable to termination for cause
Under 45 C.F.R. 74.115(a), "[t]he granting agency may terminate any
grant in whole, or in part, at any time before the date of expiration,
whenever it determines that the grantee has materially failed to comply
with the terms of the grant."
PHS policies on grant termination make clear that PHS considers
termination to be a drastic remedy. The PHS Grants Administration
Manual (PHS GAM) states that "action to suspend or terminate a grantee
shall be taken only after the grantee has been informed of the
deficiency and given sufficient time to correct it . . . [t]his policy,
however, does not preclude either immediate suspension or immediate
termination when such action is reasonable to protect the interests of
the Government." PHS GAM, sec. 1-500-30. The PHS GAM further states:
"The decision to terminate a grant [for cause] represents a serious
judgment that must reflect a thorough analysis of all relevent factors.
It initially must be determined that the grantee has failed to comply
with one or more of the terms and conditions of the grant.
Additionally, it must be determined that such noncompliance is of
sufficient magnitude to warrant the termination of grant support." PHS
GAM, sec. 1-500-40.A.
The PHS policy guidelines reflect the principle that termination is
warranted primarily when necessary to protect the present interests of
the federal government, not as a punishment for past wrongs. Thus,
while there is much evidence in the record that Metro had longstanding
problems which predated the term of the disputed grant, our focus is on
the budget period during which PHS decided to terminate the grant, to
determine if federal interests were at risk during that time period.
These interests include both protecting federal funds from waste or
misuse, and ensuring that the patient population receives services
contemplated in the grant.
Nevertheless, Metro's past actions and problems are relevant in
assessing the seriousness of a present threat to the interests of the
federal government and determining if the present problems can be
corrected. Metro's past actions provide an indication of the likely
course of Metro's future performance. As we discuss below, these past
actions while they do not alone warrant termination, in a context which
includes present threats to federal interests, support termination of
the Metro grant.
In sum, under the regulations and PHS policy, termination must be based
on 1) a finding that the grantee did not comply with the terms and
conditions of the grant award; and 2) a finding that the noncompliance
was or is material and of sufficient magnitude to constitute a present
threat to federal interests.
Discussion
Below we discuss the three areas in which we find a basis for
terminating Metro's grant award: Metro's failure to have adequate
management and fiscal control systems, Metro's violation of grant
conditions in using funds for operations at a disapproved site, and
Metro's failure to have sufficient staff to carry out grant objectives
as expressed in its approved budget. Then we discuss other issues
raised by the parties: Metro's general financial status, the conduct
and status of its governing board, and community support for Metro.
While we find no independent basis for termination in Metro's general
financial status and governing board issues, we find that these factors
support the termination of the grant on the grounds mentioned earlier
because the facts show a clear need to protect federal fiscal interests
and a general disregard for federal requirements. We also find that
community support, while perhaps relevant in determinations to award a
grant, is not a relevant issue in determining whether Metro materially
failed to comply with its grant award.
MANAGEMENT AND FISCAL CONTROL SYSTEMS ISSUES
The regulations incorporated into the grant award specify certain
minimum levels of performance for management and fiscal control
(accounting) systems. General grant rules, applicable to all HHS
grants, at 45 C.F.R. Part 74 specifically require adequate accounting
records. Grantees must maintain "[r]ecords which identify adequately
the source and application of funds for grant-or subgrant-supported
activities" in order to have "[e]ffective control and accountability
. .
. for all grant or subgrant cash, real and personal property . . . and
other assets." 45 C.F.R. 74.61(b) and (c).
These general grant regulations also specifically require detailed
property records to protect physical assets. "Recipients shall
adequately safeguard all such property and shall assure that it is used
solely for authorized purposes." 45 C.F.R. 74.61(c). Grant recipients
must maintain accurate property records including, for each item of
equipment: a description (listing the model number if any); an
identification number (such as the serial number); information necessary
to calculate the federal share of the property, acquisition date and
cost; location, use, and condition (and the date this information was
reported); and all pertinent information on ultimate transfer,
replacement or disposition. 45 C.F.R. 74.140. A physical inventory
must be taken at least once every two years and a control system shall
be in place to insure adequate safeguards to prevent loss, damage or
theft of equipment. Id.
In addition to these general grant rules, the Metro grant was subject to
the provisions of 42 C.F.R. 51c.303(d), under which a CHC must
"[d]evelop management and control systems which are in accordance with
sound financial management procedures . . . . "
The grant award conditions included two express conditions relating to
Metro's accounting and fiscal control deficiencies. One designated
Metro an "exceptional organization" because of Metro's "significant
fiscal and administrative problems," and required Metro to submit a
quarterly progress report on its management efforts and on the financial
status of the organization. Metro (and its predecessor organization)
had been designated an "exceptional organization" since May 1985.
An
"exceptional organization" is defined in the PHS Grants Administration
Manual (GAM), chapter 1-05-13, as an "organization which shows evidence
of poor program or business management practices." PHS Ex. D.
Additionally, the specific grant conditions included the "administrative
requirement" that equipment accountability shall be in accordance with
45 C.F.R. 74.130, and that any equipment acquired with grant funds will
be made available for transfer if PHS requests.
PHS presented unrebutted evidence that Metro did not meet the fiscal and
management control standards listed above. Specifically, PHS presented
evidence that Metro did not maintain ordinary current accounting records
to control cash and other assets. Metro did not maintain a general
ledger, a billing journal, or an accounts receivable journal during the
fiscal year. PHS Ex. MM. Metro did not prepare bank reconciliations or
make budgets or journal entries during the fiscal year, with the
exception of payroll journal entries indicating a transfer of funds
between the regular and the payroll accounts. PHS Ex. MM. Although
Metro alleged that its records were not available because they had been
sent to an outside accounting firm in Atlanta, PHS submitted a statement
from the Atlanta firm which indicated that the records sent to Atlanta
were only copies of cancelled checks, not records developed through the
use of ordinary accounting practices. PHS Ex. VV. The obvious
conclusion is that Metro did not keep such ordinary accounting records
to track its expenditures.
Nor did Metro keep accurate records to control its property. Metro's
inventory list did not contain an identification number for each piece
of equipment, nor did it contain accurate information on the location,
use and condition of the equipment. PHS Exs. SS, VV. As an example of
the difficulty this deficiency caused, during a site visit on August
23-24, 1988, Metro personnel could locate only one of seven motor
vehicles owned by Metro (that vehicle was in a repair shop). PHS Exs.
YY, D.
These failures to control cash and other assets were not mere technical
deficiencies. The record shows evidence of thefts of cash and physical
assets. For example, Metro did not contest PHS observations that in
August 1988, just prior to the termination, stolen checks had been
cashed against its accounts for $510. PHS Ex. SS. Furthermore, the
record indicates that Metro was often in default on, or late in paying,
its accounts with vendors and insurers. PHS Exs. SS, TT. Much of
Metro's insurance coverage, for example, had been terminated in the
first half of 1988 because it did not make regular payments on its
corporate malpractice insurance, general liability insurance, and
directors and officers liability insurance policies. PHS Exs. SS and
TT. As a result, Metro's ability to perform its grant-related
activities was hindered.
Furthermore, deficiencies in management and fiscal controls are
particularly significant in light of Metro's poor general financial
condition. As we discuss below, we find that Metro's deficit in prior
fiscal years and its continuing debt were not, in themselves, grounds
for termination, but these facts nevertheless are highly significant.
Without adequate accounting systems, it is impossible to determine
Metro's precise financial status. For example, the absence of required
or necessary accounting records meant that PHS site visitors, on August
23-24, 1988 could not determine Metro's financial status or review
Metro's progress in implementing new policies. PHS Ex. YY. PHS
reviewers were unable to determine whether Metro had misused federal
grant funds to liquidate its past deficits or service its debt in
violation of an express grant condition. Nor is it possible to
determine, for example, whether Metro had an effective plan to divide
costs among its various operating programs. Furthermore, the
substantial debt raises general questions about Metro's ability to
maintain its staff and vendor relations and continue to operate to
perform its grant-related activities.
The record contains ample evidence that Metro had been given notice of
these deficiencies. In letters dated June 8, 1987 and March 18, 1988,
PHS notified Metro of PHS concerns about Metro's large deficit in prior
grant periods, the consequent large outstanding debt (including a
substantial debt to the Internal Revenue Service), and general problems
with Metro's management and fiscal control systems. PHS Exs. FF and KK.
We also find that, given the long history of management and fiscal
control problems, PHS could reasonably have concluded that Metro would
be unable to correct these problems in time to prevent further harm to
federal interests. Metro had been placed on notice that PHS considered
its program and business management practices to be inadequate to
protect federal interests by its designation as an "exceptional
organization" since May 1985. (The PHS GAM states that a grantee
"organization may be identified as 'exceptional' if it is evident that
poor business management practices exist." Section 1-05-13(A)(1).)
Although Metro alleged that in the new budget period it was making some
progress in correcting its management problems, its failure to emerge
from the exceptional organization category for over three years is
evidence that Metro's efforts to correct its problems were not
effective.
The record provides other evidence that Metro's response to its fiscal
problems was lackluster. For example, in 1987, PHS reviewers noted the
absence of a Chief Fiscal Officer (a position which Metro had not filled
as of the date PHS terminated grant funds) and stated:
The 1986 PCER [review] indicated that while all the 1985
findings [relating to fiscal matters] were responded to, the
response was often half-hearted and ineffective and indicated a
lack of any systematic approach to fiscal controls. As will be
demonstrated below, we have found no change in this disturbing
observation. In brief, nobody is in charge, and nobody else is
watching them . . .
In sum, we find that federal interests were at risk because Metro lacked
adequate fiscal control systems, such as basic accounting procedures and
inventory controls required by regulation, which would protect the
integrity of federal funds. We find this particularly significant in
light of Metro's substantial debt, its past history of theft and its
apparent lackluster response to prior PHS concerns. These circumstances
indicate a strong possibility of misuse of federal funds (either through
outright theft, or through use of federal funds to liquidate debt
incurred for non-grant purposes) which could be prevented only by
effective fiscal control and accounting procedures. We conclude that
the absence of requisite fiscal and management controls provides strong
support for the determination by PHS to terminate Metro's grant.
USE OF FEDERAL GRANT FUNDS TO SUPPORT OPERATIONS AT A NON-APPROVED SITE
Metro's grant award specifically stated that:
No grant or grant related funds (program income) may be used to
support any operations at a non-approved service site. This
grant approves the operation of only the site at 4731 Delmar
Boulevard.
PHS Ex. A.
The grant award also stated that:
This grant includes $200,000 specifically earmarked to insure
the continuity of services to patients currently being served at
the Grand Avenue site. This could include but is not limited to
increased transportation to the Delmar facility or the transfer
of records to and coordination with other health facilities.
PHS had given Metro advance notice of these conditions. Prior to
setting the specific grant condition precluding use of federal funds at
a non-approved site, PHS notified Metro, in a letter dated June 8, 1987,
of PHS concern over the use of the facility at 2730 North Grand Street
because of unsafe conditions, and PHS stated that PHS had set aside
$1,200,000 for a replacement facility. PHS Ex. FF, p. 2-3. In a letter
dated March 18, 1988, PHS notified Metro that it: "can expect that the
1988-89 grant award will contain a condition that prohibits any
expenditure of Section 330 funds in the staffing or operation of the
Grand Street site. There will be no exception." PHS Ex. LL.
Metro conceded that it expended federal grant funds to support
operations at 2730 North Grand Avenue during two months of the term of
the disputed grant award including patient services provided through
June 24, 1988. Metro brief, pp. 6-8. Metro argued that these were
necessary costs of closing down the Grand Avenue site and maintaining
continuity of patient care.
We do not agree with Metro's characterizaton of the costs as
"necessary," since we find that Metro had sufficient notice that it
would be required to close the Grand Avenue site and could have avoided
these expenditures if it had done so. For instance, the March 18, 1988
letter from PHS specifically told Metro that no grant funds would be
available in the upcoming budget period for the Grand Avenue site.
(Even assuming that Metro could not have closed down the Grand Avenue
facility any sooner, Metro unnecessarily paid rent for an additional
month because it failed to give adequate notice to its landlord that it
would be vacating the facility. Metro Ex. C, Att. Q.)
Metro's only other argument was that the Executive Director was at
fault, and not Metro itself, because he had not responded promptly to
the Board's order to close the facility. Metro also asserted that PHS
shared responsibility for the actions of the former Executive Director
because PHS had pressured Metro to hire him.
We find no basis in the record to blame the Executive Director for the
failure to close the Grand Street facility promptly. The Metro
governing board's request to the Executive Director to close the
facility did not contemplate immediate action. Although Metro had
received earlier notice of the grant condition, the governing board's
letter, written June 7, 1989 (a week after the cutoff of funds)
referenced a time frame which contemplated closing the facility by "the
end of June, 1988." Metro Ex. H. The attached schedule contemplated
closing the facility by June 20, 1988, only 4 days earlier than the
facility in fact closed (but 20 days after the cutoff of funds). Id.
Thus, it is clear that the governing board shared responsibility for
keeping the facility open past the funding cutoff.
Even if the Executive Director could be said to be at fault, that would
not alter Metro's responsibility to comply with an explicit grant
condition. As Metro conceded, the governing board had ultimate
responsibility for closing the facility. The governing board is
responsible for directing CHC operations, setting policy for conduct of
the center, adopting sound financial practices, approving a project
budget, and assuring compliance with applicable law. See 42 C.F.R.
51c.304(d). The fact that PHS recommended that Metro hire the former
Executive Director does not change Metro's obligations under the grant.
The Metro governing board was responsible for selecting and supervising
the Executive Director. Id.
More important, Metro's failure to close down the site as specifically
instructed reflected its general inability to manage its program to
conform to program standards and to restrict use of federal funds to the
scope of the approved grant program. If the only problem at issue were
the Grand Avenue site, there would be no threat to federal interests
since the site has been closed and any grant funds misused could be
disallowed. In the context of Metro's deficiencies in meeting a range
of other grant terms and conditions, however, we find that PHS was
reasonable in determining that its violation of this express grant
condition was an indication that Metro would not respect grant
conditions over the course of the remaining part of the budget period
and might act contrary to federal interests.
STAFFING CONDITIONS
We find that PHS's determination is strongly supported by the undisputed
evidence that many of the budgeted staff positions at Metro were vacant
and that Metro was, as a result, not providing the services upon which
the grant award was based. Metro's failure to fill staff vacancies
directly violated grant terms because the staffing levels had been
incorporated into the grant through the approved budget. See Metro Ex.
A, Notice of Grant Award, line 11. The approved budget served as a
measure of the services to be provided under the aproved grant program;
in submitting the budget, Metro essentially assured PHS that it would
make available to the user community the services which could be
provided by the staff levels in that budget. Clearly, Metro failed to
meet that condition.
Moreover, Metro's grant was subject to the provisions of 42 C.F.R.
51c.303(p), under which a CHC must "[p]rovide sufficient staff,
qualified by training and experience, to carry out the activities of the
center." Metro did not contest that its staffing difficulties adversely
affected the activities of the center.
Metro did not dispute that staffing levels were significantly below
those outlined in the approved budget, or that staffing vacancies
affected patient services. The following facts were undisputed. The
position of Medical Director was vacant from May 29, 1987 through, at
least, August 31, 1988. Metro Ex. C, p. 25. Metro had several staff
vacancies, including several vacant positions for health care providers.
PHS Ex. XX. The staff vacancies caused problems in providing dental,
obstetric, gynecological, and dental services. Metro Ex. F. Metro was
actively attempting to improve staff morale and to recruit new employees
to fill vacant positions, but had not succeeded in filling those
positions through, at least, August 31, 1988. PHS Ex. SS.
The staff shortage contributed to Metro's fiscal and management problems
because of the absence of staff in key management positions, such as the
Chief Fiscal Officer and the Medical Director, during long periods of
time. Furthermore, staffing problems severely affected Metro's ability
to provide services contemplated in the grant award. Metro did not
dispute that its service capability had been affected: Metro's own
August 25, 1988 progress report indicated that the user population and
utilization rate had, indeed, fallen dramatically in the disputed period
and that Metro had discontinued providing obstetric/gynecological
services and had a shortage of pediatric coverage. Metro Ex. I.
Although Metro's last progress report indicated some efforts to recruit
additional staff, it is clear that Metro's staffing problems had
persisted over a long period of time and were not likely to be corrected
in the near future. Metro's efforts have to be viewed in the context of
past failures to retain qualified staff. Metro had, in the past, made
unsuccessful efforts to recruit needed staff, including a search for a
new Medical Director which had ended unsuccessfully in August 1988.
Metro asserted that the problem had been created by Metro's former
Executive Director and the uncertainty created by the administrative
transition when he was fired in mid-July 1988. Metro argued that it had
addressed these problems in firing the former Executive Director and
appointing a skilled Interim Executive Director. Metro presented
evidence that the Interim Executive Director had created a more positive
environment and had improved staff morale. Metro also noted that the
Interim Executive Director had started recruiting needed staff.
Even if this were true, this would not excuse Metro's persistent
problems in this area because, as we discussed above, the governing
board is ultimately responsible for the operation of the CHC and for the
actions of the former Executive Director. Moreover, while we applaud
Metro's belated efforts to address its staffing needs under the Interim
Executive Director, those efforts do not excuse its clear deficiencies
throughout the period. The Metro grant was awarded to fund particular
services and, if Metro could not presently provide those services, we
see no reason why PHS could not terminate the Metro grant. PHS was not
obligated to wait to see if Metro could, at some future time, provide
the services contemplated by the grant.
In sum, Metro did not meet grant terms and conditions 1) requiring
sufficient staff, qualified by training and experience, to carry out the
activities of the center, or 2) providing for an approved budget
contemplating certain staffing levels. We find that this was a material
ground for termination because it directly affected Metro's ability to
provide the services contemplated in the grant award and to address its
general administrative problems. GENERAL FINANCIAL STATUS
We do not rely on Metro's troubled financial status as an independent
ground to sustain this termination, but we find that it generally
supports that result. Although it is clear that Metro had some
financial difficulties, it is not clear how significant those
difficulties were to an organization the size of Metro. The record
contains no basis to determine the exact amount of Metro's debt at the
time the grant was terminated, since the only financial statement in the
record is the audit report for the years ending May 31, 1986 and May 31,
1987. Furthermore, the record contains little information on Metro's
financial status in the period subsequent to that audit report. Even if
the record were clear on this point, we have no evidence to assess
whether the debt load was out of the ordinary or contrary to any
requirement for a CHC. Nor is there evidence in the record that the
debt itself affected Metro's ability to provide services contemplated by
the grant or that federal grant funds were misused to repay the debt.
In addition, since the deficit and the debt accumulated in prior years,
and PHS was aware of Metro's financial status when it awarded the
disputed grant, we rely on PHS's own determination in awarding the grant
to find that the debt was not in itself a material deficiency. Although
PHS alleged that its site visitors had found that Metro was still
running a deficit in some months of the new grant period and this new
finding of a deficit might be the basis for termination, PHS did not
provide sufficient evidence to support a finding that the additional
debt was of sufficient magnitude to constitute a material ground for
grant termination. Metro's August 25, 1988 progress report indicates
that its debt burden had been substantially reduced and that its ongoing
collections were at a high level. Metro Ex. F. While PHS found some
continuing problems in its site visit, PHS recognized Metro's progress
on other issues. Compare PHS Ex. YY; Metro Ex. K (October 17, 1988
letter from PHS, which the Board requested and has designated Metro Ex.
K); and Metro Ex. H. Thus, we do not find that these difficulties, on
the record before us, alone warrant termination of the Metro grant.
Nor do we find that Metro's status as an "exceptional organization"
is
an independent ground for termination of the grant. While the record
indicates that Metro has been in that status since May 1985, the record
also shows evidence of sweeping changes Metro made in an effort to
respond to PHS' concerns. See, e.g., PHS Ex. M. PHS knew that Metro
had not yet eliminated all of the problems which had led to
categorization as an exceptional grantee when PHS awarded Metro the
grant in dispute. Yet PHS established a time schedule only for the
specific problems discussed above, not for elimination of the
"exceptional organization" designation as a whole. Moreover, Metro's
August 25, 1988 progress report shows that Metro was making some
progress on a variety of issues related to status as an "exceptional
organization." This included progress on financial control issues
including liquidating some longstanding financial obligations,
collecting outstanding receivables, reinstating insurance coverage,
securing outside accounting assistance, and training its staff. Metro
reported higher staff morale and increased focus on strategic planning.
Metro Ex. F.
These two factors, the general troubled financial status and exceptional
organization designation, provide some overall support for the grant
termination, however, because they show that the deficiencies discussed
above were not isolated problems. The existence of a substantial debt
shows that the poor fiscal and management control systems had been a
longstanding problem and must be given considerable weight. As we
discussed above, the debt burden also raises the possibility that
federal funds could be misused to repay unallowable debts. This also
makes more significant Metro's lack of effective fiscal and management
control systems. Similarly, Metro's designation as an "exceptional
grantee," shows that PHS had placed Metro on general notice that it must
correct its poor business management practices. Metro's failure to
eliminate the designation in over three years provides some indication
that Metro's future efforts would not quickly resolve the problems which
led to the designation. In yearly reviews of Metro's operations, while
PHS acknowledged some progress, PHS also noted that many of the problems
were never corrected. PHS Ex. M, p.27; PHS Ex. Z, pp. 24-40.
In sum, while we do not rely on Metro's general financial status as an
independent basis for sustaining this termination, we find that it
generally supports that result.
METRO GOVERNING BOARD ISSUES
Although we find that Metro substantially complied with the specific
requirements of the grant relating to the governing board and do not
rely on these issues to sustain the termination, we find that Metro's
approach to its governing board deficiencies--complying with minimum
requirements only after repeated PHS complaints and at the latest
possible date--supports the determination to terminate Metro's grant on
the grounds discussed above.
PHS based the termination in part on alleged violations of an express
grant condition in the Metro grant requiring that Metro bring its
governing board into compliance with requirements of applicable
regulations and its own by-laws by August 31, 1988. The condition also
specifically required that Metro incorporate in its by-laws a provision
to preclude any conflict of interest between Board members, private
business involvement, and the corporate business of Metro Community
Health Centers, Inc. PHS Ex. A.
PHS asserted that Metro had failed to enact a conflict of interest
provision by August 31, 1988, and that Metro was out of compliance with
regulatory requirements and by-law provisions concerning the size,
composition, tenure and meeting frequency of the governing board.
The record contains evidence that Metro enacted a conflict of interest
provision effective as of August 31, 1988, the exact date of the
deadline set in the grant condition. Metro Ex. C, Att S. It is not
clear when the provision was actually approved, since Metro did not
provide any minutes from the board meeting at which the provision was
approved. The record does indicate that the provision was not approved
on August 31 itself, since the Metro governing board did not,
apparently, meet on that day. Metro Ex. C, Att. H. Even if the
provision was actually approved a short time after the deadline, we
would find that Metro had substantially complied with the grant
requirement so that its actions related to the conflict of interest
provision would not alone warrant termination of the grant award.
With respect to the size, composition, and tenure of the governing
board, and the frequency of meetings, the regulations, at 42 C.F.R.
51c.304(d)(2), required CHCs to have a governing board which "shall hold
regularly scheduled meetings, at least once each month, for which
minutes shall be kept." Under 42 C.F.R. 51c.304(a-c), a CHC governing
board must contain between 9 and 25 members, a majority of whom must be
individuals who are or will be served by the center (a majority of the
remaining board members must not derive more than 10 percent of their
annual income from health care and must represent a diverse range of
skills). Selection of board members shall be prescribed in the by-laws
or other internal governing rules, which are subject to approval by the
Secretary. 42 C.F.R. 51c.304(c). Metro by-laws required 11 board
members, provided that members "shall serve for the term of three (3)
years . . ." and when that "term expires he or she must remain off
the
Board for a period of one (1) year and may then be reappointed to the
Board." PHS Ex. OO. The by-laws also provided that the term of office
for board officers "shall be one (1) year and no member may hold the
same office more than two (2) full terms. . . ." PHS Ex. OO.
Metro did not dispute that the governing board had only nine board
members during June and July, 1988. Nor did it contest that one member
of the Metro board had been on the Board in excess of the time permitted
in the by-laws when PHS terminated the Metro grant, and that three board
officers had held their offices in excess of the time permitted in the
by-laws when PHS terminated the Metro grant. Metro brief, p. 14.
But Metro argued that it had substantially complied with all
requirements by the August 31 deadline in the grant award. In August,
Metro "interviewed and accepted" two additional board members, and
planned to "install" these board members on August 31, 1988. Metro
Ex.
F. In the resulting board roster, a majority of the board members were
center users and the remaining members had diverse backgrounds, only one
involving health care, and had a varied range of expertise. Metro Ex.
C, App. L.
The record does not establish that Metro failed to meet the deadline of
August 31, 1988 to correct deficiencies in the size and composition of
its governing board. The record contains some evidence that Metro had
selected a sufficient number of new governing board members by August
31, 1988. Metro Ex. F. In appealing the termination, Metro submitted
the names of these new board members and indicated that the board, as a
whole, met applicable composition requirements. Metro Ex. C. Atts. K,
L. PHS argued that Metro had not, by the deadline, submitted the names
of new board members to PHS, nor had the new members actually
participated on the board. While it is not clear when the new members
were actually added to the governing board (as we mentioned above, the
board apparently did not meet on August 31), it appears that Metro had
made sufficient effort to add the additional board members so that
termination was not warranted for this reason even if it missed the
deadline. In addition, we find that submission of board member names by
a particular deadline was not an explicit grant condition upon which a
termination can be soundly based.
With respect to the fact that the terms of office of one board member
and three board officers exceeded the term in Metro's by-laws, we do not
find this to be sufficiently material to warrant termination of the
Metro grant. Metro explained that the terms of office had been exceeded
to provide continuity and expertise to the Board in a time of
administrative transition. Metro Ex. C, p. 25. This is supported by
the record, and we find that it is a reasonable explanation.
Furthermore, the issue was one which could be easily remedied if PHS
requested; in fact, Metro alleged that, effective October 20, 1988, the
three board members involved resigned their positions on the board.
Furthermore, we find that Metro substantially complied with the
requirement that the governing board must meet at least once each month.
While there is some question of whether the governing board met
regularly in prior grant periods (see Metro Ex. C, att. H indicating
that no records existed for numerous scheduled meetings between July
1987 and April 1988), the record contains minutes of regular board
meetings during the disputed grant period: June 1, July 14, July 29,
August 10, and August 17, 1988. PHS Ex. QQ.
We find significant, however, the pattern which is clear from Metro's
behavior in dealing with all of these deficiencies. The record shows
that Metro had obvious deficiencies which continued over a long period
of time and which Metro apparently did not seek to correct on its own.
After PHS explicitly pointed out the deficiencies, Metro still did not
correct them. Only after PHS set a grant condition requiring correction
of the deficiencies did Metro act, but Metro waited until the last
minute and, even then, failed to provide PHS with clear evidence of its
actions.
The board's failure to address promptly these important matters supports
the determination by PHS to terminate the Metro grant on other grounds,
because it shows a lackadaisical approach to addressing serious PHS
concerns. Metro's actions show a pattern of disregard for the
organizational requirements in both federal regulations and its own
by-laws, and a similar disregard for ordinary federal oversight of its
actions. In sum, the board's apparent unwillingness to move promptly to
address its deficiencies, while not in itself sufficient to terminate
the grant in the circumstances here, supports the conclusion that the
board would not move any more quickly to address Metro's other problems,
such as the accounting or staffing deficiencies described above. Thus,
the governing board issues provide support for the determination by PHS
to terminate the grant award.
COMMUNITY SUPPORT
Metro argued that the termination of its grant was inappropriate because
of the strong community support for Metro's programs, and the loss of
services to the patient population served by Metro. Metro initially
requested a hearing on this issue, but withdrew its request. PHS did
not contest that there was community support for Metro's programs, but
noted that PHS had made some effort to ensure that Metro's patient
population could be served by surrounding CHCs and other facilities.
Even assuming that the facts Metro alleged were true, it would not
excuse Metro from responsibility for the circumstances which we find
above supported termination of its grant. Community support and the
needs of the patient population are relevant factors in evaluating grant
proposals under 42 C.F.R. 51c.305, but these factors do not address the
question posed here of whether Metro complied with the terms and
condition of the grant already awarded. (These facts may be relevant
should Metro correct the problems discussed in this decision and apply
for a new grant award, but that is not the issue here.)
Conclusion
For the reasons we discuss above, we sustain the termination of this
grant based on Metro's material failure to comply with grant terms and
conditions: 1) requiring adequate management and fiscal control systems
(including property management); 2) precluding funding for operations at
non-approved sites; and 3) requiring sufficient staff to carry out the
activities contemplated by the grant award. In light of Metro's
material failures to comply with grant terms and conditions, we find
reasonable the PHS conclusion that termination was necessary to protect
federal interests.
Cecilia Sparks Ford
Norval D. (John) Settle
Alexander G. Teitz Presiding Board