The purpose of this Policy Information Notice (PIN) is to provide clarification regarding how budget and accounting requirements, as described in 45 CFR Part 74, shall be applied to health centers funded under section 330 of the Public Health Service Act (PHS), as amended. Specifically, this PIN clarifies the requirements that apply to section 330 grant funds versus other non-grant funds and the need for budgeting and accounting for each within the approved health center scope of project.
For the purposes of this document, the following terms are used:
This PIN applies to all health centers funded under the Health Center Program authorized in section 330 of the Public Health Service (PHS) Act (42 U.S.C. 254b) (“section 330”), as amended, including subrecipients. In a subrecipient relationship, each organization (grantee and subrecipient) must be in compliance with all applicable section 330 requirements.
This PIN also applies to Federally Qualified Health Center Look-Alikes (LALs), as they are subject to section 330 program requirements. However, because LALs do not receive federal grant funding under section 330 of the PHS Act, the specific sections of this PIN that apply only to section 330 grant funding are not applicable. All other sections of this PIN apply to the extent they describe the limitations being placed on the use of non-grant funds within the scope of project versus those associated with other line of business activity. The basis for this applicability is tied to LAL designation and benefits being dependent on LALs meeting the statutory, regulatory and policy requirements for health centers. For the purpose of this document, the term “health center” refers to health centers that are supported under section 330 of the PHS Act, as well as LALs.
This PIN is the primary Health Resources and Services Administration’s (HRSA) policy resource on the Health Center Program requirements related to a health center’s total budget. Therefore, this PIN supersedes PIN 1994-34, “Guidance Regarding Implementation of 1992 Amendments to Sections 329 and 330 of the Public Health Service Act,” PIN 1995-15, “Application of the Federal Cost Principles Only to Federal Grant Funds for Community and Migrant Health Centers,” and any other previous program guidance provided on this subject that is inconsistent with the policy contained in this document.
Health centers must maintain accounting and internal control systems appropriate to the size and complexity of the organization reflecting Generally Accepted Accounting Principles (GAAP) and separate functions appropriate to organizational size to safeguard assets and maintain financial stability. In addition, the statute and implementing regulations require that the health center governing board maintain appropriate authority to oversee the operations of the health center to include measuring and evaluating the organization’s progress in meeting its annual and long-term programmatic and financial goals and establishment of general policies for the health center. In order to comply with these requirements, the health center’s accounting and internal control systems must support appropriate stewardship of the federal funds and oversight over the health center’s entire approved scope of project, including all aspects of its clinical and fiscal operations.
In addition, the Health Center Program statute requires health centers to annually develop and submit to HRSA an operational budget that reflects expenses and revenues (including the federal grant) necessary to accomplish the service delivery plan. As such, the total budget must include projections for all revenue sources to support the scope of project, including fees, premiums, and third party reimbursements reasonably expected to be received to support operations, and state, local, private and other operational funding provided to the health center. The proposed amount of federal section 330 grant funding to support the scope of project is the difference between the projected cost of operations and the projected non-grant revenue sources.
Prior to 1992, consistent with the language contained in 42 CFR 51c.107(a), the same standards were applied to health center expenditures regardless of whether the funds were section 330 grant or non-grant funds. Documentation of the source and application of funds, as required in 45 CFR 74.21(b)(2), was interpreted to apply to all health center scope of project funds. However, certain exceptions to this broad applicability of federal rules (i.e., cost principles and other grants requirements spelled out in 45 CFR 74) were enacted in section 330 statutory amendments in 1992. Then, in 1996, Congress enacted section 330(e)(5)(D) of the PHS Act, which states, “Nongrant funds . . . including any such funds in excess of those originally expected, shall be used as permitted under this section, and may be used for such other purposes as are not specifically prohibited under this section if such use furthers the objectives of the project.”
As stated earlier, HRSA is issuing this PIN to further clarify the requirements for section 330 federal grant and non-grant funds and in turn the requirement for budgeting and accounting for each within the health center scope of project. In addition, this PIN provides details as to how health centers may use non-grant funds “for such other purposes as are not specifically prohibited under this section if such use furthers the objectives of the project.”
IV. Scope of Project and Budget Requirements
HRSA continues to acknowledge that both section 330 grant and non-grant funding sources support the health center scope of project. This PIN does not alter the existing health center policy which defines the health center’s scope of project as the activities supported by the total approved budget for the health center. Specifically, the scope of project defines the approved service sites, services, providers, service area(s) and target population which are supported (wholly or in part) under the total budget. Defining scope of project is important because certain benefits, e.g., utilization of section 330 funds and related program income, FQHC Medicaid reimbursement rate, FQHC Medicare reimbursement rate, Federal Tort Claims Act (“FTCA”) coverage under the Federally Supported Health Centers Assistance Act (“FSHCAA”), and 340B Drug Pricing benefits, require that activities for which such benefits are available be part of the section 330 approved scope of project. Such benefits do not apply to activities that are outside the health center approved scope of project.
The total budget represents projected operational costs for the approved health center scope of project where all proposed expenditures directly relate to and support in-scope activities. As stated earlier, the total budget is inclusive of section 330 grant funds and non-grant funds, which includes both program income and all other non-grant funding sources. Therefore, the total budget must reflect projections from all anticipated revenue sources from program income (e.g., fees, premiums, third party reimbursements, and payments) that is generated from the delivery of services, and from “other sources” such as state, local, or other federal grants or contracts (e.g., Ryan White, HUD, Head Start), private support or income generated from fundraising or contributions.
Health centers will continue to be required to prepare and submit applications for HRSA approval that contain an operating budget (i.e., total budget) for the health center scope of project for 12 months, unless specified otherwise by HRSA. However, beginning with applications for Fiscal Year 2014 funding, HRSA is requiring that along with a total budget which includes a budget breakdown of all health center scope of project funding, applicants must also submit a separate budget breakdown for the section 330 funding proposed for the application period (applicable only to health center grantees and applicants). That is, the budget must show which costs are supported by the section 330 grant and which projected costs are supported by other sources of non-grant funds. HRSA will allow individual health centers discretion regarding how they propose to allocate the total budget between section 330 grant funds and non-grant funds, provided the budgeting complies with all applicable HHS policies.
Health center grantees must track their spending to ensure that expenditures of federal funds are consistent with approved budgets and that appropriate HRSA approvals are requested and received. 45 CFR 74.25 defines the rules governing when rebudgeting among the federal object budget class categories requires prior HRSA approval and how they will be applied to the section 330 grant budget breakdown. Specifically, grantees must seek prior approval from HRSA when proposing to shift between the federal object class budget categories in accordance with the specified threshold.
V. Accounting for Health Center Scope of Project Funding
All health centers must have financial management systems in place that ensure effective control over and accountability of all funds, property, and other assets. These systems must also adequately ensure that assets purchased with project funds are used for their intended purpose. While health centers are afforded flexibility in the design of an operational budget, health centers must expend all total budget funds – section 330 grant, non-grant (program income and other) funds – in a manner that is consistent with the approved scope of project as well as consistent with sound business management practice, relevant state and federal rules, and organizational policies and procedures.
A. Section 330 Grant Funds (Not Applicable to Look-Alikes)
Grant regulations require health centers to maintain accurate, current and complete disclosure of financial results and that all expenditures adhere to the Federal cost principles. The cost principles establish standards for allowable and unallowable costs related to the use of grant funds. Therefore, expenditures of section 330 federal grant funds must follow all applicable requirements described in 45 CFR 74 and 45 CFR 92 (including Federal cost principles incorporated by reference) and, as such, must be accounted for separately. Health centers are expected to produce accounting records that support section 330 grant fund expenditures and demonstrate that all policies and procedures consistent with 45 CFR 74 or 45 CFR 92, as applicable to organization type, were followed.
B. Health Center Non-Grant Funds (Open for Public Comments)
Section 330(e)(5)(D) of the PHS Act states, “Nongrant funds . . . including any such funds in excess of those originally expected, shall be used as permitted under this section, and may be used for such other purposes as are not specifically prohibited under this section if such use furthers the objectives of the project.” In addition, in order to be considered used in support of a health center’s scope of project, all health center non-grant funds must be spent in a manner consistent with sound business practices, the organization’s policies and procedures relative to such practices and/or safeguarding of assets and any relevant rules identified or established by the funding source.
In cases where the total budget includes funds from other sources of funding, health centers are reminded to follow their applicable restrictions or other specifications for the expenditure of such funds. Specifically, the health center is expected to honor the terms of these sources of funding and to account for such funds in a manner that demonstrates compliance with applicable terms and conditions of such awards. In addition, if program income and other non-grant funds include funds derived from any other federal grants (i.e., other federal grant funds or any funds used to meet the matching requirements of other federal grants), Federal cost principles are applicable to those funds consistent with applicable federal statutes, regulations, and the terms and conditions of that Notice of Award.
HRSA’s policy is that program income and other non-grant funds that support the health center scope of project should generally be used for allowable costs even though HRSA recognizes that section 330 authorizes an alternative use of non-grant funds. However, health centers must be able to document that these non-grant funds are furthering the objectives of the project. In general, HRSA believes that health centers can demonstrate that the use of non-grant funding furthers the objectives of the project through evidence that the proposed expenditures directly support and will contribute to one or more of the following program outcomes: increased services to health center patients; services provided to an increased number of health center patients; and/or improved quality of the services being provided to health center patients.
All health centers are urged to exercise caution and strong stewardship to ensure that uses of non-grant funds are consistent with the statutory purposes of section 330 and with the total approved scope of project. In addition, the uses must align with sound fiscal management practices, as described in the individual health center’s board approved policies and procedures, including those related to conflict of interest and procurement policies. In all cases, accounting records for these non-grant expenditures must include clearly identified funding sources other than section 330 grant funds and documentation as to their reasonableness (e.g., the amount of the cost does not exceed the price (or cost) analysis of services procured under the circumstances prevailing at the time the decision was made to incur the cost).
Other costs that are unallowable for use of grant funds may be permissible for the use of non-grant funds, provided they both further the objectives of the project and are consistent with the approved scope of project. These non-grant funds, as part of the total budget, may include items which are considered unallowable under Federal cost principles, are not subject to HHS salary limitations, or, under very limited circumstances, are procured in a manner that is inconsistent with the rules defined in 45 CFR Part 74.
Specifically, HRSA has determined that the following in-scope non-grant expenditures (which generally are not permissible uses of health center grant funds) are permissible uses of non-grant funds as they further the objectives of the health center scope of project as set forth in Section 330(e)(5)(D) of the PHS Act. However, as specified above, health centers must be able to provide documentation to auditors and on-site reviewers that such costs have been researched as to the cost or price analysis, were incurred consistent with the individual health’s center policies and procedures for expending in-scope non-grant revenue, and were fully covered by specified, non-grant funding sources. These expenditures include:
Any proposed expenditure of non-grant scope of project funds other than one that conforms to the list above must be submitted for HRSA review and approval. Health centers must demonstrate that: projected costs are based on a current price (or cost) analysis; appropriate internal approvals are documented consistent with health center policies and procedures; and coverage of such costs by specified non-grant funding sources is identified. In addition, HRSA’s review will evaluate whether the proposed expenditures directly support and contribute to one or more of the following:
All expenditures must be consistent with approved in-scope activities and meet one or more of these bulleted outcomes listed above.
When audits or other information/reviews result in a finding that the health center incurred non-grant expenditures for items that are not consistent with the policy guidelines above and the health center did not request and receive prior approval to do so, HRSA may take one or more of the following actions: apply progressive action conditions, place the health center on drawdown restriction, and/or reduce the health center’s future federal grant funding level. Therefore, it is imperative that health centers prepare annual operating budgets that reflect health center in-scope activities and that they maintain accounting systems to document that all expenditures are consistent with approved scope activities and the policies contained in this PIN.
VI. Other Lines of Business outside the Scope of the Health Center Project
Health centers may operate as part of a larger corporate structure or conduct activities that are not part of the health center’s approved scope of project. Therefore, in such cases, the health center’s total budget (i.e., for the approved scope of project) for their operations must be clearly distinguished from any other line(s) of business (OLOB) within the larger organizational budget and accounting system. Specifically, when a health center carries out such OLOB, these activities are not part of the health center scope of project and are not subject to section 330 requirements or those associated with Health Center Program implementing regulations, or HHS grant requirements. Federal benefits associated with the receipt of section 330 funds cannot be used for such activities. For example, a grantee corporation may run a food market, which would not be approvable within its health center scope of project, and therefore, the health center may not use health center funds (i.e., section 330 funds or related program income) in support of store operations. In addition, the revenue generated from this OLOB must be sufficient to support direct costs of the activity plus a reasonable share of overhead to ensure that section 330 funds and other grant-related income are not used inappropriately to support costs outside the approved scope of project.
VII. Effective Date
Effective immediately, health centers are expected to comply with the clarifying policies described in the following sections of this PIN:
IV. Scope of Project and Budget Requirements;
V. V.A. Accounting for Health Center Scope of Project Funding, Section 330 Grant Funds;
VI. Other Lines of Business outside the Scope of the Health Center Project;
VII. Effective Date; and
As such, the federal budgeting requirements of this PIN will be incorporated into all health center grant applications beginning in 2014. Existing health centers must review their current budgeting and financial management policies and procedures, and take necessary actions to ensure they are in compliance with this PIN. In addition, health centers must implement accounting policies and procedures that comply with this policy.
Notwithstanding this, Section V.B. (Accounting for Health Center Scope of Project Funding, Health Center Non-grant Funds) of this PIN that details accounting for health center non-grant funds is new policy. Therefore, comments on this proposed new policy will be accepted until August 30, 2013. Comments should be sent to: OPPDBudgetPIN@hrsa.gov. After review of submitted comments, HRSA will issue a final PIN. All health centers will be expected to comply with Section V.B. upon issuance of the final PIN.
If you have any questions or require further guidance regarding the policies detailed in this PIN, please contact the Bureau of Primary Health Care, Office of Policy and Program Development at OPPDBudgetPIN@hrsa.gov. If you have any questions or require further guidance on the budgeting process, please contact your Grants Management Specialist.
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