Milwaukee Health Services, Inc., Claimed Unallowable Costs Under Health Resources and Services Administration Grants

Of the $7.7 million in costs covered by our review, Milwaukee Health Services, Inc. (MHSI) claimed $1.8 million of American Recovery and Reinvestment Act of 2009, P.L. No. 111-5 (Recovery Act), costs that were allowable under the terms of the Increased Demand for Services (IDS) and Capital Improvement Program (CIP) grants and applicable Federal requirements. We could not determine the allowability of $5.9 million in costs that consisted of salary, wage, and fringe benefit costs that MHSI charged against its section 330 grant.

HRSA provided and MHSI claimed section 330 grant costs totaling $5.9 million from February 1, 2007, through January 31, 2011; Recovery Act costs of $453,000 for an IDS grant from March 27, 2009, through March 26, 2011; and $1.3 million for a CIP grant from June 29, 2009, through June 28, 2011, totaling $7.7 million.

MHSI did not maintain a financial management system that adequately identified the source and application of section 330 grant costs and did not adequately support, with personnel activity reports, the distribution of salaries and wages. MHSI did not have policies and procedures to ensure that the use of grant funds complied with Federal requirements. As a result, Federal funds were at risk of not being properly accounted for or used in accordance with Federal requirements.

In 2010, MHSI discovered and we verified that $755,000 of income earned under the section 330 grant-"program income"-was misappropriated. (A former accounts payable employee, who is now residing outside of the United States, misappropriated the funds.) Program income in a section 330 grant may be used only for costs that are permitted under law and further the objectives of the project. The $755,000 of misappropriated program income was not a cost permitted by law and did not further the objectives of the project. Therefore, it is not a cost that is allowable under section 330 and MHSI's Notice of Grant Award.

We recommended that HRSA (1) either require MHSI to refund $5.9 million to the Federal Government or work with MHSI to determine whether any of these costs were allowable;

(2) work with MHSI to ensure that any monetary recoveries related to the misappropriation of $755,000 is applied to services and activities consistent with the scope of the health center program; and (3) impose special award conditions on MHSI so that it takes corrective actions to ensure that financial records adequately identify the source and application of Federal program funds, personnel activity reports for employees working on Federal awards are maintained, and

segregation of duties is adequate to safeguard assets. MHSI did not dispute the validity of our findings and described actions it is taking or plans to take to address our recommendations.