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Final Rule: Automatic Data Processing Equipment and Services; Conditions for FFP - 1987

AT-87-02

Published: January 15, 1987
Information About:
State/Local Child Support Agencies
Topics:
Funding, Federal Financial Participation (FFP), State Systems, Cost Allocation
Types:
Policy, Action Transmittals (AT), Regulations
Tags:
Procurement/Acquisition

ACTION TRANSMITTAL

OCSE-AT-87-02

January 15, 1987

TO:STATE AGENCIES ADMINISTERING CHILD SUPPORT ENFORCEMENT PLANS APPROVED UNDER TITLE IV-D OF THE SOCIAL SECURITY ACT AND OTHER INTERESTED INDIVIDUALS

SUBJECT: Automatic Data Processing Equipment and Services; Conditions for Federal Financial Participation

ATTACHMENT:Attached are final regulations issued by the Health Care Financing Administration, the Office of Child Support Enforcement, the Office of Family Assistance, and the Office of the Secretary, Department of Health and Human Services. These regulations change requirements for the claiming of Federal matching funds for the acquisition of ADP equipment or services in the administration of public assistances programs under the Social Security Act, including Title IV-D.

REGULATION REFERENCE:42 CFR Part 433 and 45 CFR Parts 95, 205, and 307.

EFFECTIVE DATE:January 20, 1987

RELATED MATERIAL:OCSE-AT-86-03, dated February 12, 1986

INQUIRIES TO:OCSE Regional Representatives

Deputy Director

Office of Child Support Enforcement

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

Office of Child Support Enforcement

Office of Family Assistance

Office of the Secretary

42 CFR Part 433

45 CFR Parts 95, 205, and 307

Automatic Data Processing Equipment and Services; Conditions for Federal Financial Participation

AGENCY: Health Care Financing Administration, Office of Child Support Enforcement, Office of Family Assistance, and Office of the Secretary, HHS.

ACTION: Final rule.

SUMMARY: In September 1978, the Department of Health and Human Services (HHS-then the Department of Health, Education and Welfare) published a regulation containing requirements that State and local governments must observe to claim Federal reimbursement for the costs of automatic data processing (ADP) equipment or services. The regulations are applicable to certain public assistance programs under the Social Security Act. The regulations were modified in February 1980 and in January 1986 to implement certain changes.

These regulations change requirements for the claiming of Federal matching funds for the acquisition of ADP equipment or services in the administration of public assistances programs under the Social Security Act Titles I, IV, X, XIV, (AABD), XXIX and XX.

The change modifies the regulations to conform to legislative changes, raises the HHS prior approval threshold for most State and local government acquisitions, and limits the types of documents which are subject to prior approval requirements. The purpose of the change is to:

-Simplify and make these regulations consistent, to the maximum extent possible, with those regulations that govern availability of Federal Financial Participation (FFP) at the enhanced matching rate for computerized systems that support programs under Titles IV-A, IV-D, and XIX of the Social Security Act;

-Allow States more flexibility in implementing small systems; and

-Reduce paperwork.

EFFECTIVE DATE: January 20, 1987.

FOR FURTHER INFORMATION CONTACT: Ron Lentz, (202) 245-0422.

SUPPLEMENTARY INFORMATION: HHS, then the Department of Health, Education and Welfare, published final regulations "Automatic Data Processing Equipment and Services-Conditions for Federal Financial Participation", Subpart F of 45 CFR Part 95 in the Federal Register, (43 FR 44851), on September 29, 1978. These regulations required State and local governments to obtain prior written approval by the Department for the acquisition of ADP equipment or ADP services when the acquisition costs exceeded $25,000. These regulations were modified by a rule change published on February 19, 1980 in the Federal Register, (45 CFR 10794) to raise the prior approval threshold to $100,000 for acquisitions costing that amount or more in Federal and State funds over a twelve-month period and to $200,000 in Federal and State funds for the total acquisition. The change also required States to submit a brief prior notice of acquisition of ADP equipment and services that cost $25,000 to $100,000 over a twelve-month period.

On November 19, 1984, HHS published a Notice of Proposed Rule Making (NPRM) on Automatic DAta Processing Equipment and Services-Conditions for Federal Financial Participation in the Federal Register (49 FR 45617). Current regulations are applicable to the administration of Public Assistance programs under Titles I, IV-A, B, C, and D, X, XIV, XVI, (AABD), and XIX of the Social Security Act. The public was invited to submit comments pertaining to the NPRM. The final rules published herein address the comments received from the public in response to the NPRM and finalize the provisions of the NPRM with changes as noted.

On January 27, 1986, an Interim Final Rule was published in the Federal Register (51 FR 3337) which established the conditions and the procedures under which a State can obtain consideration for Federal Financial Participation (FFP) in emergency and certain other circumstances for the acquisition of Automatic Data Processing (ADP) Equipment or services in affected programs. The public was invited to submit comments pertaining to the Interim Final Rule.

Section 95.623 of the NPRM published on November 19, 1984 was published in revised final form as part of the Interim Final Rule published on January 27, 1986 (51 FR 3337) and for that reason will not be addressed as part of this final rule.

The major changes to existing requirements presented in these rules stem from an analysis of State requests made since the 1980 regulations change. HHS found that State requests for acquisitions costing between $100,000 and $200,000 represents 9.9 percent of the total number of requests but only 1.4 percent of the dollar amount requested. Additionally, HHS found that States had submitted only 109 prior notices during the three-year period. Therefore, HHS is raising the prior approval threshold to $200,000 for acquisitions costing that amount or more in Federal (regular matching) and State funds over a twelve-month period and to $300,000 in Federal (regular matching) and State funding for the total acquisition, and is eliminating the priornotice requirement, thus reducing paperwork requirements. The changes also modify the regulation to conform to legislative changes in the administration of some Social Security Act programs and to clarify the regulatory language.

Specifics of the changes are:

1. The Adoption Assistance and Child Welfare Act of 1980 (Pub. L. 96-272, June 17, 1980) amended Title IV of the Social Security Act by adding Part E-Federal Payments for Foster Care and Adoption Assistance. We are adding Title IV-E to the applicable list of programs covered under this regulation. This is based on the provisions in section 474 of the Social Security Act. The Title IV-E program is administered by the Office of Human Development Services, HHS. We are retaining Title IV-B because of the interaction of program and information systems requirements between Titles IV-A, IV-B and IV-E, and deleting Title IV-C to conform to current HHS policy to reduce general administration requirements placed upon categorical grant programs with close-ended appropriations.

2. The Omnibus Budget Reconciliation Act of 1981 (Pub. L. 97-35) established seven block grant programs to be administered by the Secretary of Health and Human Services. Section 2352 of this Act amends Title XX of the Social Security Act to establish a social services block grant. Since the States, including Puerto Rico, Guam, the Virgin Islands and the Commonwealth of the Northern Mariana Islands must assume administration of a block grant in its entirety if they want to operate such a program, all references to the Title XX program will be deleted from this regulation. Section 2352 of this Act also deleted the social services programs in Puerto Rico, Guam, the Virgin Islands and the Commonwealth of the Northern Mariana Islands under Titles I, IV-A, X, XIV, and XVI(AABD). All reference to these social service programs have also been deleted.

3. Sections 405 and 406 of Pub. L. 96-265 modified Title IV-D and Title IV-A of the Social Security Act respectively to provide enhanced FFP for States which opt to plan, design, develop, improve and install computerized systems which meet the functional and administrative requirements stated in Pub. L. 96-265. These requirements are delineated in regulations promulgated by the Department on September 30, 1981. The regulation citations are 45 CFR Parts 205 and 307. Title XIX of the Social Security Act also authorizes enhanced FFP for Medicaid systems. The Title XIX enhanced funding regulation citation is 42 CFR Part 433, Subpart C. The proposed changes to Part 95 cross-reference the regulations for higher level matching in Federal financial participation available for certain ADP systems.

4. We are making minor amendments to õ95.605 to include certain definitions now included in regulations governing enhanced funding for Titles IV-A, IV-D and XIX. The definitions that are common to multiple programs are included in 45 CFR Part 95, Subpart F and eliminated from the companion regulations for Titles IV-A, IV-D and XIX. This will eliminate redundant and or conflicting term definitions from the regulations governing ADP systems, equipment and services.

The term definitions affected are:

-"Advance planning document" is modified to include the requirement for a statement of alternative considerations including transfer of an existing system and an explanation of why such a transfer is not feasible if another alternative is proposed; a requirements analysis; an estimate of prospective cost distributions to the various State and Federal funding sources; the proposed procedure for distributing costs; and a statement setting forth the security and interface requirements to be employed and the backup and fallback contingency procedures available. HHS agencies administering the Titles covered by this regulation are committed to the implementation of State management information systems in the most cost beneficial way. The agencies feel that this can be accomplished through the State's examination of the availability of other State systems that can be implemented through the transfer concept. Also, it has been the agencies' practice to require States to consider systems transfers. For this reason the APD definition has been expanded to include the requirement for consideration of the transfer of an existing system. Definition of these terms are added to õ95.605.

-"Automatic data processing equipment" is expanded to include the term "hardware" to be interchangeable with "automatic data processing equipment". Hardware is the terminology used by the Office of Family Assistance (OFA) and the Office of Child Support Enforcement (OCSE) regulations that implement Pub. L. 96-265 that authorizes Titles IV-A and IV-D of the Social Security Act to provide enhanced funding for States that design, develop, improve and install computerized systems which meet the functional and administrative requirements stated in Pub. L. 95-265.

-"Design or system design" was included in õ95.605 under the term "system design". The modified definition standardizes the term as defined in regulations governing enhanced funding for systems authorized under Titles IV-A, IV-D and XIX.

-"Development", "Installation", and "Operation" are term definitions not included in Parts 205 and 307 of this title for specific requirements for Titles IV-A and IV-D and 42 CFR Part 433, Subpart C for specific requirements of Title XIX. Inclusion of these definitions in this section standardizes the definition for the multiple programs and eliminates the repetition of the terms in the companion regulations.

-"Enhanced matching rate" as defined in the NPRM to include the improvement of systems. The word "improvement of systems" have been deleted from the definition in the final rule because this rule deals only with the acquisition of ADP equipment or services.

-"Enhancement" is being included in õ95.605 to standardize the terms "Modifications or Additions", "Improvements" and "Enhancements" as used in regulations governing enhanced funding for systems authorized under Titles IV-A, IV-D and XIX.

-"Software" is modified to clarify and simplify the term definition.

-"Service agreement" is modified to define the meaning ofthe word "primarily" used in item (f) of the current definition, and to add the period of time the agreement covers to its definition (new item (g)), and the requirement for a schedule of expected total charges to the titles covered by this regulation for the period of the service agreement (new item (h)). The current regulation requires the service provider to obtain HHS prior approval for ADP equipment or ADP services that are acquired primarily to support the titles covered by this subpart. ADP equipment and services are considered to be primarily acquired to support the titles covered by this subpart when the titles may reasonably be expected to either be billed for more than 50 percent of the total charges made to all users of the equipment or services, or directly charged for the total cost of the purchase or lease of ADP equipment or services. In either case, the provisions of õ95.611(a) apply. The definition of the word "primarily" and the application of õ95.611(a) are expanded upon for further clarification in the final regulation. This corrects an error which appeared in the NPRM published on November 19, 1984 in the Federal Register where we stated that õ95.611(a) applied only if the titles covered by this regulation are to be directly charged for the cost of the purchase or lease of the ADP equipment or services acquired for a central processing facility. Contrary to the NPRM, the longstanding departmental practice has been to apply thresholds in õ95.611(a) not only where the titles are directly charged but also where ADP equipment and/or services are acquired primarily to support the titles covered by the subpart. There was no intent to change that practice.

The definition of a "service agreement" is further revised to explain when a service agreement is necessary. This latter revision does not impose any new requirement, but simply reflects in the regulations longstanding HHS policy.

-"State Agency" is clarified to precisely identify the programs that are affected by these regulations.

We are rescinding other conflicting definitions contained in Parts 205 and 307 of this Title and 42 CFR Part 433, Subpart C, to the extent that statutory requirements permit.

5. Section 95.611(a) is modified to:

-Raise the prior approval threshold of $100,000 to provide that a State shall obtain prior written approval from the Department when it plans to acquire ADP equipment or services that it anticipates will have total acquisition costs of $200,000 or more in State and Federal funds over a twelve-month period, or $300,000 or more in Federal and State funds for the total acquisition, unless the acquisition is noncompetitive from a commercial source, or the state plans to acquire ADP equipment or services with proposed FFP at the enhanced matching rate. The State requests for funding of ADP acquisitions costing between $100,000 and $200,000 since the February 1980 rule change that raised the threshold to $100,000, represent 1.4 percent of the total dollar amount requested and 9.9 percent of the total number of State requests received. By raising the threshold to $200,000, HHS will continue to prior approve most State expenditures but will substantially reduce the number of requiredState submittals. The purpose of the change is to allow States to implement small systems or system changes more quickly; simplify the process of State application for Federal financial participation in the costs of ADP systems; and reduce paperwork burden.

Part 95 is amended by removing õ95.611(b)(2). This eliminates the prior approval requirement for service agreements. It does not eliminate the requirement for service agreements where a State or local agency is acquiring services from a State or local central data processing facility.

We are deleting this section because we have determined that the prior approval requirement for service agreements duplicates similar requirements of the Department's Regional Division of Cost Allocation. The Regional Office of Cost Allocation is responsible for the review and approval of cost allocation proposals submitted by States for use in administration of the various programs under the Social Security Act. Therefore, the requirement is deleted from the regulations.

A new õ95.611(b)(2) is added which codifies in this regulation the Department's policy that States submit for prior approval requests for proposals (RFP), contracts and contract amendments for which they request funding at the enhanced matching rate.

Sections 95.611(b)(3) and 95.611(b)(4) are replaced with a new õ95.611(b)(3) which modifies the Department's requirement for prior approval of RFP's and contracts when states request funding at the regular matching rate.

Sections 95.611(b)(3)(i) and (ii) require the prior approval of RFP's and contracts for which a State will request the regular matching rate, when required by the Department. For example, the Department may require prior approval of RFP's and contracts for complex procurements or when the grantee has history of performance problems. The purpose of these changes is to reduce the reporting burden on States, while at the same time retaining HHS overview and approval for such situations as noted.

Section 95.611(b)(3)(ii) requires the prior approval of contract amendments, for which a State will request the regular matching rate, when required by the Department. Under the modified regulation the Department may, for example, require prior approval of contract amendments for complex procurements or when the grantee has a history of performance problems. In the past the Department has had a policy that States submit contract amendments for prior approval. The purpose of this change is to codify this policy.

Section 95.611(b)(4) is deleted because contracts are now addressed under õ95.611(b)(2)(ii) and (3)(ii).

Section 95.611(b)(5) is redesignated õ95.611(B)(4) with no other change.

We are establishing a new õ95.611(c) that requires States to provide HHS copies of:

-RFP's not required for prior approval, when they are released to the public; and

-Contracts and contract amendments not required for prior approval when a State formally enters a contract.

This will permit HHS to assure that RFP's, contracts and contract amendments are consistent with the approved advance planning document. The Department is responsible for making the determinations required under õ95.611(b)(3) and (4).

Section 95.611(c) is redesignated õ95.611(d) with no other change.

6. Section 95.612 presently requires a State to notify HHS when it acquires ADP equipment or services that will cost $25,000 to $100,000 over a twelve-month period in Federal (regular funding) and State funds. This requirement is eliminated by these changes.

In order to maintain proper oversight of State acquisitions costing below the new threshold of $200,000, HHS will conduct periodic on-site surveys as required in the new õ95.621(d).

7. Section 95.613 is modified by adding the phrase "regardless of any conditions for prior approval" to the first sentence of the section. The revised sentence now reads: "Procurements of ADP equipment or services are subject to the procurement standards prescribed by Subpart P of 45 CFR Part 74 regardless of any conditions for prior approval." This added phrase emphasizes that Federal procurement standards, including free and open competition, apply to all acquisitions notwithstanding the fact that HHS will only require prior approval of acquisitions that cost in excess of $200,000.

8. We are making a minor modification to the title of õ95.615 to clarify the language of the requirement pertaining to access to state agency ADP records and systems and all records pertaining to the systems from planning through operational stages including cost records of the agency, contractors and subcontractors.

9. We are making three changes to õ95.617, Software and ownership rights. The changes, intended as language clarification only, are:

-The first sentence under õ95.617(a) is amended to include the phrase "must include a clause in all procurement instruments that provides that the State or local government". The sentence will now read: "The State or local government must include a clause in all procurement instruments that provides that the State or local government will have all ownership rights in software of modifications thereof and associated documentation designed, developed or installed with Federal financial participation under this subpart."

-The title of õ95.617(b) is being changed from "Exemption" to "Federal license" because that term more aptly describes the subject of the regulatory provision.

-The regulation provision reference in õ95.617(c) is being changed from "of this subpart" to "in paragraphs (a) and (b) of this section" to point directly to the referenced provisions. A final sentence was added to õ95.617(c) to make it clear that FFP is not available for propriety application software developed specifically for the public assistance programs covered under this subpart. The HHS intention is to clarify existing Department policy under Part 95 that FFP is not available for design, development or installation of management informationsystems for a State in which the vendor would retain propriety interest in that system.

10. We are changing the last phrase in õ95.619 to simplify the language by substituting "a shorter period is justified" for "the elapsed shorter period of time is sufficient to justify the Federal funds involved". The requirement will read: "ADP systems designed, developed, or installed with Federal financial participation shall be used for a period of time specified in the advance planning document, unless the Department determines that a shorter period is justified."

11. We are adding a provision of õ95.621(d) that states that HHS will conduct periodic on-site reviews to assure that State acquisitions costing less than $200,000 were made in accordance with 45 CFR Part 74 and to determine the efficiency, economy and effectiveness of the acquired equipment or service.

We are also adding a provision at õ95.621(e) that requires States to maintain a copy of Service Agreements on file at the State agency and that Service Agreements be available for Federal audit.

12. A new õ95.625, Increased FFP for certain ADP systems, is being added to cross reference the general regulatory provisions that States must meet to qualify for enhanced funding for ADP systems that support State plans for Titles IV-A, IV-D and XIX of the Social Security Act. The section states availability of enhanced matching for certain systems and gives the regulatory citations of specific requirements for such systems.

13. The center heading for õ95.631 and 95.633 is being changed from "Cost Allocation Plan" to "Federal Financial Participation in Costs of ADP Acquisitions" to more accurately reflect the subject of the sections.

14. Section 95.631 is changed as follows: The title of õ95.631 is changed from "Relationship to the approved cost allocation plan:" to "Cost identification for purpose of FFP claims." As with the section heading, this change is being made to more accurately title the subject of the section. The provisions of the section have been restated to describe in a straightforward manner, the methods States must use in identifying, accounting for, and claiming FFP for costs incurred in system development and operation and in acquiring services from a State operated central data processing facility.

15. We are revising õ95.641 (now entitled "Exemption from Subpart G of this part") to explain more clearly the relation of Subpart G of Part 95 to ADP equipment and this Subpart F.

Subpart G concerns "Equipment Acquired Under Public Assistance Programs." Among other things, Subpart G permits a State to charge the cost of equipment having a unit acquisition cost of more than $25,000 only by means of depreciation or use allowances, not by claiming the full cost in the year of acquisition. Section 95.641 of this Subpart F, as we are revising the section, explains that, although that restriction applies to ADP equipment as well as other equipment, the Department will, in the case of ADP equipment, consider requests for waivers of the restriction. the revised text also explainsthat, if the acquisition of the equipment is part of an advance planning document that is subject to the prior approval requirements of this Subpart F, the state may submit the request for waiver as part of the advance planning document.

16. We are deleting õ95.643. The purpose of that section is to waive for HHS public assistance programs any prior approval requirements for ADP costs in the OMB principles for determining allowable costs of governments (OMB Circular A-87). However, we find the section redundant and unnecessary. The charging of ADP equipment under these programs is fully treated in Subpart G of Part 95. ADP services require prior approval only as specifically provided in this Subpart F.

Public Comments

We published the Notice of Proposed Rulemaking in the Federal Register on November 19, 1984 (49 FR 45617). We asked for public comments within a period of 60 days. The comment period closed on January 18, 1985. For ease of comprehension and for perspective, we have grouped comments according to the issues raised. Although some of the comments are condensed, summarized or paraphrased, we have responded to each of the issues raised.

Issue: Threshold Amounts

Comment: One commenter recommended that the floor at which HHS's approval must be sought be increased to $500,000 for initial acquisition (e.g., within the initial 12-month period) and to $1,000,000 for total project costs.

Response: For the smaller agencies covered by the regulations, their share of FFP might nearly always fall under the thresholds suggested by the commenter. Because of the adverse impact, i.e., loss of funding control, on these smaller agencies covered by the regulation, it was decided to leave them as proposed in the regulation - at the $200,000 and $300,000 amounts.

Comment: The same commenter recommended that the $25,000 threshold for "non-competitive" acquisitions be raised to $300,000 or eliminated because of the need for procurements of compatible or like equipment. This commenter suggested that a system of prior notice, followed by an HHS audit of the technical compatibility issues and the cost-effectiveness of"limited market" acquisitions, would be more sensible.

Response: Even where compatibility with existing equipment is a requirement, we believe there is a competitive market to supply compatible or like equipment. Therefore, it is our view that the Federal Government's policy of fostering maximum free and open competition dictates that only in the rarest circumstances should the State contemplate a "sole-source" procurement. Since the threshold applies only to "sole-source" procurements, we do not believe the States are unduly restricted by this requirement.

Issue: Service Agreements

Comment: One commenter suggested that service agreements should not require prior Federal approval. Another questioned what was meant by extensions and adjustments to service agreements, citing that a prior approval requirement for every adjustment will create substantial paperwork and delay operations under contract.

Response: The Department agrees that service agreements should not require prior approval under 45 CFR Part 95 Subpart F. However, the Department recognizes that service agreements can have significant impacts on developmental projects funded by the Department. The Department's response to this issue is to eliminate the prior approval requirement for service agreements, but to require that service agreements be executed and on file in the State welfare agencies for review at anytime by HHS representatives.

Issue: Waiver of Prior Approval

Comment: One commenter observed that the proposed regulation would have started a six-month time period running on the date of acquisition of the equipment or services during which the State could seek waiver of the prior approval requirement. However, the event which constitutes "acquisition" was not defined. Since many events might be interpreted as "acquisitions", the commenter suggested that the regulation specify more precisely what would trigger the six-month period.

Response: The intent of the earlier proposed waiver procedure was to allow for certain emergency circumstances which precluded a State from obtaining prior approval. However, this provision on prior approval was replaced by the Interim Final Rule published in the Federal Register on January 27, 1986 (51 FR 3337). The Interim Final Rule establishes the conditions and the procedures under which a State can obtain consideration for Federal Financial Participation (FFP) in emergency and certain other circumstances for the acquisition of Automatic Data Processing (ADP) equipment or services in affected programs. Since this emergency procedure replaces the earlier proposed procedure for waiver of prior approval, this comment is no longer applicable to the regulation.

Issue: Definitions

Comment: One commenter cited the need to define "Modification or Additions" to existing systems to standardize the definition between 42 CFR 433.12, 45 CFR 307.1, and 45 CFR 96.605. This commenter suggested that HHS adopt one term and include it in the definitions section of the proposed regulations in order to achieve uniformity.

Response: As the commenter point out, 42 CFR 433.112 uses the word "improvement" and 45 CFR 307.1 uses the word "enhancement" to mean "modifications or additions" to an existing system. To standardize these terms, the term "enhancement" has been adopted and included in õ95.605 and the redundant and/or conflicting definitions are eliminated from the companionregulations for titles IV-D and XIX.

Issue: Consistency of HHS regulations with USDA regulations

Comment: One commenter stated that unless changes are made by the United States Department of Agriculture (USDA) in parallel, the improvements in the proposed HHS regulations will be nullified since most acquisitions must meet the same justification criteria for both the USDA and HHS.

Response: HHS and USDA are cooperating in a major effort to standardize their requirements. The USDA has been consulted in the preparation of this Final Rule and its itself seeking to establish similar requirements.

Issue: Procurements

Comment: One commenter suggested that we eliminate the requirement for approval of RFP's and contracts since the procurements were approved in the APD. Another commenter suggested that where contracts have already been approved, and where such contracts allow for negotiated ADP services (system modification and maintenance) that the requirement be eliminated for prior approval for each additional ADP service.

Response: HHS agrees that not all RFPs, contracts and contract amendments should require prior approval. Accordingly, these regulations have been modified to require prior approval of all RFPs, contracts and contract amendments for which a State will claim the enhanced matching rate, and only "when required by the Department" for RFPs, contracts and contract amendments for which a State will claim the regular matching rate.

Issue: Clarification of Content Requirements for APDs

Comment: One Commenter stated that the proposed definition of the advance planning document, while it enlarges the content requirements, does not incorporate many of the specific APD requirements now set out in the Medical Assistance Manual, 45 CFR 307.15 and 45 CFR 205.38. That fact makes it unclear whether HHS intends to eliminate these program-specific content requirements. If not, the definition of APD in the proposed regulation should be clarified by including the statement that it is not exclusive and informing the reader that the program-specific content requirement have been retained.

Response: The definition of the advance planning document has been expanded to include the major items which are required by all the programs covered by this regulation. However, there are still program-specific requirements at this time. There is presently an effort underway to standardize the requirements for all the programs and it is expected that when this effort is completed, future content requirements for APDs will be standardized among the programs.

Issue: Prior Approval Documents

Comment: One commenter suggested that only APDs be submitted for prior approval of projects when total systems costs are above a threshold. For audit and review purposes only, a notice of intent to purchase or lease ADP hardware or software and appropriate justification would be submitted for "limited market" acquisitions at any time.

Another commenter stated that the proposed regulation does not specify clearly which documents would require HHS prior approval in order for the State to qualify for enhanced funding and asked if HHS will notify the State if advance approval of the feasibility study, system study, system specifications and acceptance document are required in connection with projects for which the state seeks enhanced funding. This commenter stated that submission and approval of documents in addition to the APD, RFP and contract will create substantial delays in the contracting process.

Response: The Department shares the concern that procedures not delay work on a project while prior approval of documents is sought. At the same time, the Department must adequately control the expenditure of its funds through prior approval requirements to ensure that they are spent effectively and efficiently to support its programs. To meet both these needs, the Department is revising the regulations to limit the prior approval requirements to: (1) All APDs, (2) RFPs, contracts and contract amendments for which the enhanced matching rate will be claimed: and (3) RFPs, contracts and contract amendments for which the regular matching rate will be claimed when required by the Department. The intent is to maintain the authority to follow closely, through prior approval, certain RFPs, contracts, and contract amendments.

Issue: Cost Allocation

Comment: One commenter suggested revising õ95.631(a) to more definitively outline the roles and requirements of the APD and the cost allocation plan.

Response: Section 95.631 has been revised to clarify the required relationship between the APD and the cost allocation plan.

Regulatory Impact Analysis

The Secretary has determined, in accordance with Executive Order 12291, that this rule does not constitute a major rule because it will not have an annual impact on the economy of $100 million or more, result in a major increase in costs or prices for consumers, any industries, any governmental agencies or any geographic regions, or otherwise meet the thresholds of the Executive Order.

Regulatory Flexibility Analysis

Consistent with the Regulatory Flexibility Act (Pub. L. 96-354), which requires the Federal government to anticipate andreduce the impact of rules and paperwork requirements on small businesses and other small entities, the Secretary certifies that this rule has no significant effect on a substantial number of small entities. Therefore, a regulatory flexibility analysis is not included.

Paperwork Reduction Act

In accordance with the Paperwork Reduction Act of 1980, the Department has previously obtained OMB clearance of the process described in this document under which the states may apply for and obtain Federal financial participation in their ADP acquisitions. The OMB approval number is 0990-0058.

List of Subjects

42 CFR Part 433

Administrative practice and procedure, Child support, Claims, Medicaid, Reporting and recordkeeping requirements.

45 CFR Part 95

Claims, Computer technology, Grant programs - health, Grant programs, social programs, Social Security.

45 CFR Part 205

Grant programs - social programs, Public assistance programs, Reporting and recordkeeping requirements.

45 CFR Part 307

Child support, Computer technology, Grant programs--social programs, Reporting and recordkeeping requirements.

(Catalog of Federal Domestic Assistance Program Numbers 13.645, Child Welfare Services - State Grants; 13.658, Foster Care, Maintenance; 13.659, Adoption Assistance; 13.679, Child Support Enforcement Program; 13.714, Medical Assistance Program; 13.808, Assistance Payments - Maintenance Assistance; 13.810, Assistance Payments - State and local Training)

Dated: August 7, 1986.

Otis R. Bowen,

Secretary of Health and Human Services.

PART 95 - [AMENDED]

45 CFR Part 95, Subpart F is amended as set forth below:

1. The Table of Contents to 45 CFR Part 95 is amended by revising the entries for Subpart F to read as follows:

Subpart F - Automatic Data Processing Equipment and Services -Conditions for Federal Financial Participation (FFP)

General

Sec.

95.601 Scope and applicability.

95.605 Definitions.

Specific Conditions for FFP

95.611 Prior approval conditions.

95.613 Procurement standards.

95.615 Access to systems and records.

95.617 Software and ownership rights.

95.619 Use of ADP systems.

95.621 ADP reviews.

95.623 Waiver of prior approval requirements.

95.624 Consideration for FFP in emergency situations

95.625 Increased FFP for certain ADP systems.

Federal Financial Participation in Costs of ADP Acquisitions

95.631 Cost identification for purpose of FFP claims.

95.633 Nondiscrimination requirements.

Exemptions

95.641 Applicability of rules for charging equipment in Subpart G of this part.

Authority: Section 1102 of the Social Security Act, 42 U.S.C. 1302; 5.U.S.C. 301

2. Section 95.601 is revised to read as follows:

General

õ95.601 Scope and applicability.

This subpart prescribes the conditions under which the Department of Health and Human Services will approve Federal Financial participation (FFP), at the applicable rates, for the costs of automatic data processing incurred under an approved State plan for Titles I, IV-A, IV-B, IV-D, IV-E, X, XIV, XVI (AABD), of XIX of the Social Security Act.

(Approved by the Office of Management and Budget under Control Numbers 0990-0058 and 0990-0160)

3. Section 95.605 is revised to read as follows:

õ95.605 Definitions.

As used in this part, the term:

"Acceptance documents" means written evidence of satisfactory completion of an approved phase of work or contract, and acceptance thereof by the State agency.

"Acquisition" means acquiring ADP equipment or services from commercial sources or form State or local governmental resources.

"Advance planning document" or "APD" means a written plan of action to acquire the proposed ADP services or equipment. The APD must contain a statement of needs and objectives; a statement of alternative considerations including transfer of an existing system and an explanation of why such a transfer is not feasible if another alternative is proposed; a requirements analysis; a preliminary cost/benefits analysis; a personnel resource statement indicating availability of qualified and adequate staff, including a project director, to accomplish the project objective; a detailed description of the nature and scope of the activities to be undertaken and the methods to be used to accomplish the project; a proposed activity schedule for the project; a proposed budget; a statement indicating the period of time the State expects to use the ADP service or equipment; an estimate of prospective cost distribution to the various State and Federal funding sources; the proposed procedure for distributing costs and a statement setting forth the security and interface requirements to be employed and the backup and fallback contingency procedures available. "Alternative Considerations" means methods of satisfying the stated needs and objectives (e.g., upgrade or transfer of an existing system), that the state considered in addition to the selected method.

"Approving component" means an organization within the Department that is authorized to approve requests for the acquisition of ADP equipment or ADP services, Family Support Administration (FSA) for cash assistance for Titles I, IV-A, X, XIV, and XVI(AABD); Office of Human Development Services (OHDS) for social services for Titles IV-B (child welfare services) and IV-E (foster care and adoption assistance); Family Support Administration (FSA) for Title IV-D; and Health Care Financing Administration (HCFA) for Title XIX of the Social Security Act.

"Automatic data processing" or "ADP" means data processing performed by a system of electronic or electronic machines so interconnected and interacting as to minimize the need for human assistance or intervention.

"Automatic data processing equipment" or "ADP equipment" or "Hardware" means automatic equipment that accepts and stores data, performs calculations and other processing steps, and produces information. This includes:

(a) Electronic digital computers;

(b) Peripheral or auxiliary equipment used in support of electronic computers;

(c) Data transmission or communications equipment, and

(d) Data input equipment.

"Automatic data processing services" or "ADP services" means:

(a) Services to operate ADP equipment, either by private sources or by employees of the State agency, or by State or localorganizations other than the State agency; and/or

(b) Services provided by private sources or by employees of the State agency or by State and local organizations other than the State agency to perform such tasks as feasibility studies, system studies, system design efforts, development of system specifications, system analysis, programming and system implementation.

"Data processing" means the preparation of source media containing data or basic elements of information and the use of such source media according to precise rules or procedures to accomplish such operations as classifying, sorting, calculating, summarizing, recording and transmitting.

"Department" means the Department of Health and Human Service.

"Design" or "system design" means a combination of narrative and diagrams describing the structure of a new or more efficient automatic data processing system. This includes the use of hardware to the extent necessary for the design phase.

"Development" means the definition of system requirements, detailing of system and program specifications, programming and testing. This includes the use of hardware to the extent necessary for the development phase.

"Enhanced matching rate" means the higher than regular rate of FFP authorized by Title IV-A, IV-D, and XIX of the Social Security Act for acquisition of services and equipment that conform to specific requirements designed to improve administration of the Aid to Families with Dependent Children, Child Support Enforcement and Medicaid programs.

"Enhancement" means modifications which change the functions of software and hardware beyond their original purposes, not just to correct errors or deficiencies which may have been present in the software of hardware, or to improve the operational performance of the software or hardware.

"Feasibility study" means a preliminary study to determine whether it is sufficiently probable that effective and efficient use ADP equipment or systems can be made to warrant a substantial investment of staff, time, and money being requested and whether the plan is capable of being accomplished successfully.

"FFP" means Federal financial participation.

"Emergency situation" is defined as a situation where:

(a) A State can demonstrate to the Department an immediate need to acquire ADP equipment or services in order to continue the operation of one or more of the Social Security act programs covered by Subpart F, and

(b) The state can clearly document that the need could not have been anticipated or planned for and the state was prevented from following the prior approval requirements of õ95.611.

"Installation" means the integrated testing of programs and subsystems, system conversion, and turnover to operation status. This includes the use of hardware to the extent necessary for the installation phase.

"Operation" means the automated processing of data used in the administration of State plans for Title I, IV-A, IV-B, IV-D, IV-E, X, XIV, XVI(AABD), of XIX of the Social Security Act. Operation includes the use of supplies, software, hardware, and personnel directly associated with the functioning of the mechanized system. See 45 CFR 205.38 and 307.10 for specific requirements for Title IV-A and IV-D, and 42 CFR 433.112 and 42 CFR 433.113 for specific requirements for Title XIX.

"Regular matching rate" means the normal rate of FFP authorized by Titles I, IV-A, IV-B, IV-D, IV-E, X, XIV, XVI(AABD), of XIX of the Social Security Act of State and local agency administration of programs authorized by those titles.

"Requirements Analysis" means determining and documenting the information needs and the functional and technical requirements the proposed computerized system must meet.

"Service agreement" means the document signed by the State or local agency and the State or local Central Data Processing facility whenever the latter provides data processing services to the former and:

(a) Identifies those ADP services the Central Data Processing facility will provide;

(b) Includes, preferably as an amendable attachment, a schedule of charges for each identified ADP service, and certification that these charges apply equally to all users;

(c) Includes a description of the method(s) of accounting for the services rendered under the agreement and computing services charges.

(d) Includes assurances that services provided will be timely and satisfactory;

(e) Includes assurances that information in the computer system as well as access, use and disposal of ADP data will be safeguarded in accordance with provisions of 45 CFR 205.50 and 303.21;

(f) Requires the provider to obtain prior approval pursuant to 45 CFR 95.611(a) from the Department for ADP equipment and ADP services that are acquired from commercial sources primarily to support the titles covered by this subpart and requires the provider to comply with 45 CFR Part 74, Subpart P for procurements related to the service agreement. ADP equipment and services are considered to be primarily acquired to support the titles covered by this subpart when these titles may reasonably be expected to either: be billed for more than 50 percent of the total charges made to all users of the ADP equipment and services during the time period covered by the service agreement, or directly charged for the total cost of the purchase or lease of ADP equipment of services;

(g) Includes the beginning and ending dates of the period of time covered by the service agreement; and

(h) Includes a schedule of expected total charges to the title covered by this subpart for the period of the service agreement.

"Software" means a set of computer programs, procedures, and associated documentation used to operate the hardware.

"State agency" means the State agency administering or supervising the administration of the State plan under Titles I, IV, X, XIV, XVI(AABD), of XIX of the Social Security Act.

"System specifications" means information about the new ADPsystem - such as workload descriptions, input data, information to be maintained and processed, data processing techniques, and output data - which is required to determine the ADP equipment and software necessary to implement the system design.

"System study" means the examination of existing information flow and operational procedures within an organization. The study essentially consists of three basic phases: Data gathering investigation of the present system and new information requirements; analysis of the data gathered in the investigation; and synthesis, or refitting of the parts and relationships uncovered through the analysis into an efficient system.

4. Section 95.611 is revised to read as follows:

Specific Conditions for FFP

õ95.611 Prior approval conditions.

(a) General Acquisition requirement. A State shall obtain prior written approval from the Department, as specified in paragraph (b) of this section, when it plans to acquire ADP equipment or services with proposed FFP at the regular matching rate that it anticipates will have total acquisition costs of $200,000 or more in Federal and State funds over any twelve-month period, or $300,000 or more in Federal and State funds for the total acquisition. A State shall obtain prior written approval from the Department as specified in paragraph (b) of this section, when it plans to acquire ADP equipment or services with proposed FFP at the enhanced matching rate authorized by 45 CFR 205.35, 45 CFR Part 307 or 42 CFR Part 433, Subpart C regardless of the acquisition cost. A State shall also obtain prior written approval from the Department, as specified in paragraph (b), when it plans to acquire noncompetitively from a nongovernmental source ADP equipment or services that cost more than $25,000 in Federal and State funds. The State shall submit requests for prior systems approval signed by the appropriate State official, to the Assistant Secretary for Management and Budget (ASMB), Department of Health and Human Services. Requests from States shall indicate clearly the Social Security Act titles under which funding is requested, the estimated cost for the total acquisition, and the estimated amount or percent that is requested for each title. The State shall send to the Department the original and three copies of the request for each component that must approve the request. The Department will acknowledge receipt of the State request.

(b) Specific prior approval requirements. The State agency shall obtain written approval of the Department:

(1) For the advance planning document or any change of the advance planning document prior to entering into contractual agreements or making any other commitment for acquisition of ADP equipment or ADP services;

(2) If the State proposes to claim FFP at the enhanced matching rate, for:

(i) The request for proposal (RFP) prior to its issuance when service or equipment proposals are being solicited fromnongovernmental sources;

(ii) The contract, prior to signature of the contracting officer; and

(iii) Contract amendments, prior to signature of the contracting officer;

(3) If the State proposes to claim FFP at the regular matching rate, when:

(i) Required by the Department for the RFP, prior to its issuance, when service or equipment proposals are being solicited from non-governmental sources. For example, the Department may require prior approval of the RFP if the procurement is complex or if the grantee has a history of performance problems;

(ii) Required by the Department for the contract, prior to signature of the contracting officer. For example, the Department may require prior approval of the contract if the procurement is complex or if the grantee has a history of performance problems; and,

(iii) Required by the Department for the contract amendment, prior to signature of the contracting officer. For example, the Department may require prior approval of the contract amendment if the procurement is complex or if the grantee has a history of performance problems.

(4) When required by the Department for:

(i) The feasibility study;

(ii) The system study;

(iii) The system design;

(iv) The system specifications; and

(v) The acceptance document.

The Department will notify the State agency if such prior approval is required under õ95.611(b) (3), or (4).

(c) Miscellaneous requirements. States are required to provide HHS copies of:

(1) RFP's not requested for prior approval, when they are released to the public; and

(2) Contracts and contract amendments not requested for prior approval, when a State formally enters into a contract or contract amendment.

(d) Prompt action or requests for prior approving. The ASMB will promptly send to the approving components the items specified in paragraph (b) of this section. If the Department has not communicated approval or disapproval within 30 days the ASMB or an approving component will notify the State regarding the status of the request.

õ95.612 [Removed]

5. Section 95.612 is removed.

6. Section 95.613 is revised to read as follows:

õ95.613 Procurement standards.

(a) Procurements of ADP equipment and services are subject to the procurement standards prescribed by Subpart P of 45 CFR Part 74 regardless of any conditions for prior approval. Thosestandards include a requirement for maximum practical open and free competition regardless of whether the procurement is formally advertised or negotiated.

(b) Those standards, as well as the requirement for prior approval, apply to ADP services and equipment acquired by a State or local agency, and the ADP services and equipment acquired by a State or local agency, and the ADP services and equipment acquired by a State or local Central Data Processing facility primarily to support the Social Security Act programs covered by this subpart. Service agreements are exempt from these procurement standards.

7. Section 95.615 is amended by removing the word "records" from the section heading and inserting in its place the words "systems and records" to read as follows:

õ95.615 Access to systems and records.

8. Section 95.617 is revised to read as follows:

õ95.617 Software and ownership rights.

(a) General. The State or local government must include a clause in all procurement instruments that provides that the State or local government will have all ownership rights in software or modifications thereof and associated documentation designed, developed or installed with Federal financial participation under this subpart.

(b) Federal license. The Department reserves a royalty-free, nonexclusive, and irrevocable license to reproduce, publish, or otherwise use and to authorize others to use for Federal Government purposes, such software, modifications, and documentation.

(c) Proprietary software. Proprietary operating/vendor software packages (e.g., ADABAS or TOTAL) which are provided at established catalog or market prices and sold or leased to the general public shall not be subject to the ownership provisions in paragraphs (a) and (b) of this section. FFP is not available for proprietary applications software developed specifically for the public assistance programs covered under this subpart.

9. Section 95.619 is revised to read as follows:

õ95.619 Use of ADP systems.

ADP systems designed, developed, or installed with FFP shall be used for a period of time specified in the advance planning document, unless the Department determines that a shorter period is justified.

10. A new paragraph (d) is added to õ95.621 to read as follows:

õ95.621 ADP reviews.

* * * *

(d) Acquisitions not subject to prior approval. Reviewswill be conducted on an audit basis to assure that system and equipment acquisitions costing less than $200,000 were made in accordance with 45 CFR Part 74 and the conditions of this subpart and to determine the efficiency, economy and effectiveness of the equipment or system.

11. A new paragraph (e) is added to õ95.621 to read as follows:

(e) State Agency Maintenance of Service Agreements. The State agency will maintain a copy of the Service Agreement on file at the State agency for Federal review.

12. A new õ95.625 is added to read as follows:

õ95.625 Increased FFP for certain ADP systems.

(a) General. FFP is available at enhanced matching rates for the development of individual or integrated systems and the associated computer equipment that support the administration of State plans for Titles IV-A, IV-D and/or XIX provided the systems meet the specifically applicable provisions referenced in paragraph (b) of the section.

(b) Specific reference to other regulations. The applicable regulations for the Title IV-A program are contained in 45 CFR 205.35. The applicable regulations for the Title IV-D program are contained in 45 CFR Part 307. The applicable regulations for the Title XIX program are contained in 45 CFR Part 433, Subpart C.

13. The center heading before õõ95.631 and 95.633 is revised to read as follows:

Federal Financial Participation in Costs of ADP Acquisitions

14. Section 95.631 is revised to read as follows:

õ95.631 Cost identification for purposes of FFP claims.

The conditions of this subpart apply notwithstanding the existence of an approved cost allocation plan. State agencies shall assign and claim the costs incurred under an approved APD in accordance with the following criteria:

(a) Developmental costs. (1) Using its normal departmental accounting system, the State agency shall specifically identify what items of costs constitute development costs, assign these costs to specific project cost centers, and distribute these costs to funding sources based on the specific identification, assignment and distribution outlined in the approved APD; (2) the methods for distributing costs set forth in the APD should provide for assigning identifiable costs, to the extent practicable, directly to program/functions. The State agency shall amend the cost allocation plan required by Subpart E of this part to include the approved APD methodology for the identification, assignment and distribution of the development costs.

(b) Operational costs. Costs incurred for the operation of an ADP system shall be identified and assigned by the Stateagency to funding sources in accordance with the approved cost allocation plan required by Subpart E of this part.

(c) Service agreement costs. States that operate a central data processing facility shall use their approved central service cost allocation plan required by OMB circular A-87 to identify and assign costs incurred under service agreements with the State agency. The State agency will then distribute these costs to funding sources in accordance with paragraphs (a) and (b) of this section.

15. Section 95.641 is revised to read as follows:

õ95.641 Applicability of rules for charging equipment in Subpart G of this part.

ADP equipment, as well as other equipment acquired under public assistance programs, is subject to Subpart G of this part. Among other things, Subpart G provides that a State may charge only depreciation or use allowances for equipment with unit acquisition of the equipment os part of an APD that is subject to the prior approval requirements of Subpart F, the State may submit the request for a waiver as part of the APD.

õ95.643 [removed]

16. Section 95.643 is removed.

PART 205 - [AMENDED]

45 CFR Part 205, is amended as set forth below:

1. The authority citation for 45 CFR Part 205 continues to read as follows:

Authority: Sec. 1102, 49 Stat. 647; 42 U.S.C. 1302, unless otherwise noted.

2. Section 205.35 is revised to read as follows:

õ205.35 Mechanized claims processing and information retrieval systems; definitions.

Section 205.35 through 205.38 contain State plan requirements for an automated statewide management information system, conditions for FFP and responsibilities of the Social Security Administration (SSA). For purposes of õõ205.35 through 205.38:

(a) "A mechanized claims processing and information retrieval system", hereafter referred to as an automated "application processing and information retrieval system" (APIRS), or the "system", means a system of software and hardware used:

(1) To introduce, control and account for data items in providing public assistance under the Aid to Families with Dependent Children (AFDC) State plan; and

(2) To retrieve and produce utilization and management information about such aid and services as by required by the single State agency and Federal government for program administration and audit purposes.

(b) "Planning" means:

(1) The preliminary project activity to determine the requirements necessitating the project, the activities to be undertaken, and the resources required to complete the project:

(2) The preparation of an APD;

(3) The preparation of a detailed project plan describing when and how the computer system will be designed and developed; and

(4) The preparation of a detailed implementation plan describing specific training, testing, and conversion plans to install the computer system.

(c) The following terms are defined at 45 CFR Part 95, Subpart F õ95.605:

"Design" or "System Design"; "Development"; "Hardware"; "Installation"; "Operation"; and, "Software".

PART 433 - [AMENDED]

42 CFR Part 433, Subpart C is amended as set forth below:

1. The authority citation for 42 CFR Part 433 continues to read as follows:

Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 1302).

2. Section 433.111 is revised to read as follows:

õ433.111 Definitions.

For the purposes of this section:

(a) The following terms are defined at 45 CFR {Part 95, Subpart F õ95.605:

"Advance planning Document"; "Design" or "System Design"; "Development"; "Enhancement"; "Hardware"; "Installation"; "Operation"; and, "Software".

(b) "Mechanized claims processing and information retrieval system" means a system of software and hardware used to process Medicaid claims, and to retrieve and produce utilization and management information about services that is required by the Medicaid agency or Federal Government for administrative and audit purposes.

3. The heading for õ433.112 is revised to read as follows:

õ433.112 FFP for design, development, installation or enhancement of mechanized claims processing and information retrieval systems.

4. Section 433.112(a) is revised to read as follows:

(a) FFP is available at 90 percent in expenditures for design, development, installation or enhancement of a mechanized claims processing and information retrieval system, if the system is approved by the Administrator.

PART 307 - [AMENDED]

45 CFR Part 307 is amended as set forth below:

1. The authority citation for 45 CFR Part 307 continues to read as follows:

Authority: 42 U.S.C. 652 through 658, 664, 666, 667 and 1302.

2. Section 307.1 is revised to read as follows:

õ307.1 Definitions.

(a) "Computerized support enforcement system" means a system of software and hardware (that may have State and local components) which:

(1) Introduces, processes, accounts for and monitors data used by the Child Support Enforcement program in carrying out activities under the State plan; and

(2) Produces utilization and management information about support enforcement services as required by the State IV-D agency and Federal government for program administration and audit purposes.

(b) "Planning" means:

(1) The preliminary project activity to determine the requirements necessitating the project, the activities to be undertaken, and the resources required to complete the project;

(2) The preparation of an APD;

(3) The preparation of a detailed project plan describing when and how the computer system will be designed and developed; and

(4) The preparation of a detailed implementation plan describing specific training, testing, and conversion plans to install the computer system.

(c) The following terms are defined at 45 CFR Part 95, Subpart F õ95.605;

"Advance Planning Document"; "Design" or "System Design"; "Development"; "Enhancement"; "Installation"; "Operation"; "Requirements analysis", and "Software".

(d) The definitions found in õ301.1 of this chapter are also applicable to this part.

[FR Doc. 86-28253 Filed 12-17-86; 8:45 am]

BILLING CODE 4150-04-M