DEPARTMENT OF HEALTH & HUMAN SERVICES 

AUG - 5 2009 

RE: Guidance on Substance Abuse Prevention and Treatment and 

Community Mental Health Services Block Grant Requirements 

Dear State Substance Abuse and Mental Health Director: 

Substance Abuse and Mental 

Health Services Administration 

Center for Mental Health Services 

Center for Substance Abuse 

Prevention 

Center for Substance Abuse 

Treatment 

Rockville MD 20857 

The purpose of this letter is to clarify the guidance regarding Substance Abuse Prevention and 

Treatment (SAPT) and Community Mental Health Services (CMHS) Block Grant program 

requirements issued by the Substance Abuse and Mental Health Services Administration 

(SAMHSA) on June 15, 2009. The guidance provided herein replaces and supersedes that provided 

by SAMHSA on June 15, 2009. 

Over the past several years, States and Territories began utilizing administrative service 

organizations and payment/reimbursement processes via purchaser-vendor arrangements. The 

SAPT and CMHS Block Grant statutes and regulations do not specifically address these 

arrangements, and as a result, SAMHSA has received many questions about the interpretation of 

various Block Grant requirements. This communication is designed to provide guidance to States 

and Territories on how the statutes and regulations address these arrangements and how they should 

be interpreted. Specifically, this letter addresses the following issues: the funding of for-profit 

organizations; vendor compliance with SAMHSA Block Grant statutory requirements; clarification 

of the differences between subrecipients and vendors, and audit requirements for subrecipients and 

vendors. The basis for this guidance is the Public Health Service (PHS) Act, 45 Code of Federal 

Regulations (CFR) Part 96 (Block Grants), and Office of Management and Budget (OMB) 

Circular A-133 (Audits of States, Local Governments, and Non-profit Organizations). 

Funding of For-Profit Organizations 

In response to questions regarding fee-for-service (procurement contracts) arrangements 

with for-profit service providers, both the PHS Act establishing the SAPT and CMHS 

Block Grants and the implementing regulations impose restrictions on the expenditure of 

grant funds, including a prohibition on awards of financial assistance to for-profit entities. 

Specifically, the PHS Act§ 1931 (a)(l )(E) and 1916(a)(5) and 45 CFR § 96.135(a)(5) 

prohibit States and Territories from expending Block Grant funds "to provide financial 

assistance to any entity other than a public or nonprofit private entity." Ordinarily, the 

term "financial assistance" is used to describe a grant relationship as distinguished from 

an acquisition (or procurement) relationship, typically funded by a contract. While the 

statute and regulations preclude States and Territories from providing grants to for-profit 

entities, procurement contracts may be entered into with for-profit entities. 

Vendor Compliance with Block Grant Statutory Requirements 

Vendors receiving Block Grant funds must comply with all Block Grant laws, 

regulations, contracts, agreements, and other program requirements. However, § 210 (f) 

of OMB Circular A-133 states, in part, that although program compliance requirements 

Office of the Administrator - Office of Applied Studies - Office of Communications - Office of Policy, Planning and Budget - Office of Program Services 
Page 2 

do not normally pass through to vendors, non-Federal entities 1 

are responsible for 

ensuring that vendor transactions are either structured such that the vendor is responsible 

for program compliance or the vendors' records must be reviewed to determine program 

compliance. Therefore, as recipients and subrecipients of Federal Block Grant funds, 

States, local governments, and non-profit organizations are responsible for ensuring that 

their vendors are in compliance with Block Grant program requirements. 

Clarification of Differences Between Subrecipients and Vendors 

According to§ 105 of OMB Circular A-133: 

./ A subrecipient is a non-Federal entity that expends Federal awards received from a pass-through 

entit/ to carry out a Federal program; and 

./ A vendor is a dealer, distributor, merchant, or other seller providing goods or services that are 

required for the conduct of a Federal program. 

§ 210 (b) and ( c) lists the following characteristics, indicating that some or all of the listed features 

may be present: 

SUBRECIPIENTS VENDORS 

Determine who is eligible to receive Federal 

financial assistance 

Provide the goods and services within 

normal business operations 

Performance is measured against whether the 

objectives of the Federal program are met 

Provide similar goods or services to many 

different purchasers 

Responsible for programmatic decision making Operate in a competitive environment 

Responsible for adherence to applicable Provide goods or services that are ancillary 

Federal program comp I iance requirements to the operation of the F edera I program 

Use Federal funds to carry out a program of the 

organization 

Are not directly subject to the compliance 

requirements of the Federal program 

Further, § 210 ( d) states, in part, that: 

./ Unusual circumstances may exist; therefore, careful judgment should be exercised in 

determining whether an entity is a subrecipient or vendor; and 

./ The relationship between the recipient of Federal funds and the entity should be examined, 

rather than the form of the written agreement between the two parties. 

1 States, local governments, or non-profit organizations. 2 A non-Federal entity that provides a Federal award to a subrecipi ent to carry out a Federal program. 
Page 3 

Audit Requirements for Subrecipients and Vendors 

In accordance with OMB Circular A-133 § 210, local government and non-profit organization 

subrecipients are subject to OMB Circular A-133 audits, but for-profit subrecipients and vendors 

are not. 

Summary 

Recipients and subrecipients of SAMHSA Block Grant funds may award contracts, but not grants, 

to for-profit organizations. All grantees, subrecipients, and vendors must adhere to all legal, 

regulatory, and Block Grant program requirements. The relationship between Block Grant 

recipients and the characteristics of the recipient contributions to the Block Grant program should 

be carefully examined to determine whether the entity is a subrecipient or vendor. While SAMHSA 

Block Grant local government and non-profit organization subrecipients are subject to OMB 

Circular A-133 audits, for-profit subrecipients and vendors are not. 

If you have any questions about this guidance, please contact your State Project Officer. 

,- -7 

c~ <~u~ Kathryn Po ver:--L.Ed. 

Director 

Center for Mental Health Services 

., J.D. , M.P.H. , CAS, FASAM