oversight

Crop Insurance: Savings Would Result from Program Changes and Greater Use of Data Mining

Published by the Government Accountability Office on 2012-03-13.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office

GAO          Report to the Ranking Member,
             Permanent Subcommittee on
             Investigations, Committee on
             Homeland Security and Governmental
             Affairs, U.S. Senate
March 2012
             CROP INSURANCE

             Savings Would Result
             from Program
             Changes and Greater
             Use of Data Mining




GAO-12-256
                                            March 2012

                                            CROP INSURANCE
                                            Savings Would Result from Program Changes and
                                            Greater Use of Data Mining
Highlights of GAO-12-256, a report to the
Ranking Member, Permanent Subcommittee
on Investigations, Committee on Homeland
Security and Governmental Affairs, U.S.
Senate


Why GAO Did This Study                      What GAO Found
The U.S. Department of Agriculture          If a limit of $40,000 had been applied to individual farmers’ crop insurance
(USDA) administers the federal crop         premium subsidies, as it is for other farm programs, the federal government
insurance program with private              would have saved up to $1 billion in crop insurance program costs in 2011,
insurance companies. In 2011, the           according to GAO’s analysis of U.S. Department of Agriculture (USDA) data.
program provided about $113 billion in      GAO selected $40,000 as an example of a potential subsidy limit because it is
insurance coverage for over 1 million       the limit for direct payments, which provide fixed annual payments to farmers
policies. Program costs include             based on a farm’s crop production history. Had such a limit been applied in 2011,
subsidies to pay for part of farmers’       it would have affected up to 3.9 percent of all participating farmers, who
premiums. According to the
                                            accounted for about one-third of all premium subsidies and were primarily
Congressional Budget Office, for fiscal
                                            associated with large farms. For example, one of these farmers insured crops in
years 2013 through 2022, the program
costs—primarily premium subsidies—
                                            eight counties and received about $1.3 million in premium subsidies. Had
will average $8.9 billion annually.         premium subsidies been reduced by 10 percentage points for all farmers
                                            participating in the program, as recent studies have proposed, the federal
GAO determined the (1) effect on            government would have saved about $1.2 billion in 2011. A decision to limit or
program costs of applying limits on         reduce premium subsidies raises other considerations, such as the potential
farmers’ premium subsidies, as              effect on the financial condition of large farms and on program participation.
payment limits are set for other farm
programs, and (2) extent to which           Since 2001, USDA has used data mining tools to prevent and detect fraud,
USDA uses key data mining tools to          waste, and abuse by either farmers or insurance agents and adjusters but has
prevent and detect fraud, waste, and        not maximized the use of these tools to realize potential additional savings. This
abuse in the program. GAO analyzed          is largely because of competing compliance review priorities, according to GAO’s
USDA data, reviewed economic                analysis. USDA’s Risk Management Agency (RMA), which is responsible for
studies, and interviewed USDA               overseeing the integrity of the crop insurance program, has used data mining to
officials.                                  identify farmers who received claim payments that are higher or more frequent
                                            than others in the same area. USDA informs these farmers that at least one of
What GAO Recommends                         their fields will be inspected during the coming growing season. RMA officials told
To reduce crop insurance program            GAO that this action has substantially reduced total claims. The value of
costs, Congress should consider             identifying these farmers may be reduced, however, by the fact that USDA’s
limiting premium subsidies for              Farm Service Agency (FSA)—which conducts field inspections for RMA—does
individual farmers, reducing subsidies      not complete all such inspections, and neither FSA nor RMA has a process to
for all farmers, or both. GAO also          ensure that the results of all inspections are accurately reported. For example,
recommends, in part, that USDA              RMA did not obtain field inspection results for about 20 percent and 28 percent of
encourage the completion of field           these farmers, respectively, in 2009 and 2010. As a result, not all of the farmers
inspections. In commenting on a report      RMA identified were subject to a review, increasing the likelihood that fraud,
draft, USDA did not agree that              waste, or abuse occurred without detection. Field inspections were not
Congress should consider limiting
                                            completed, in part because FSA state offices are not required to monitor the
premium subsidies, but GAO believes
                                            completion of such inspections. In addition, RMA generally does not provide
that when farm income is at a record
high and the nation faces severe fiscal     insurance companies with FSA inspection results when crops are found to be in
problems, limiting premium subsidies is     good condition, although USDA’s Inspector General has reported this information
an appropriate area for consideration.      may be important for followup. Past cases have revealed that some farmers may
USDA agreed with encouraging the            harvest a high-yielding crop, hide its sale, and report a loss to receive an
completion of field inspections.            insurance payment. Furthermore, RMA has not directed insurance companies to
                                            review the results of all completed FSA field inspections before paying claims
                                            that are filed after inspections show a crop is in good condition. As a result,
                                            insurance companies may not have information that could help them identify
View GAO-12-256. For more information,      claims that should be denied.
contact Lisa Shames at (202) 512-3841 or
shamesl@gao.gov.

                                                                                    United States Government Accountability Office
Contents


Letter                                                                                           1
                       Background                                                               4
                       A Limit on Crop Insurance Subsidies Would Lower Program Costs           14
                       RMA Has Not Maximized the Use of Data Mining Tools, Largely
                         Because of Competing Priorities                                       25
                       Conclusions                                                             35
                       Matter for Congressional Consideration                                  36
                       Recommendations for Executive Action                                    36
                       Agency Comments and Our Evaluation                                      37

Appendix I             Objectives, Scope, and Methodology                                      40



Appendix II            Income and Payment Limits for Selected Farm Programs                    43



Appendix III           Locations of Participating Farmers Receiving More than $40,000 in
                       Premium Subsidies, 2011                                                 44



Appendix IV            Information on the Levels of Premium Subsidies and Administrative
                       Expense Subsidies for Individual Farmers                                46



Appendix V             Comments from the U.S. Department of Agriculture                        47



Appendix VI            GAO Contact and Staff Acknowledgments                                   57



Related GAO Products                                                                           58




                       Page i                                             GAO-12-256 Crop Insurance
Tables
          Table 1: Premium Subsidies and Administrative Expense Subsidies,
                   2000 through 2011                                                                 8
          Table 2: Number of RMA Requests for FSA Field Inspections and
                   Percentage of Inspections Completed for Selected States
                   in 2009 and 2010                                                                 27


Figures
          Figure 1: Financial Relationships among the Federal Government,
                   Private Insurance Companies, Agents, and Farmers                                  6
          Figure 2: Levels of Premium Subsidies that Individual Farmers
                   Received in 2010                                                                 16
          Figure 3: Levels of Premium Subsidies that Individual Farmers
                   Received in 2011                                                                 16
          Figure 4: Percentage of Participating Farmers and Value of
                   Premium Subsidies by Individual Farmers Receiving
                   Subsidies of $40,000 or Less, or More than $40,000 in 2010                       18
          Figure 5: Percentage of Participating Farmers and Value of
                   Premium Subsidies, by Individual Farmers Receiving
                   Subsidies of $40,000 or Less, or More than $40,000 in 2011                       19
          Figure 6: Locations of Participating Farmers Receiving Premium
                   Subsidies of More Than $40,000, 2011                                             45



          Abbreviations

          ARPA              Agricultural Risk Protection Act of 2000
          FSA               Farm Service Agency
          RMA               Risk Management Agency
          SRA               Standard reinsurance agreement
          USDA              U.S. Department of Agriculture



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          Page ii                                                        GAO-12-256 Crop Insurance
United States Government Accountability Office
Washington, DC 20548




                                   March 13, 2012

                                   The Honorable Tom Coburn
                                   Ranking Member
                                   Permanent Subcommittee on Investigations
                                   Committee on Homeland Security and Governmental Affairs
                                   United States Senate

                                   Dear Dr. Coburn:

                                   Federally subsidized crop insurance, which farmers can purchase to help
                                   manage the risk inherent in farming, has become one of the most
                                   important programs in the farm safety net. Under the federal crop
                                   insurance program, farmers can choose various levels and types of
                                   insurance protection: they can insure against losses caused by poor crop
                                   yields, declines in crop prices, or both, for each insurable crop they
                                   produce. In 2011, the crop insurance program provided about $113 billion
                                   in insurance coverage for about 264 million acres of farmland, for over 1.1
                                   million policies. The federal government’s crop insurance costs include
                                   subsidies to pay for (1) part of a farmer’s crop insurance premiums, which
                                   averaged about 62 percent of the total premiums in 2011, and (2)
                                   administrative and operating expenses (administrative expenses)—
                                   provided on behalf of farmers—to insurance companies to cover their
                                   expenses for selling and servicing crop insurance policies. The amount of
                                   subsidies—for premiums and administrative expenses—is not limited for
                                   individuals or legal entities.

                                   The Congressional Budget Office estimates that, for fiscal years 2013
                                   through 2022, the federal government’s crop insurance costs will average
                                   $8.9 billion per year. The cost of the federal crop insurance program has
                                   come under increased scrutiny because of the nation’s budgetary
                                   pressures, particularly when farm income is at record-high levels. For
                                   2011, the U.S. Department of Agriculture (USDA) reported that 2011 net
                                   farm income was a record $98.1 billion. For 2012, USDA estimates that
                                   net farm income will decline to $91.7 billion—still the second highest level
                                   on record. In addition, according to USDA, the top 5 earnings years for
                                   the past 3 decades have occurred since 2004, attesting to the recent
                                   profitability of farming. Furthermore, farmland values, another measure of
                                   farm prosperity, increased by 85 percent from 2003 through 2011.

                                   We and others have reported over the years on the risks for fraud, waste,
                                   and abuse in the crop insurance program and recommended ways to


                                   Page 1                                               GAO-12-256 Crop Insurance
minimize these risks, including examining data on crop insurance claims
to identify potential abuses. 1 For example, in 2005, we reported on crop
insurance fraud cases investigated by USDA that resulted in criminal
prosecutions. 2 These cases showed that the farmers, sometimes in
collusion with insurance agents and others, falsely claimed weather
damage and low production to receive crop insurance payments. Several
of these cases also demonstrated the importance of having USDA’s Farm
Service Agency (FSA), which administers many farm programs, and Risk
Management Agency (RMA), which administers the federal crop
insurance program, work together to identify and share information on
questionable farming practices and activities. 3 In part to improve
compliance with, and the integrity of, the crop insurance program,
Congress enacted the Agricultural Risk Protection Act of 2000 (ARPA). 4
This act provided RMA and FSA with new tools for monitoring and
controlling program abuses. Among other things, it required the Secretary
of Agriculture to use data mining—a technique for extracting knowledge
from large volumes of data—to administer and enforce the crop insurance
program. Following USDA’s written procedures, developed pursuant to a
requirement in ARPA, RMA provides FSA with a list of farmers who have
received payments for anomalous claims—that is, claims that are higher
or more frequent than others in the same area and that match RMA
scenarios of fraud, waste, or abuse. Under the written procedures, staff in
FSA county offices are to inspect the fields of the listed farmers and
report the inspection results to RMA.




1
 GAO, Crop Insurance: Actions Needed to Reduce Program’s Vulnerability to Fraud,
Waste, and Abuse, GAO-05-528 (Washington, D.C.: Sept. 30, 2005); GAO, Crop
Insurance: Opportunities Exist to Reduce the Cost of Administering the Program,
GAO-09-445 (Washington, D.C.: Apr. 29, 2009); GAO, Crop Insurance: More Needs to
Be Done to Reduce Program’s Vulnerability to Fraud, Waste, and Abuse, GAO-06-878T
(Washington, D.C.: June 15, 2006); and U.S. Department of Agriculture Office of the
Inspector General, Risk Management Agency Compliance Activities, No. 05601-11-At
(Washington, D.C: Sept. 16, 2009).
2
GAO-05-528.
3
 FSA, which has an extensive field office structure, is generally responsible for helping
farmers enroll in agricultural support programs, overseeing these programs, and issuing
program payments.
4
 The Agricultural Risk Protection Act of 2000, Pub. L. No. 106-224, 114 Stat. 358,
amended the Federal Crop Insurance Act .




Page 2                                                          GAO-12-256 Crop Insurance
USDA also administers an array of other farm programs to support farm
income, assist farmers after disasters, and conserve natural resources.
Unlike the crop insurance program, these other farm programs generally
have statutory income and payment limits that apply to individual farmers
and legal entities, including corporations, estates, and trusts. For
example, USDA provides about $5 billion in fixed annual payments—
called direct payments—to farmers based on a farm’s crop production
history. However, a person or legal entity with an average adjusted gross
farm income (over the preceding 3 tax years) exceeding $750,000 is
generally ineligible for direct payments. In addition, for direct payments,
the annual payment is generally no more than $40,000 per person or
legal entity. In anticipation of the next farm bill, farm groups have made
proposals that would result in having crop insurance become the
centerpiece of the federal farm safety net, with support through traditional
commodity programs playing a significantly reduced role.

In this context, you asked us to identify additional opportunities for
reducing the cost of the crop insurance program. Our objectives were to
determine (1) the effect on program costs of applying limits on farmers’
federal crop insurance subsidies, as payment limits are applied to other
farm programs, and (2) the extent to which USDA has used key data
mining tools to prevent and detect fraud, waste, and abuse in the crop
insurance program.

To address the first objective, we reviewed eligibility standards, such as
adjusted gross income limits and payment limits, in the provisions of the
Food, Conservation, and Energy Act of 2008 (2008 farm bill); other
statutes; and USDA regulations. We also interviewed FSA and RMA
officials regarding eligibility standards and payment limits. To determine
the distribution of crop insurance subsidies among farmers who
participate in the program, we analyzed RMA data for 2010 and 2011 on
the number and percentage of farmers receiving various levels of
subsidies and the locations of farmers who received higher subsidies. We
selected $40,000 as an example of a potential subsidy limit because it is
the payment limit for direct payments, which is one of the largest
components of the farm safety net. We also reviewed USDA and others’
studies that examined participation in the crop insurance program and
premium subsidies. In addition, we reviewed USDA data on the financial
condition of farms of different sizes. To address the second objective, we
interviewed officials at RMA headquarters and RMA’s six regional
compliance offices to determine RMA’s current uses of data mining
results, including data mining related to farmers with anomalous claim
payments, as well as insurance agents and adjusters who had anomalous


Page 3                                               GAO-12-256 Crop Insurance
             losses in comparison with their peers in the same geographic area. In
             addition, we analyzed 2009 and 2010 data on FSA’s completion of field
             inspections, pursuant to RMA’s data mining list of farmers with
             anomalous claim payments. We also interviewed officials at FSA
             headquarters and five FSA state offices—California, Colorado, Florida,
             North Dakota, and Texas—to obtain information about field inspection
             processes and obstacles to the completion of these inspections. We
             selected FSA’s North Dakota office because of its high completion rate of
             field inspections (96 percent) for 2009 and 2010 and large number of
             requests for field inspections (378). We selected the other four state
             offices because, over the 2-year period, they had low completion rates of
             field inspections (less than 33 percent) and at least 80 requests for field
             inspections. A more detailed discussion of our scope and methodology is
             presented in appendix I.

             We conducted this performance audit from January 2011 to March 2012
             in accordance with generally accepted government auditing standards.
             Those standards require that we plan and perform the audit to obtain
             sufficient, appropriate evidence to provide a reasonable basis for our
             findings and conclusions based on our audit objectives. We believe that
             the evidence obtained provides a reasonable basis for our findings and
             conclusions based on our audit objectives.


             In conducting their operations, farmers are exposed to financial losses
Background   because of production risks—droughts, floods, and other natural
             disasters—as well as price risks. The federal government has played an
             active role in helping to mitigate the effects of these risks on farm income
             by promoting the use of crop insurance. RMA has overall responsibility for
             administering the federal crop insurance program, including controlling
             costs and protecting against fraud, waste, and abuse. RMA partners with
             15 private insurance companies that sell and service the federal
             program’s insurance policies and share a percentage of the risk of loss
             and opportunity for gain associated with the policies.

             Through the federal crop insurance program, farmers insure against
             losses on more than 100 crops. These crops include major crops—such
             as corn, cotton, soybeans, and wheat, which accounted for three-quarters
             of the acres enrolled in the program in 2011—as well as nursery crops
             and certain fruits and vegetables. For the purposes of this report, we
             generally refer to participants in the federal crop insurance program as
             participating farmers.



             Page 4                                               GAO-12-256 Crop Insurance
Most crop insurance policies are either production-based or revenue-
based. For production-based policies, a farmer can receive a payment if
there is a production loss relative to the farmer’s historical production per
acre. Revenue-based policies protect against crop revenue loss resulting
from declines in production, price, or both. The federal government
encourages farmers’ participation in the federal crop insurance program
by subsidizing their insurance premiums and acting as the primary
reinsurer for the private insurance companies that take on the risk of
covering, or “underwriting,” losses to insured farmers. A common
measure of crop insurance program participation is the percentage of
planted acres nationwide for major crops that are enrolled in the program.

In addition, the federal government pays administrative expense
subsidies to insurance companies as an allowance that is intended to
cover their expenses for selling and servicing crop insurance policies. In
turn, insurance companies use these subsidies to cover their overhead
expenses, such as payroll and rent, and to pay commissions to insurance
agencies and agents. Companies also incur expenses associated with
verifying—adjusting—the amount of loss claimed. These expenses
include, for example, loss adjusters’ compensation and their travel
expenses to farmers’ fields. The financial relationships among the federal
government, private insurance companies, agents, and farmers are
illustrated in figure 1.




Page 5                                                GAO-12-256 Crop Insurance
Figure 1: Financial Relationships among the Federal Government, Private Insurance
Companies, Agents, and Farmers




Page 6                                                  GAO-12-256 Crop Insurance
Costs of Crop Insurance   For 2011, the federal government’s subsidy costs were about $7.4 billion
Subsidies That Benefit    for crop insurance premiums and about $1.3 billion for administrative
Farmers                   expenses. Crop insurance premium subsidies are not payments to
                          farmers, but they can be considered a financial benefit. Without a
                          premium subsidy, a participating farmer would have to pay the full amount
                          of the premium. The administrative expense subsidies also can be
                          considered a subsidy to farmers; with these subsidies, crop insurance
                          premiums are lower than they would otherwise be if the program followed
                          commercial insurance practices. In private insurance, such as automobile
                          insurance, these administrative expenses typically are included in the
                          premium that a policy holder pays. 5

                          ARPA and the 2008 farm bill set premium subsidy rates, that is, the
                          percentage of the premium paid by the government. Premium subsidy
                          rates vary by the level of insurance coverage that the farmer chooses and
                          the geographic diversity of the crops insured. For most policies, the
                          statutory subsidy rates range from 38 percent to 80 percent. Table 1
                          shows the total costs of subsidies for all crop insurance premiums and
                          administrative expenses for 2000 through 2011. The table shows that
                          premium subsidies have generally increased since 2000, both in dollars
                          and as a percentage of total premiums. The premium subsidy rates,
                          authorized by ARPA, became effective in 2001. Premium subsidies
                          increased, as a percentage of total premiums, from 37 percent in 2000 to
                          60 percent in 2001. In addition, premium subsidies rose as crop prices
                          increased.




                          5
                           Farmers’ benefit from administrative expense subsidies may not be equal to the full
                          amount of these subsidies. That is, to the extent that administrative expense subsidies
                          reflect an inefficient delivery system that provides services that farmers do not need or
                          allows excess profits, these subsidies are not a benefit to farmers.




                          Page 7                                                           GAO-12-256 Crop Insurance
Table 1: Premium Subsidies and Administrative Expense Subsidies, 2000 through 2011

Dollars in millions
                                     Government–paid                                      Farmer-paid
                        Government premium subsidies                   Farmer-         premiums as a                   Administrative
                      -paid premium as a percentage of                    paid          percentage of       Total           expense
Year                       subsidies   total premiums                premiums          total premiums   premiums          subsidies
2000                          $951                       37               $1,589                  63       $2,540                $552
2001                          1,772                      60                    1,190              40        2,962                 636
2002                          1,741                      60                    1,175              40        2,916                 626
2003                          2,042                      60                    1,389              40        3,431                 734
2004                          2,477                      59                    1,709              41        4,186                 888
2005                          2,344                      59                    1,605              41        3,949                 829
2006                          2,682                      59                    1,898              41        4,580                 959
2007                          3,823                      58                    2,739              42        6,562                1,333
2008                          5,691                      58                    4,160              42        9,851                2,009
2009                          5,426                      61                    3,523              39        8,950                1,619
2010                          4,710                      62                    2,882              38        7,592                1,368
                                                                                                                                     a
2011                         $7,367                      62               $4,455                  38      $11,822              $1,330
                                           Source: GAO analysis of RMA data.


                                           Note: The premium data are as of October 24, 2011.
                                           a
                                           The 2011 administrative expense subsidy is estimated.

                                           As crop prices increase, the value of the crops being insured increases,
                                           which results in higher crop insurance premiums and premium subsidies.
                                           For example, the prices of major crops were substantially higher in 2011
                                           than in 2006, and premium subsidies in 2011 (about $7.4 billion) were
                                           substantially higher than in 2006 (about $2.7 billion). USDA forecasts that
                                           the prices of major crops—corn, cotton, soybeans, and wheat—will
                                           continue to be substantially higher than 2006 prices through 2016.
                                           Administrative expense subsidies also increased because of higher crop
                                           prices. However, RMA capped administrative expense subsidies in the
                                           2011 standard reinsurance agreement (SRA), a cooperative financial
                                           agreement between USDA and insurance companies. These changes
                                           became effective in 2011. As a result, administrative expense subsidies
                                           were lower in 2011 than they otherwise would have been.




                                           Page 8                                                             GAO-12-256 Crop Insurance
Crop Insurance               The federal government provides crop insurance subsidies to farmers in
Participation and Disaster   part to achieve high crop insurance participation and coverage levels, 6
Assistance Payments          which are intended, according to USDA economists, to reduce or
                             eliminate the need for ad hoc disaster assistance payments to help
                             farmers recover from natural disasters, which can be costly. For example,
                             under three separate congressionally authorized ad hoc crop disaster
                             programs, USDA provided $7 billion in disaster assistance payments to
                             farmers whose crops were damaged or destroyed by natural disasters
                             from 2001 through 2007.

                             Congress established a standing disaster program in the 2008 farm bill—
                             the Supplemental Revenue Assistance Payments Program. Under this
                             program, Congress funded a $3.8 billion permanent trust fund and
                             directed the Secretary of Agriculture to make crop disaster assistance
                             payments to eligible farmers who suffer crop losses on or before
                             September 30, 2011. USDA—through FSA—began making disaster
                             payments under this program in early 2010 for crop losses incurred in
                             2008. To qualify for a disaster assistance payment under this program, a
                             farmer must have purchased either federal crop insurance coverage or be
                             covered under the Noninsured Crop Disaster Assistance Program for all
                             crops of economic significance on their farming operation. Without
                             reauthorization, the Supplemental Revenue Assistance Payments
                             Program will not make payments on losses caused by natural disasters
                             that occurred after September 30, 2011.

                             Farmers’ participation in the federal crop insurance program and
                             spending on ad hoc disaster assistance have been policy issues for more
                             than 30 years. According to a 2005 USDA publication, Congress passed
                             the Federal Crop Insurance Act in 1980 to strengthen participation in the
                             crop insurance program with the goal of replacing the costly disaster
                             assistance programs. 7 Crop insurance participation can be measured by
                             acres enrolled in the program, the percentage of eligible acres of major
                             crops and the percentage of a crop’s market value insured—the coverage
                             level. According to the USDA publication, the government has historically



                             6
                              Farmers select a coverage level—that is, the percentage of their normal yield or revenue
                             they want to insure. In 2009, over half of the enrolled corn and soybean acres were at
                             coverage levels above 70 percent.
                             7
                              R. Dismukes and J. Glauber, “Why Hasn’t Crop Insurance Eliminated Disaster
                             Assistance?” Amber Waves, USDA Economic Research Service (June 2005).




                             Page 9                                                        GAO-12-256 Crop Insurance
                              attempted to increase participation by subsidizing premiums. Under the
                              1980 law, the government offered premium subsidy rates of up to 30
                              percent. However, by 1994, less than 40 percent of eligible acreage was
                              enrolled in the program, and Congress had passed ad hoc disaster
                              assistance totaling nearly $11 billion. In order to increase participation,
                              according to the USDA publication, the Federal Crop Insurance Reform
                              Act of 1994 increased premium subsidy rates. Farmers responded by
                              enrolling more acres. Enrollment was about 100 million acres in 1993
                              before the act and about 182 million acres in 1997. Under ARPA,
                              premium subsidy rates increased again in 2001. Farmers subsequently
                              purchased more insurance at higher coverage levels. With the increases
                              in acres enrolled and coverage levels, premium subsidy costs increased.
                              The 2005 USDA publication noted that by 2004 premium subsidies
                              totaled nearly $2.5 billion and had become an increasingly costly way of
                              encouraging participation. As shown in table 1, premium subsidies
                              reached $7.4 billion in 2011.


Potential for Fraud, Waste,   From 2008 through 2010, annual payments to farmers for their crop
and Abuse in the Federal      insurance claims averaged about $6 billion. Most claims are legitimate,
Crop Insurance Program        but some involve fraud, waste, or abuse, according to RMA’S data mining
                              contractor. USDA’s Office of the Inspector General has reported that
                              fraud is commonly perpetrated through false certification of one or more
                              of the basic data elements, such as production history, essential for RMA
                              to determine program eligibility or validity of claims. Crop insurance fraud
                              cases can be particularly complex in their details and correspondingly
                              time-consuming to review. These fraud cases sometimes involve multiple
                              individuals working together, such as farmers, insurance agents, and
                              insurance loss adjusters. Claim payments based on fraudulent crop
                              insurance losses sometimes result in comparatively large monetary costs
                              to USDA. Waste is incurring unnecessary costs as a result of inefficient or
                              ineffective practices, systems, or controls. Waste includes improper
                              payments that may be caused by errors in data upon which claim
                              payments are based. Abuse occurs when a participating farmer’s actions
                              defeat the intent of the program, although no law, regulation, or contract
                              provision may be violated. For example, under the Federal Crop
                              Insurance Act, RMA must offer coverage for prevented planting—that is, if
                              farmers cannot plant a crop for specified reasons, prevented planting
                              coverage enables them to receive a claim payment. In 2005, we noted
                              instances in which FSA county officials stated they believed that some
                              farmers in their counties who claimed prevented planting losses never
                              intended to plant or did not make a good faith attempt to plant their crop
                              but still received prevented coverage claim payments. In 2011, RMA


                              Page 10                                              GAO-12-256 Crop Insurance
                           issued guidance to its field offices and insurance companies to address
                           abuse involving prevented planting.


Data Mining to Prevent     RMA uses data mining—a technique for extracting knowledge from large
and Detect Fraud, Waste,   volumes of data—to detect potential cases of fraud, waste, or abuse by
and Abuse                  (1) developing scenarios of potential program abuse by farmers,
                           insurance agents, and loss adjusters and (2) querying the database
                           containing crop insurance data and information on weather, soil, and land
                           surveys to generate reports and lists of participating farmers with
                           anomalous claim payments. RMA has contracted with the Center for
                           Agribusiness Excellence, located at Tarleton State University in
                           Stephenville, Texas, to conduct data mining since 2001. Following USDA
                           written procedures, RMA and the insurance companies are to use data
                           mining results to conduct reviews of the claims to determine if there is
                           actual fraud, waste, or abuse. The data mining tools that RMA uses
                           include the following:

                           •   List of farmers with anomalous claim payments. Through data mining,
                               RMA develops a list of farmers with anomalous claim payments. 8
                               RMA annually provides this list to FSA, which assists RMA in
                               monitoring these farmers. Under USDA guidance, FSA county offices
                               are to conduct two inspections (postplanting and preharvest) for each
                               policy these farmers hold. FSA county offices are then to report to
                               RMA on whether they inspected the crop and, if so, whether the
                               inspection determined that (1) the inspected farmer’s crop was in
                               good condition; (2) the inspected farmer’s crop was not in good
                               condition, but other farmers’ crops in the local area were in good
                               condition; or (3) the inspected farmer’s crop was not in good
                               condition, and other farmers’ crops in the local were also not in good
                               condition.

                               List of insurance agents and adjusters with anomalous losses. ARPA
                               requires the Secretary of Agriculture to establish procedures that RMA
                               can use to develop a list of insurance agents and loss adjusters with
                               anomalous losses—losses that are higher than those of their peers in



                           8
                            For the purposes of this report, “farmers with anomalous claim payments” refers to those
                           farmers with claim payments over $10,000. In 2011, RMA, for the first time, asked
                           companies to review farmers with anomalous claims under $10,000 in 2010. These
                           payments totaled over $7 million.




                           Page 11                                                       GAO-12-256 Crop Insurance
                           the same geographic area—and to review this list to determine
                           whether the anomalous losses are the result of fraud, waste, or
                           abuse. RMA uses data mining and scenarios it has developed for
                           fraud, waste, and abuse to identify these insurance agents and
                           adjusters.

                       The RMA contractor’s data mining reports identify individual farmers with
                       anomalous claim payments or insurance agents and adjusters with
                       anomalous losses, but these anomalies only indicate potential cases of
                       fraud, waste or abuse. These claims and losses may be legitimate,
                       resulting from unusual weather or other conditions on a farm. As such, a
                       portion of each list inevitably represents “false positives”—farmers whose
                       claims were valid. To determine if there is actual fraud, waste, or abuse,
                       RMA or the insurance company must engage in additional review. Such
                       reviews may require RMA or the company to, among other things,
                       analyze the claims, appraisal sheets, special adjuster reports,
                       photographs, and receipts for inputs, such as seeds and fertilizer. These
                       reviews are needed to determine the validity of the data mining reports;
                       providing feedback on the reports’ validity to the data mining contractor
                       enables RMA’s contractor to refine its data mining tools, thereby
                       improving the detection of fraud, waste and abuse.


Standard Reinsurance   RMA administers the crop insurance program through the SRA. This
Agreement              agreement establishes the terms and conditions under which insurance
                       companies that sell and service policies have to operate. Under the 2011
                       SRA, insurance companies are to conduct reviews, including inspections
                       of crop insurance policies for which anomalies have been identified
                       through data mining, and report the results to RMA. These reviews are
                       not to exceed 3 percent of eligible crop insurance contracts (about 30,000
                       policies), unless RMA provides notice that additional reviews are
                       required. The SRA also requires insurance companies to conduct
                       inspections or monitoring programs for agents and loss adjusters that
                       RMA has identified as necessary for protecting the program’s integrity.




                       Page 12                                             GAO-12-256 Crop Insurance
Farm Programs’ Income         Unlike the crop insurance program, many USDA farm programs—
and Payment Limits and        including income support programs, conservation programs, and disaster
Other Eligibility Standards   assistance programs 9—have statutory income and payment limits that
                              apply to individual farmers and legal entities. Income limits set the
                              maximum amount of income that a person or legal entity can earn and
                              still remain eligible for certain farm program payments. For example, a
                              person or legal entity with an average adjusted gross farm income (over
                              the preceding 3 tax years) exceeding $750,000 is generally ineligible for
                              direct payments. 10 Payment limits set the maximum payment amount that
                              a person or legal entity can receive per year from a farm program. For
                              example, for direct payments, the payment limit in the 2008 farm bill is
                              generally $40,000 per person or legal entity. 11 For a disaster assistance
                              program, the annual payment limit is $100,000 per person or legal
                              entity. 12 Additional income and payment limits for selected farm programs
                              are described in appendix II.

                              Farming operations are organized in various ways, including as sole
                              proprietorships, partnerships, and corporations. As we have previously
                              reported, 13 some farmers and legal entities change the way their farming
                              operations are organized to maximize their farm program benefits.
                              However, other considerations may outweigh the financial gains of
                              making such a change.

                              Eligibility for many farm programs also depends on compliance with other
                              standards. For example, to receive direct payments or Average Crop




                              9
                               Income support programs help stabilize and support farmers’ income. Conservation
                              programs encourage environmental stewardship of farmlands. Disaster assistance
                              programs help farmers recover financially from a natural disaster.
                              10
                                A husband and wife may divide their income for the income limit test as if they had filed
                              separate income tax returns.
                              11
                                A husband and wife can each receive a payment, which enables them collectively to
                              receive up to $80,000 in direct payments annually.
                              12
                                USDA’s Farm Service Agency is responsible for ensuring that only eligible individuals
                              receive farm program payments, either directly or as a member of an entity, and do not
                              receive payments that exceed the established limits.
                              13
                                GAO, Farm Program Payments: USDA Needs to Strengthen Regulations and Oversight
                              to Better Ensure Recipients Do Not Circumvent Payment Limitations, GAO-04-407
                              (Washington, D.C.: Apr. 30, 2004).




                              Page 13                                                         GAO-12-256 Crop Insurance
                            Revenue Election Program payments under the 2008 farm bill, 14 an
                            individual or entity must be “actively engaged in farming.” To be
                            considered actively engaged in farming, an individual must, among other
                            things, make significant contributions to a farming operation in (1) capital,
                            land, or equipment and (2) personal labor or active personal
                            management. An entity is considered actively engaged in farming if,
                            among other things, the entity separately makes a significant contribution
                            of capital, land, or equipment, and its members collectively make a
                            significant contribution of personal labor or active personal management.
                            In addition, participants in many farm programs who farm in areas
                            identified as having highly erodible land or a wetland must comply with
                            certain land and environmental conservation requirements for payment
                            eligibility purposes. Participants who fail to abide by or apply approved
                            conservation practices on land identified as highly erodible or a wetland
                            are subject to payment reductions or total ineligibility for program
                            payments.


                            According to our analysis of RMA data for 2011, the federal government
A Limit on Crop             would have achieved savings in the crop insurance program by limiting
Insurance Subsidies         premium subsidies for crop insurance participants, as payments are
                            similarly limited for other farm programs. A decision to limit or reduce
Would Lower                 premium subsidies to achieve cost savings raises other considerations,
Program Costs               such as the potential effect of such a limit on the financial condition of
                            large farms and on program participation.


A Potential Limit on Crop   Without limits on the premium subsidies in the crop insurance program,
Insurance Subsidies Would   the nearly 900,000 farmers participating in the program received premium
Have Resulted in Savings    subsidies of $4.7 billion in 2010 and $7.4 billion in 2011. Applying limits
                            on premium subsidies to participating farmers, similar to the payment
for 2011                    limits for other farm programs, would lower program costs and save
                            federal dollars, according to our analysis of RMA data. Using a limit of
                            $40,000 per participating farmer for premium subsidies for this period—
                            the limit applied to direct payments—we identified significant potential




                            14
                              Under the Average Crop Revenue Election Program, farmers may receive revenue-
                            based payments as an alternative to receiving certain other types of farm program
                            payments and must forgo 20 percent of their direct payments.




                            Page 14                                                    GAO-12-256 Crop Insurance
savings to the federal government—savings of up to $358 million for 2010
and $1 billion for 2011. 15

The amount of these savings may depend on whether, and the extent to
which, farmers and legal entities reorganized their business to avoid or
lessen the effect of limits on premium subsidies. As we have previously
reported regarding payment limits for other farm programs, some farming
operations may reorganize to overcome payment limits to maximize their
farm program benefits. 16 For these farmers and legal entities, it is unclear
whether further reorganization to lessen the effect of limits on premium
subsidies would occur. In addition, in some instances, the requirement
that an individual or entity be actively engaged in farming to receive farm
program benefits is likely to prevent the creation of entities in order to
avoid a limit on premium subsidies. Finally, some farmers would likely
begin to report their spouse as a member of the farming operation, which
under payment limit rules enables an operation to double the amount of
benefits it can receive.

In particular, if a $40,000 limit on premium subsidies had been applied in
2010, up to 13,309 farmers—1.5 percent of all participating farmers—
would have seen their subsidies reduced, for an annual savings of up to
$358 million to the federal government. For 2011, if the limit had been
applied, up to 33,690 farmers—3.9 percent of all participating farmers—
would have received reduced subsidies, at an annual savings of up to $1
billion. The number of participating farmers receiving more than $40,000
in premium subsidies increased from 2010 to 2011 because crop prices
increased. Higher crop prices increased the value of crops insured,
resulting in higher crop insurance premiums and hence a higher subsidy
level. Figures 2 and 3 provide more information about the distribution of
premium subsidies among participating farmers in 2010 and 2011. The
figures show the number of participating farmers by the level of premium
subsidies that individual farmers (i.e., persons or legal entities) received.




15
  In this report, we used $40,000 as an example of a premium subsidy limit. Setting a
premium subsidy limit higher or lower than $40,000 would have corresponding effects on
cost savings.
16
  GAO-04-407. Since we issued this report, the 2008 farm bill decreased the incentive to
reorganize a farming operation in order to avoid a limit on farm program payments by
eliminating the “three-entity rule” and requiring direct attribution of payments to individuals.




Page 15                                                            GAO-12-256 Crop Insurance
Figure 2: Levels of Premium Subsidies that Individual Farmers Received in 2010




Figure 3: Levels of Premium Subsidies that Individual Farmers Received in 2011




Page 16                                                  GAO-12-256 Crop Insurance
In addition, figures 2 and 3 show that 1,260 participating farmers received
more than $100,000 in premium subsidies in 2010, and 4,202
participating farmers received more than $100,000 in premium subsidies
in 2011. Even if a higher limit on premium subsidies were applied—
$100,000, for example—in 2010 and 2011, the federal government would
have still realized savings, according to our analysis—of up to $87 million
and $232 million, respectively.

Figures 4 and 5 show, for 2010 and 2011, the percentage of participating
farmers and the value of the premium subsidies they received, separated
into two groups: those who received premium subsidies of $40,000 or
less and those who received premium subsidies of more than $40,000.
Figure 4 shows that 1.5 percent of all participating farmers (13,309
participating farmers) accounted for 18.9 percent of the premium
subsidies in 2010. 17 Figure 5 shows that 3.9 percent of all participating
farmers (33,690 participating farmers) accounted for 32.6 percent of the
premium subsidies in 2011. 18




17
  Among the 13,309 participating farmers receiving more than $40,000 in premium
subsidies, the average insured value of their crops was about $983,000. For all
participating farmers, the average insured value of the crops was about $89,000.
18
  Among the 33,690 participating farmers receiving more than $40,000 in premium
subsidies, the average insured value of their crops was about $873,000. For all
participating farmers, the average insured value of the crops was about $129,000.




Page 17                                                      GAO-12-256 Crop Insurance
Figure 4: Percentage of Participating Farmers and Value of Premium Subsidies by
Individual Farmers Receiving Subsidies of $40,000 or Less, or More than $40,000 in
2010




Page 18                                                  GAO-12-256 Crop Insurance
Figure 5: Percentage of Participating Farmers and Value of Premium Subsidies, by
Individual Farmers Receiving Subsidies of $40,000 or Less, or More than $40,000 in
2011




Many of the participating farmers who received more than $40,000 in
premium subsidies were in the northern and southern plains. Additional
information on the locations of participating farmers who received more
than $40,000 in premium subsidies for 2011 is presented in appendix III.

We also found the following:

•   In 2010, the average value of the premium subsidies received by
    participating farmers was $5,339. Thirty-seven participating farmers
    each received more than $500,000 in premium subsidies. The
    participating farmer receiving the most in premium subsidies—a total
    of about $1.8 million—was a farming operation organized as a
    corporation that insured cotton, tomatoes, and wheat across two
    counties in one state. In addition, the cost of the administrative
    expense subsidies that the government spent on behalf of this
    corporation was about $309,000. Another of the 37 participating
    farmers was an individual who insured corn, forage, potatoes,


Page 19                                                  GAO-12-256 Crop Insurance
     soybeans, sugar beets, and wheat across 23 counties in six states, for
     a total of about $1.6 million in premium subsidies. In addition, the cost
     of the administrative expense subsidies that the government spent on
     behalf of this farmer was about $443,000.

•    In 2011, the average value of the premium subsidies received was
     $8,312. Fifty-three of these farmers each received more than
     $500,000 in premium subsidies. The largest recipient was a
     corporation that insured nursery crops across three counties in one
     state, for a total of about $2.2 million in premium subsidies. In
     addition, the administrative expense subsidies that the government
     spent on behalf of this corporation totaled about $816,000. Another of
     the 53 farmers was an individual who insured canola, corn, dry beans,
     potatoes, soybeans, sugar beets, and wheat across eight counties in
     two states, for a total of about $1.3 million in premium subsidies. In
     addition, the administrative expense subsidies that the government
     spent on behalf of this farmer totaled about $499,000.

Alternatively, recent studies—noting the rising cost of premium
subsidies—have proposed reducing premium subsidy rates for all
participating farmers to achieve savings. 19 For example, if the premium
subsidy rate for 2010 and 2011 had been reduced by 10 percentage
points—from 62 percent to 52 percent—for all participating farmers, the
annual cost savings for those years would have been about $759 million
and $1.2 billion, respectively.

We also examined the effect on costs for the federal crop insurance
program of applying a crop insurance subsidy limit to administrative
expense subsidies, as well as premium subsidies. Additional savings
would be realized, according to our analysis. For example, if a limit of
$40,000 per farmer for both premium subsidies and administrative
expense subsidies had been applied to the crop insurance program for
2011, up to 52,693 farmers (6 percent of all participating farmers) would
have seen their subsidies reduced, at an annual savings of up to nearly
$1.8 billion to the federal government. In contrast, applying limits to
premium subsidies alone would have resulted in a savings of about $1


19
  Bipartisan Policy Center’s Debt Reduction Task Force, Restoring America’s Future
(Washington, D.C.: November 2010); Congressional Budget Office, Reducing the Deficit:
Spending and Revenue Options (Washington, D.C.: March 2011); Office of Management
and Budget, Fiscal Year 2013 Budget of the U.S. Government (Washington, D.C.:
February 2012).




Page 20                                                     GAO-12-256 Crop Insurance
                             billion. Additional information about the 2010 and 2011 cost of premium
                             subsidies and administrative expense subsidies by farmer is in appendix
                             IV.


Limiting or Reducing         In addition to federal cost savings, we identified a number of other
Premium Subsidies Raises     considerations that may come into play in deciding whether to limit
Other Considerations         premium subsidies to individual farmers. These considerations include (1)
                             the potential effect on the financial condition of large farms (i.e., those
                             with annual gross sales of $1 million or more), whose owners are most
                             likely to be affected by subsidy limits; (2) the availability of other risk
                             management tools against crop losses, such as marketing contracts; and
                             (3) the potential effect on beginning and smaller farmers. In addition, we
                             identified considerations associated with either limiting premium subsidies
                             to large farmers or reducing premium subsidy rates for all farmers.

Potential Effect on Large    The application of limits of $40,000 in premium subsidies to farmers
Farms’ Financial Condition   participating in the federal crop insurance program would primarily affect
                             farmers who have large farms. For example, as discussed earlier, using
                             our data for 2011, these participating farmers represented 3.9 percent of
                             the farmers participating in the crop insurance program in 2011 and
                             accounted for 32.6 percent of the premium subsidies. In view of the
                             insured value of these farmers’ crops, they likely had annual gross sales
                             approaching or exceeding $1 million. In addition, the insured value of
                             these farmers’ crops represented about 26 percent of the total value of
                             insured crops in 2011. 20 Limiting premium subsidies to farmers may raise
                             concerns about how these limits could affect large farms’ financial
                             condition. Based on our review of data from USDA’s Agricultural
                             Resource Management Survey on the financial condition of farms, by
                             farm size, large farms are better positioned than smaller farms to pay a
                             higher share of their premiums. Specifically, according to the USDA data:

                             •    During 2008 and 2009, the most recent years for which USDA data
                                  were available, the largest farms with crop insurance coverage (i.e.,
                                  those with annual gross sales of $1 million or more) earned an
                                  average annual net farm income of about $561,000. In contrast, the
                                  next two farm categories (farms with annual gross sales of from
                                  $500,000 to $1 million and farms with annual gross sales of from


                             20
                               We used 2011 numbers because, based on USDA crop price projections, 2011 is
                             generally more indicative of the future than 2010.




                             Page 21                                                   GAO-12-256 Crop Insurance
                                  $250,000 to $500,000) had average annual net farm incomes of about
                                  $184,000 and $92,000, respectively.

                             •    The largest farms with crop insurance coverage had higher relative
                                  profitability as measured by rate of return on equity, which is the ratio
                                  of net farm income to the net worth of the farm. These farms had an
                                  average rate of return on equity of 8.8 percent. In contrast, the next
                                  two farm categories had rates of 4.5 percent and 1.9 percent,
                                  respectively.

                             •    The largest farms had higher debt-to-asset ratios than the next two
                                  farm categories, 21 but the largest farms’ ability to service debt by
                                  covering principal payments and interest on term debt was greater.
                                  Furthermore, a high debt-to-asset ratio is not necessarily a problem,
                                  as long as the rate of return on assets exceeds the interest rate on the
                                  funds borrowed. On average, farms with sales greater than $5 million
                                  generate more net cash income per dollar of assets than other farms,
                                  and the larger gross cash income can be used to pay interest or
                                  reduce loan balances.

                             In addition, regarding the financial condition of large farms, a related
                             consideration is the global competiveness of U.S. agriculture. According
                             to critics of limits on farm program benefits, larger farms should not be
                             penalized for the economies of size and efficiencies they have achieved,
                             and farm programs should help make U.S. farmers more competitive in
                             global markets.

Availability of Other Risk   If the large farmers affected by a limit on premium subsidies were to
Management Tools against     reduce their coverage, they may be able to self-insure through a variety of
Crop Losses                  risk management methods, including the following:

                             •    Marketing contracts. Marketing contracts reduce price risks and are
                                  already used by many large farmers. These contracts are either
                                  verbal or written agreements between a buyer and a farmer that set a
                                  price for a commodity before harvest or before the commodity is ready
                                  to be marketed.


                             21
                               A debt-to-asset ratio is a ratio of the farm’s total debt to total assets, showing the share
                             of assets owed to creditors. It is a measure of the risk exposure of the farm business, with
                             a higher ratio corresponding to greater risk. According to a 2012 Congressional Research
                             Service Report, the debt-to-asset ratio for all farms is expected to fall to 10.3 percent in
                             2012, the lowest ratio on record.




                             Page 22                                                          GAO-12-256 Crop Insurance
                          •    Futures contracts and hedging. A futures contact is a financial
                               contract obligating the buyer to purchase an asset (or the seller to sell
                               an asset), such as a commodity, at a predetermined future date and
                               price. Futures contracts detail the quality and quantity of the
                               underlying asset and are standardized to facilitate trading on a futures
                               exchange. Futures can be used to hedge on the price movement of
                               the underlying asset. For example, a producer of corn could use
                               futures to lock in a certain price and manage risk (hedge).

                          •    Crop and other enterprise diversification. Diversification is a risk
                               management strategy that involves participating in more than one
                               activity. A crop farm, for example, may have several productive
                               enterprises (i.e., several different crops or both crops and livestock),
                               or may operate nonadjacent parcels so that local weather disasters
                               are less likely to reduce yields for all crops simultaneously.

                          •    Liquid credit reserves. Farmers may maintain liquid credit reserves,
                               such as an open line of credit, to generate cash quickly to meet
                               financial obligations in the face of an adverse event. Liquid credit
                               reserves reflect unused borrowing capacity.

                          •    Private insurance. Certain agricultural risks—such as the risks
                               associated with hail and other weather events damage—are insured
                               by private companies without subsidized premiums.

Effect on Beginning and   Unlimited premium subsidies for individual farmers and farm entities may
Smaller Farmers           compound challenges that beginning and smaller farmers already face.
                          For example, we reported in 2007 that the challenges facing beginning
                          farmers include obtaining capital to purchase land and that the rising cost
                          of land, driven in part by farm program subsidies, may make it difficult for
                          beginning farmers to purchase land. 22 According to USDA studies, farm
                          program payments and other benefits, such as premium subsidies, result
                          in higher prices to buy or rent land because, in some cases, the benefits
                          go directly to landowners—resulting in higher land value—and in other
                          cases the benefits go to tenants, prompting landlords to raise rental
                          rates. 23 Furthermore, a recent USDA report explained how farm program


                          22
                           GAO, Beginning Farmers: Additional Steps Needed to Demonstrate the Effectiveness of
                          USDA Assistance, GAO-07-1130 (Washington, D.C.: Sept. 18, 2007).
                          23
                            These studies analyzed the effects of farm program payments. Crop insurance premium
                          subsidies have a similar effect, though the link is less direct.




                          Page 23                                                    GAO-12-256 Crop Insurance
                                 payments may provide an advantage to larger farms. 24 According to this
                                 report, “For some farmers, payments may provide opportunities to
                                 increase the size of their operation. A steady stream of income may allow
                                 recipients to gain access to higher levels of credit or may allow them to
                                 increase their rental or purchase bids for land. This may provide
                                 opportunities for them to increase in size while driving out competition
                                 from smaller farms that don’t have access to the same levels of capital,
                                 which can impact the overall structure of agriculture.”

Additional Considerations to     We identified additional considerations associated with either limiting
Limiting or Reducing Subsidies   premium subsidies to large farms or reducing premium subsidy rates for
                                 all farmers.

                                 Premium subsidy limits or reduced premium subsidy rates could lead to
                                 lower participation in the federal crop insurance program and higher
                                 disaster assistance payments to farmers. In the past, Congress has
                                 authorized ad hoc disaster assistance payments to help farmers whose
                                 crops were damaged or destroyed by natural disasters. However, in view
                                 of the nation’s budgetary pressures, Congress may be less willing to
                                 approve such payments than it has in the past. In addition, according to a
                                 Congressional Budget Office report, 25 the increasing importance of crop
                                 insurance to private lenders who provide farm loans may cause farmers
                                 to continue to participate in the crop insurance program, even if premium
                                 subsidies were reduced. Furthermore, assuming they are eligible to
                                 purchase unsubsidized crop insurance, farmers could still enroll all of
                                 their eligible crop acres in the program, making them eligible to receive
                                 claim payments on these acres. In the event of a loss, farmers who chose
                                 to maintain crop insurance coverage as they had in the past would then
                                 have the same level of protection.

                                 As a member of the World Trade Organization, the United States has
                                 made commitments to limit domestic agricultural support that is most
                                 likely to distort trade. Under the current World Trade Organization
                                 agreement, the United States is committed to spending no more than
                                 $19.1 billion per year on this support. Keeping this domestic agricultural



                                 24
                                   USDA Economic Research Service, The Changing Organization of U.S. Farming
                                 (Washington, D.C.: December 2011).
                                 25
                                   Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options
                                 (Washington, D.C.: March 2011).




                                 Page 24                                                    GAO-12-256 Crop Insurance
                           support below this limit is likely to be a consideration of policymakers
                           when they are developing or modifying farm programs. In August 2011,
                           when the United States reported its domestic agricultural support for 2009
                           to the World Trade Organization, it included the value of crop insurance
                           premium subsidies—$5.4 billion—in its submission as nonproduct-
                           specific support. 26 This $5.4 billion was the largest amount reported as
                           nonproduct-specific support, which totaled $6.1 billion. However, under
                           the current agreement, nonproduct-specific support in 2009 did not count
                           toward the United States’ limit of $19.1 billion.


                           Since 2001, RMA has used data mining tools to prevent and detect fraud,
RMA Has Not                waste, and abuse in the crop insurance program by either farmers or
Maximized the Use of       insurance agents and adjusters, but it has not maximized their use to
                           realize potential additional savings, largely because of competing
Data Mining Tools,         compliance review priorities. In particular, using data mining tools, RMA
Largely Because of         develops lists of farmers with anomalous claim payments and informs
Competing Priorities       these farmers that their fields will be inspected. In addition, investigators
                           from RMA and USDA’s Office of the Inspector General sometimes use
                           the list of agents and adjusters—identified through data mining—who
                           have anomalous losses to corroborate information from other sources,
                           but RMA has not conducted required reviews of agents and adjusters to
                           determine whether anomalous losses are the result of fraud, waste, and
                           abuse. RMA has not maximized the use of data mining tools, largely
                           because of competing compliance review priorities, according to RMA
                           documents we examined and officials we spoke with. In addition, RMA
                           and FSA have not taken full advantage of data management techniques
                           to increase the effectiveness of data mining.


Letters to Farmers Have    Using data mining, RMA has identified farmers with anomalous claim
Prevented Fraud, Waste,    payments (listed farmers), as called for under USDA procedures
and Abuse, but RMA Has     developed pursuant to an ARPA requirement. In addition, as described in
                           these procedures, at RMA’s request, FSA has sent letters informing these
Not Fully Used This Data   farmers that an official in the FSA county office would inspect the crop in
Mining Tool                at least one of their fields during the growing season and report the
                           results of the field inspection to RMA. For example, in 2010—the most



                           26
                             “U.S. Domestic Support Notification for Marketing Year 2009,” G/AG/N/USA/80, World
                           Trade Organization, August 29, 2011.




                           Page 25                                                     GAO-12-256 Crop Insurance
recent year for which data are available—RMA asked FSA to send letters
to 1,747 listed farmers for each of their 2,452 policies with anomalous
claim payments. RMA officials told us that the letters act as a warning and
have substantially reduced total claims, by an estimated $838 million from
2001 through 2010. According to RMA officials, about two-thirds of the
farmers who receive a letter from FSA reduce or stop filing claims for at
least 2 or 3 years following receipt of the letter, and one-third of farmers
make additional anomalous claims after being placed on the list; some of
these claims are likely to be legitimate.

The value of identifying farmers with anomalous claim payments may be
undermined, however, by the fact that FSA does not complete all field
inspections, and neither FSA nor RMA has a process to ensure that the
results of all completed inspections are accurately reported, in
accordance with USDA’s written procedures. In particular, in 2009 and
2010, RMA did not have field inspection results for 20 percent and 28
percent, respectively, of the fields for farmers listed as having anomalous
claim payments. Four states—California, Colorado, Florida, and Texas—
accounted for more than 40 percent of the missing data. For example, in
Florida, FSA inspected a field for 8 of the 88 farmers with anomalous
claim payments, according to our review of RMA records. If FSA does not
complete all field inspections requested by RMA, not all farmers who
have had anomalous claim payments will be subject to a review,
increasing the likelihood that fraud, waste, or abuse may occur without
detection. Table 2 shows the number of requests RMA made for FSA field
inspections and the percentage of fields inspected for 2009 and 2010 in
selected states.




Page 26                                              GAO-12-256 Crop Insurance
Table 2: Number of RMA Requests for FSA Field Inspections and Percentage of
Inspections Completed for Selected States in 2009 and 2010

                                             2009                              2010
                                     Number of Percentage of       Number of Percentage of
                                    inspections  inspections      inspections  inspections
    State                             requested   completed         requested   completed
    Florida                                 64             3                  24                 17
    California                              84           17                   85                 44
    Colorado                                54             0                  47                   0
    Minnesota                              132           95                 111                  97
    North Dakota                           195          100                 183                  92
                                                                                                   a
    Texas                                  153           42                 215
Source: GAO analysis of RMA data.
a
 RMA reported that some 2010 data for Texas were not included because the FSA Texas office sent
the data to RMA too late for it to be included in RMA’s totals, and other Texas data were missing for
reasons RMA could not determine.


We identified three reasons for the absence of FSA field inspections.
First, we found that FSA state offices are not required to monitor the
completion of field inspections conducted by FSA county offices during
the growing season. Without FSA state office monitoring of RMA-
requested field inspections, FSA county offices may have less incentive
to complete them. The FSA state offices in the six states we reviewed
varied in how closely they monitor these field office inspections. In
particular, in Minnesota and North Dakota, FSA state offices monitored
completion of field inspections and, in 2010, in these states, FSA county
offices had 111 and 183 field inspections to conduct, respectively, and
completed 97 percent and 92 percent, respectively, of these inspections.
In Minnesota, according to an FSA official we spoke with, the state office
“encouraged” completion of field inspections by e-mailing all of the state’s
FSA county offices a list of offices that had not completed their
inspections. In North Dakota, a state FSA official attributed the state’s
high rate of completed inspections largely to the fact that the state office
monitors the rate of field inspections during the growing season,
encouraging county offices that have not completed their inspections to
do so. In contrast, California, Colorado, and Florida each had from 24 to
85 inspections to conduct and completed from none to 44 percent of
these inspections. 27 FSA officials from California and Florida agreed that


27
     As noted in table 2, Texas data for 2010 were incomplete.




Page 27                                                                GAO-12-256 Crop Insurance
it would be a good practice to monitor the completion of field inspections
during the growing season at the state or district level to hold the county
offices accountable.

Second, FSA state officials in two of the four states with low inspection
rates told us that insufficient resources were a key reason that county
offices had not completed FSA inspections. These officials said that
staffing had decreased for the past several years, but workload had
increased.

Third, some FSA state officials said that county office staff may hesitate
to spend time and effort on inspections when they do not believe the
inspections will have any impact. For example, they said that neither they
nor county officials are informed of any action taken on their inspection
results and that county officials are discouraged when their inspections do
not result in actions against the farmers who appear to be engaged in
negligent farming practices. However, at least one RMA compliance
office—RMA’s Northern Regional Compliance Office—does provide
feedback to FSA. This office is responsible for Iowa, Minnesota, Montana,
North Dakota, South Dakota, Wisconsin, and Wyoming. According to an
FSA official in North Dakota, RMA’s Northern Regional Compliance Office
sends FSA state officials letters describing the results of reviews RMA
requested the insurance companies to conduct based on FSA
inspections, and the state officials are to forward this information to the
counties.

In addition, in 2010, as provided for under the SRA, RMA regional
compliance offices directed insurance companies to review and report on
farmers’ policies to ascertain whether fraud, waste, or abuse had
occurred. These RMA offices have generally directed such reviews in two
situations. First, when FSA inspectors reported that farmers’ crops were
in worse condition than their peers, RMA regional compliance offices may
direct companies to analyze the claims, documenting their work with
appraisal sheets, special adjuster reports, pictures, and receipts for inputs
such as seeds and fertilizer. Second, when farmers have anomalous
claims data related to production history—a key factor in determining the
total claims farmers make—RMA offices may direct the insurance
companies to review these policies.




Page 28                                              GAO-12-256 Crop Insurance
USDA’s Office of the Inspector General reported in 2009 that RMA lacks
documented procedures for following up on cases where farmers file
claims after FSA’s field inspections indicate that crops are in good
condition, and the farmer should not experience a loss. 28 Under the
Standards for Internal Control in the Federal Government, federal
agencies are to employ control activities, such as clearly documenting
internal control in management directives, administrative policies, or
operating manuals, and the documentation is to be readily available for
examination. 29 Without documented agency policies and procedures for
reviewing farmers’ policies identified by data mining reports, RMA cannot
provide reasonable assurance that the farmers’ policies would be
reviewed consistently. The Inspector General added that, since RMA’s
resources are not unlimited, the agency should consider requiring that
insurance companies perform as much of this work as possible. In this
regard, as we noted above, about one-third of farmers listed as having
anomalous claim payments again claim losses after being placed on the
list. RMA has not maximized the use of the list of farmers with anomalous
claim payments by, for example, directing insurance companies to review
these farmers’ claims before paying them after FSA has reported the
crops to be in good condition. According to three current and former RMA
and Office of the Inspector General officials, because these farmers have
previously had anomalous claim payments, their claims warrant a review,
particularly when FSA’s inspection found their crops to be in good
condition within weeks of the time that the farmer made a claim.




28
 USDA Office of the Inspector General, RMA Compliance Activities.
29
  See GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). These standards, issued
pursuant to the requirements of the Federal Managers’ Financial Integrity Act of 1982,
provide the overall framework for establishing and maintaining internal control in the
federal government.




Page 29                                                        GAO-12-256 Crop Insurance
USDA May Use the List of    Investigators from RMA and USDA’s Office of the Inspector General said
Agents and Adjusters with   that they use the list of insurance agents and loss adjusters with
Anomalous Losses to         anomalous losses at times to corroborate information from other
                            sources—such as the Office of the Inspector General’s fraud hotline—
Corroborate Other           rather than as a basis for initiating reviews. However, RMA has not fully
Information, but RMA        met a statutory ARPA requirement to conduct a review of agents and
Does Not Conduct            adjusters with higher losses than their peers to determine whether the
Required Reviews            losses associated with these individuals are the result of fraud, waste, or
                            abuse.

                            Officials from RMA and its data mining contractor told us of an instance in
                            which an investigator in USDA’s Office of the Inspector General used the
                            list of insurance agents and loss adjusters with anomalous losses as a
                            starting point. Based on information in the list, the investigator began
                            calling other USDA Inspector General investigative offices to determine
                            whether they were also familiar with an agent who frequently had large
                            anomalous losses. As a result of the list and telephone calls, the
                            investigator identified an Inspector General hotline informant who had
                            filed complaints about the same agent; the investigator initiated a review
                            that became the largest crop insurance fraud case in U.S. history; this
                            case involved tobacco farmers and insurance agents and adjusters
                            working together. According to the Office of the Inspector General, the
                            case may result in lower program costs of more than $80 million and
                            continues to expand to more related reviews.

                            We also found that RMA had not fully met a requirement to conduct a
                            review of agents and adjusters with higher losses than their peers to
                            determine whether the losses associated with these individuals are the
                            result of fraud, waste, or abuse. In 2009, the Inspector General found that
                            RMA was not reviewing these individuals and recommended that RMA
                            develop policies and procedures for reviewing disparately performing
                            agents and adjusters to assess whether the higher-than-average loss
                            ratios for the agents and adjusters identified are the result of potential
                            fraud, waste, or abuse. According to RMA officials we interviewed, RMA
                            had not fully met this requirement because of resource constraints,
                            among other things. These officials told us that investigating agents and
                            loss adjusters is more complex and time-consuming than investigating
                            individual farmers because one agent or adjuster may be identified with a
                            dozen or more policies. In addition, officials said, the insurance company
                            database used to develop the list includes agents who are not servicing
                            the policy they are identified with. RMA officials told us that they have
                            discussed the problem of inaccurate data with insurance companies and
                            that the companies have made improvements, but they could not specify


                            Page 30                                              GAO-12-256 Crop Insurance
                            the extent of the problem or the improvements. Some RMA officials also
                            pointed out that investigators use many different data mining tools and
                            that it may be a better use of resources if the requirement for RMA to
                            review the list of agents and adjusters was changed to allow RMA to
                            review agents and adjusters and farmers using a variety of data mining
                            tools, such as a software program that helps investigators identify links
                            among producers, agents, or adjusters who are jointly engaged in
                            activities that are anomalous. In addition, in response to another 2000
                            ARPA requirement, RMA included in the 2011 SRA a provision directing
                            insurance companies to annually evaluate the performance of every
                            agent and loss adjuster, including their loss ratios and the number and
                            type of errors made by an agent or adjuster. The SRA does not, however,
                            require additional focus on agents and adjusters identified as having
                            anomalous losses through data mining.


Competing RMA Priorities    According to RMA documents we examined and five of the six RMA
Result in Limited Time to   regional compliance officials we spoke with, RMA staff devote most of
Conduct Reviews of          their time to three priority compliance activities aimed at detecting fraud,
                            waste, and abuse in crop insurance. As a result, they have limited time to
Farmers and Agents and      review individuals identified by data mining tools, such as the list of
Adjusters Identified by     farmers with anomalous claim payments and the list of agents and
Data Mining Tools           adjusters with anomalous losses. Specifically, regional compliance offices
                            are responsible for carrying out the following priority activities:

                            •   Reconciling conflicting RMA/FSA data associated with an FSA
                                disaster assistance program, the Supplemental Revenue Assistance
                                Payments Program. RMA headquarters directs staff to reconcile RMA
                                data, such as the number of acres for which a farmer is claiming a
                                loss, with FSA data on the number of acres planted. According to an
                                RMA document, as of August 5, 2011, FSA had identified more than
                                5,000 discrepancies for 2008 and 2009 and sent these to RMA, and
                                RMA regional compliance offices had resolved over half of them. RMA
                                officials said that they do not use data mining to determine priorities
                                for reconciliations because they are required to reconcile every
                                discrepancy referred by FSA, even if it is a $10 discrepancy. In
                                addition, the RMA Administrator told us that insurance companies that
                                are asked to help RMA resolve discrepancies have discussed the
                                substantial costs they incur to correct small errors.

                            •   Reviewing crop insurance policies to comply with the Improper
                                Payments Information Act of 2002. RMA staff review 250 randomly
                                selected policies each year, as agreed with the Office of Management



                            Page 31                                              GAO-12-256 Crop Insurance
                                       and Budget, to estimate a payment error rate. Some RMA officials
                                       said that they would prefer to focus more attention on using data
                                       mining to review high-risk policies to detect and prevent fraud, waste,
                                       and abuse and focus less attention on conducting reviews to estimate
                                       an error rate.

                                   •   Reviewing potential cases of fraud, waste, or abuse in the crop
                                       insurance program that were identified through hotline calls and
                                       referred by USDA’s Inspector General. According to RMA data, each
                                       year the agency opens and closes several hundred cases of potential
                                       fraud, waste, and abuse involving thousands of crop insurance
                                       policies; some field offices reported having large backlogs of cases to
                                       address. Several RMA officials said they would like to use data mining
                                       to determine which referrals they should review, but Office of the
                                       Inspector General policy requires them to review all of these referrals
                                       within 90 days. They noted that some referrals provide little
                                       information or relate to small-value policies, but RMA may give priority
                                       to these referrals over reviews with a potentially greater cost-benefit
                                       result because of the Office of the Inspector General policy.

RMA and FSA Have Not               We identified three areas in which RMA and FSA have not taken full
Taken Full Advantage of            advantage of data management techniques to increase the effectiveness
Data Management                    of data mining: inaccurate and incomplete FSA field inspection data for
                                   listed farmers, the insufficiency of the data collected from insurance
Techniques to Facilitate           companies on the results of their reviews, and RMA’s not providing
Data Mining                        insurance companies with results for most FSA inspections.

Inaccurate and Incomplete FSA      Certain FSA field inspection data for listed farmers may be inaccurate and
Field Inspection Data for Listed   incomplete because the results of the inspections may be reported late or
Farmers                            not at all. This problem arises because RMA and FSA have a complicated
                                   process for transmitting the data, creating opportunities for errors and
                                   omissions. Specifically:

                                   •   Staff in about 1,000 FSA county offices transmit their field inspection
                                       data to nearly 50 state offices by e-mailing data, mailing CDs or paper
                                       documents, or inputting the data in their FSA computer systems.

                                   •   The FSA state offices e-mail or mail the data, in its different formats,
                                       to six RMA regional compliance offices.

                                   •   Two of the six RMA regional compliance offices retype the data into
                                       an RMA system, and the other four offices retype a small portion of
                                       the data—the field inspection date and crop conditions—into a



                                   Page 32                                               GAO-12-256 Crop Insurance
    spreadsheet that already contains the original data mining
    information, such as the policy number and participating farmer’s
    name. The six offices then send the FSA data to RMA’s data mining
    contractor for analysis.

Through interviews with FSA state officials and a review of the data on
FSA field inspection results, we identified several examples of errors and
omissions that had occurred in the process of recording and transmitting
the data from FSA to RMA and its data mining contractor for additional
analysis and followup on anomalous claims and to its data mining
contractor for further analysis. For example:

•   Officials in three FSA state offices said that additional field inspections
    likely have been done even though the data for them are missing.
    They said that some county staff had not been trained on how to enter
    inspection results into the FSA computer system and therefore did not
    always report information on completed inspections to state FSA
    offices so that it could be provided to RMA.

•   FSA state offices, at times, did not forward field inspection data to
    RMA for several months after the inspections were completed,
    according to our analysis of FSA records and an RMA official. All of
    the field inspection data for one state were missing from RMA’s data
    mining contractor records because the FSA state office provided the
    data to RMA after RMA had sent inspection data to the data mining
    contractor for analysis. At least 10 percent of the data for another
    state were missing for the same reason. One RMA official noted that
    FSA occasionally provides late responses for fields with crops in
    worse condition than others in the area. Such delays mean that RMA
    cannot ask insurance companies to review the fields for these policies
    before harvest or making a claim payment, when insurance adjusters
    could determine whether the crop was being deliberately managed in
    a way that reduces yield.

According to RMA officials and contractor staff, they have recognized
these problems and proposed using software that other USDA agencies
use in a new process to transmit the data from the FSA county offices
directly to a USDA system while providing access to RMA and FSA. They
told us that they are planning to implement the new system before 2012
field inspections have begun and believe the new system will eliminate
problems we identified.




Page 33                                                GAO-12-256 Crop Insurance
Insufficiency of the Data     RMA does not collect sufficient data from insurance company reviews in
Collected from Insurance      an electronic format that facilitates its data mining, according to RMA
Companies on the Results of   officials. RMA uses an electronic form to collect data from all types of
Their Reviews                 company reviews, including those that RMA requested as a result of data
                              mining and those that were requested because of Office of the Inspector
                              General hotline referrals. However, this form does not provide the data
                              mining contractor with sufficient information on which records the
                              insurance companies reviewed and why they reviewed these records in
                              order to determine if an adjustment needs to be made to improve data
                              mining, according to RMA officials and the data mining contractor. In
                              addition, RMA officials and the data mining contractor told us that the
                              electronic form does not provide an efficient way of sorting out the data
                              needed for data mining. RMA officials said that more complete data on
                              the insurance company reviews are important for improving data mining
                              because insurance companies often have information that RMA does not
                              have that can explain why an anomalous claim is being made. The data
                              mining contractor stated that it had developed proposals for revising the
                              electronic form to collect information that could help it improve data
                              mining lists, such as the list of farmers with anomalous claim payments
                              and agents and adjusters with anomalous losses. In 2009, the Inspector
                              General also concluded that the data mining contractor needed such
                              information to refine data mining reports. Without an electronic
                              mechanism to collect sufficient data from insurance companies on their
                              reviews, RMA is limited in the analyses it can conduct and in the
                              improvements it can make in data mining. As a result, RMA may be
                              missing opportunities for savings that result from better data mining. RMA
                              officials said that they are considering making changes so that the data
                              mining contractor receives additional information.

RMA Is Not Providing          RMA generally does not provide insurance companies with field
Companies with Results for    inspection results for most FSA inspections—that is, those for fields in
Most FSA Inspections          good condition—but provides them with the field inspection results for a
                              small portion of the farmers—those with crops in worse condition than
                              their peers. However, inspection information on fields in good condition is
                              important—particularly for inspections that occurred shortly before a claim
                              was made. Past cases have revealed that some farmers may harvest a
                              high-yielding crop, hide the sale of that crop, and report a loss to receive
                              an insurance payment. USDA’s Inspector General has reported on the
                              need to use FSA field inspection information to identify potential fraud,




                              Page 34                                              GAO-12-256 Crop Insurance
              waste, and abuse. 30 For example, in 2009, the Inspector General reported
              on two farmers on the list of farmers with anomalous claim payments
              whose crops were in good condition, according to the FSA inspection;
              however, these farmers filed nearly $300,000 in claims a short time after
              the FSA inspection, and RMA did not notice the discrepancy. RMA’s data
              mining contractor stated that it could, with a few days of effort, provide all
              the FSA field inspection data to the insurance companies, including those
              on crops in good condition, which represent the bulk of inspections.


              Federal crop insurance plays an important role in protecting farmers from
Conclusions   losses caused by natural disasters and price declines, and it has become
              one of the most important programs in the safety net for farmers. As we
              have discussed, unlike other farm programs, the crop insurance program
              does not limit the subsidies that a farmer can receive. Without subsidy
              limits, a small number of farmers receive relatively large premium
              subsidies and a relatively large share of total premium subsidies. In
              addition, premium subsidies for all farmers, which averaged 62 percent of
              premiums in 2011, have increased substantially since 2000. With
              increasing pressure to reduce the federal budget deficit and with record
              farm income in recent years, it is critical that taxpayer-provided funds for
              the farm safety net are spent as economically as possible. Limits on
              premium subsidies to individual farmers or reductions in the amount of
              premium subsidies for all farmers participating in the crop insurance
              program, or both limits and reductions, present an opportunity to save
              hundreds of millions of dollars per year for taxpayers without
              compromising this safety net.

              In addition, RMA has made substantial progress over the past decade in
              developing data mining tools to detect and prevent fraud, waste, and
              abuse from a list of farmers who have received payments for anomalous
              claims, but RMA’s use of these tools lags behind their development,
              largely because of competing priorities. By not maximizing the use of
              these tools, RMA may be missing opportunities to identify and prevent
              losses to the federal government that result from fraud, waste, or abuse.
              Furthermore, because FSA does not require its state offices to monitor,
              during the growing season, completion of its county office field



              30
               U.S. Department of Agriculture Office of the Inspector General, RMA Compliance
              Activities.




              Page 35                                                     GAO-12-256 Crop Insurance
                      inspections for farmers with anomalous claim payments, and because
                      FSA does not always communicate its inspection results to RMA in a
                      timely manner, RMA and FSA may not know about farmers who
                      improperly manage their crops or falsely report losses. FSA state offices
                      that do such monitoring seem to encourage a higher completion rate of
                      county office field inspections. RMA has also not provided insurance
                      companies with most FSA inspection results, particularly findings that
                      crops were in good condition, or directed insurance companies to review
                      the results of all completed FSA field inspections before paying claims
                      that occur after inspections showed a crop was in good condition. As a
                      result, insurance companies may not have information that could help
                      them identify claims that should be denied.

                      RMA has also not realized the potential of data mining tools to enhance
                      its detection of fraud, waste, and abuse on the part of insurance agents
                      and adjusters, including addressing the ARPA requirement to review
                      agents and adjusters identified as having anomalous losses.
                      Furthermore, RMA has not taken steps requiring minimal resources, for
                      example, by directing insurance companies, during annual performance
                      evaluations of agents and adjusters, to focus more attention on the list of
                      agents and adjusters with such losses. In addition, RMA’s electronic form
                      does not collect sufficient data from insurance companies on their reviews
                      in order to facilitate the use of these reviews in data mining.

                      To reduce the cost of the crop insurance program, Congress should
Matter for            consider limiting the subsidy for premiums that an individual farmer can
Congressional         receive each year or reducing the subsidy for all farmers participating in
                      the program, or both limiting and reducing these subsidies.
Consideration
                      To help prevent and detect fraud, waste, and abuse in the federal crop
Recommendations for   insurance program, we recommend that the Secretary of Agriculture
Executive Action      direct the Administrator of RMA and the Administrator of FSA, as
                      appropriate, to take the following four actions:

                      •   For the list of farmers with anomalous claim payments, encourage the
                          completion of FSA county office inspections during the growing
                          season by requiring FSA state offices to monitor the status of their
                          completion.

                      •   Maximize the use of the list of farmers with anomalous claim
                          payments by, for example, ensuring that insurance companies receive
                          the results of all FSA field inspections in a timely manner and directing


                      Page 36                                              GAO-12-256 Crop Insurance
                         insurance companies to review the results of all completed FSA field
                         inspections before paying claims that occur after inspections showed
                         the crop was in good condition.

                     •   Increase the use of the list of agents and adjusters with anomalous
                         losses through actions, such as directing insurance companies, during
                         annual performance evaluations of insurance agents and adjusters, to
                         focus more of their attention on the list of agents and adjusters with
                         anomalous losses.

                     •   Develop a mechanism, such as a revised electronic form, to collect
                         additional data from insurance companies in order to facilitate the use
                         of the companies’ reviews in data mining.


                     We provided the Secretary of Agriculture with a draft of this report for
Agency Comments      review and comment. We received written comments from the acting
and Our Evaluation   USDA Under Secretary for Farm and Foreign Agricultural Services. In
                     these comments, the acting Under Secretary stated it was ill advised for
                     us to suggest that Congress consider limiting or reducing premium
                     subsides without further study. The acting Under Secretary stated that in
                     recommending a $40,000 limit on premium subsidies, the report does not
                     fully account for all potentially negative impacts and costs resulting from
                     such a change. However, as we state in the report, we do not recommend
                     a $40,000 limit in premium subsidies per crop insurance participant.
                     Instead, we used $40,000 as an example of a premium subsidy limit and
                     noted that setting a premium subsidy limit higher or lower would have
                     corresponding effects on cost savings. In addition, our report recognizes
                     that setting a subsidy limit may have impacts, and we discuss some of
                     these potential impacts. Moreover, at a time when the agriculture sector is
                     enjoying record farm income and higher farmland values and the nation is
                     facing severe deficit and long-term fiscal challenges, we believe that crop
                     insurance premium subsidies—the single largest component of farm
                     program costs—is a potential area for federal cost savings. Furthermore,
                     the Administration’s budget for fiscal year 2013 and the Congressional
                     Budget Office each proposed a reduction in premium subsidies. These
                     subsidies increased fourfold, from $1.7 billion in 2002 to $7.4 billion in
                     2011.

                     USDA agreed with one of our recommendations, and did not directly
                     respond to the other three. Regarding our first recommendation—
                     encouraging the completion of FSA county office inspections for the list of
                     farmers with anomalous claim payments by requiring FSA state offices to



                     Page 37                                             GAO-12-256 Crop Insurance
monitor the status of their completion—USDA stated that it will update its
written procedures to require FSA state offices to monitor county offices’
completion of these inspections.

Regarding our second recommendation—that USDA maximize its list of
farmers with anomalous claims by providing the results of completed FSA
inspections to the insurance companies—USDA stated it is unlikely that
FSA will be able to accomplish this recommendation, but that comment is
not responsive to our recommendation. We clarified the language to say
that insurance companies should receive the results of all inspections that
have been completed. This effort would not entail additional work on the
part of FSA. RMA’s data mining contractor told us that it could complete
this activity within a few days after an inspection was completed.

Regarding our third recommendation—to direct insurance companies,
during annual performance evaluations of insurance agents and
adjusters, to focus more of their attention on the list of agents and
adjusters with anomalous losses than on others—USDA reported that it
was issuing guidance directing companies to provide to USDA the results
of reviews conducted on each agent/loss adjuster identified on the
anomalous agent/loss adjuster list provided by RMA. We agree that
providing guidance to the companies is important and continue to believe
that directing insurance companies to focus more attention on these
agents and loss adjusters during annual performance reviews would
produce additional benefits.

Regarding the fourth recommendation—to develop a mechanism, such as
a revised electronic form, to collect additional data from insurance
companies in order to facilitate the use of the companies’ reviews in data
mining—USDA did not clearly state whether it agreed or disagreed.
USDA stated that as one of its information systems projects matures, it
will find better ways to record and gather data for data mining. However,
we continue to believe that the data mining contractor needs additional
data from insurance company reviews in order to improve data mining,
and that specific direction from USDA is needed to acquire it.

USDA comments and our response are in appendix V.




Page 38                                             GAO-12-256 Crop Insurance
As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
report date. At that time, we will send copies of this report to the
appropriate congressional committees; the Secretary of Agriculture; the
Director, Office of Management and Budget; and other interested parties.
In addition, this report will be available at no charge on the GAO website
at http://www.gao.gov.

If you or your staff members have any questions about this report, please
contact me at (202) 512-3841 or shamesl@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Key contributors to this report are listed in
appendix VI.

Sincerely yours,




Lisa Shames,
Director, Natural Resources
   and Environment




Page 39                                                GAO-12-256 Crop Insurance
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              Our objectives were to determine (1) the effect on program costs of
              applying limits on farmers’ federal crop insurance subsidies, as payment
              limits are applied to other farm programs, and (2) the extent to which the
              U.S. Department of Agriculture (USDA) has used data mining tools to
              prevent and detect fraud, waste, and abuse in the crop insurance
              program.

              To address the first objective, we reviewed eligibility standards, such as
              adjusted gross income limits and payment limits, in the provisions of the
              Food, Conservation, and Energy Act of 2008 (2008 farm bill); other
              statutes; and USDA regulations. We also interviewed officials from
              USDA’s Farm Service Agency (FSA) and Risk Management Agency
              (RMA) regarding eligibility standards and payment limits in the 2008 farm
              bill for farm programs other than the crop insurance program. To
              determine the distribution of crop insurance subsidies among farmers
              who participate in the program, we analyzed RMA data for 2010 and 2011
              on the number and percentage of farmers receiving various levels of
              subsidies and the locations of farmers who received higher subsidies. We
              selected $40,000 as an example of a potential subsidy limit because it is
              the payment limit for direct payments. Many participants in the crop
              insurance program also participate in other farm programs that are
              administered by USDA’s Farm Service Agency (FSA). Many of these
              other farm programs have payment limits based on benefits that are
              attributed to each interest holder in a farming operation. Under a scenario
              of a limit on premium subsidies, it is likely these same rules regarding the
              attribution of benefits would also apply to premium subsidies for the crop
              insurance program. Therefore, in our analysis, we attributed these
              subsidies for each policy to the interest holders in the policy. We did so
              based on the payment share of each interest holder as recorded in FSA’s
              validated Permitted Entity database that is used to ensure compliance
              with payment limit rules. For entities, we attributed benefits through four
              levels, as appropriate. We summed premium subsidies across policies for
              each crop insurance participant. For those that were not found in FSA’s
              Permitted Entity database or if RMA’s database contradicted FSA’s
              Permitted Entity database, we attributed premium subsidies by dividing it
              equally among the policy holder and the interest holders as reported in
              RMA’s database. These participants represented 18.5 percent of the
              entities.

              We also reviewed USDA and other studies that examined participation in
              the crop insurance program and premium subsidies. In addition, we
              reviewed USDA data on the financial condition of farms of various sizes.
              Furthermore, we reviewed USDA reports on the availability of private risk


              Page 40                                              GAO-12-256 Crop Insurance
Appendix I: Objectives, Scope, and
Methodology




management tools against crop losses and the effects of farm program
subsidies on beginning and smaller farmers. Finally, we reviewed farm
and crop insurance industry organizations’ statements on the crop
insurance program.

To determine the extent to which USDA has used data mining tools to
prevent and detect fraud, waste, and abuse in the crop insurance
program, we analyzed how RMA uses two data mining lists—the list of
farmers with anomalous claim payments and the list of insurance agents
and adjusters with anomalous losses—and the methods it uses to
develop these lists. We reviewed requirements in the Agricultural Risk
Protection Act of 2000 and the current and former standard reinsurance
agreement related to data mining, FSA guidance for field inspections,
FSA letters to farmers with anomalous claim payments, data analyses
and summaries on data mining tools developed by RMA’s data mining
contractor, USDA’s Inspector General reports and testimonies, and
reports of RMA completion of disaster payment reconciliations. We also
interviewed RMA data mining contractor staff, and RMA officials at
headquarters and six regional compliance offices to identify RMA’s uses
of these data mining tools, weaknesses found in the tools, opportunities
for increased use of them, or competing RMA priorities. We also
interviewed officials with USDA’s Office of Inspector General on their
views and uses of these tools. In addition, we worked with RMA’s data
mining contractor to analyze 2009 and 2010 data on FSA’s completion of
field inspections for policies of those farmers listed as having anomalous
claim payments. We conducted tests of the reliability of the data, such as
checking formulas, and found the data to be sufficiently reliable for the
purposes of this report. We also interviewed officials with RMA and its
data mining contractor to determine the process used to acquire FSA’s
field inspection data. We interviewed officials with FSA’s headquarters
office and the five FSA state offices for California, Colorado, Florida,
North Dakota, and Texas to obtain information about these data,
obstacles to completing the inspections, and suggestions for increasing
their completion and reporting. 1 We selected FSA’s North Dakota office
because of its high completion rate of field inspections (96 percent) for
2009 and 2010 and large number of requests for field inspections (378).
We selected the other four state offices because, over the 2-year period,



1
 One of the five officials we interviewed had been located in the Minnesota FSA office and
informed us of the practices of this office.




Page 41                                                        GAO-12-256 Crop Insurance
Appendix I: Objectives, Scope, and
Methodology




they had low completion rates of field inspections (less than 33 percent)
and at least 80 requests for field inspections.

We conducted this performance audit from January 2011 to March 2012
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




Page 42                                             GAO-12-256 Crop Insurance
Appendix II: Income and Payment Limits for
                                            Appendix II: Income and Payment Limits for
                                            Selected Farm Programs



Selected Farm Programs


                                                                                                                                a
Program/payment category                         Income limit                                               Payment limit
Commodity programs
Direct and Countercyclical Program               $500,000 (average adjusted gross nonfarm                   $65,000
countercyclical payments                         income over the 3 preceding tax years).
                                                                                                                       b
Direct and Countercyclical Program direct        $500,000 (average adjusted gross nonfarm                   $40,000
payments                                         income over the 3 preceding tax years).
                                                 $750,000 (average adjusted gross farm income
                                                 over the 3 preceding tax years).
Loan Deficiency Payments                         $500,000 (average adjusted gross nonfarm                   No limit
                                                 income over the 3 preceding tax years).
Disaster programs
Supplemental Revenue Assistance                  $500,000 (average adjusted gross nonfarm                   $100,000
Payments                                         income over the 3 preceding tax years).
Noninsured Crop Disaster Assistance              $500,000 (average adjusted gross nonfarm                   $100,000
                                                 income over the 3 preceding tax years).
Conservation programs
Conservation Reserve                             $1,000,000 (average adjusted gross nonfarm                 $50,000 (annual rental payment)
                                                                                        c
                                                 income over the 3 preceding tax years).
Environmental Quality Incentives                 $1,000,000 (average adjusted gross nonfarm                 $300,000 (total for all contracts for
                                                                                        c
                                                 income over the 3 preceding tax years).                    fiscal years 2009 through 2012)
                                            Source: GAO analysis of USDA information.


                                            Notes:

                                            The income limits apply to a person or legal entity.

                                            A husband and wife may divide their income for the income limit test as if separate income tax returns
                                            had been filed.

                                            A husband and wife can each receive a payment, which enables them collectively to receive up to
                                            double the payment limit annually.
                                            a
                                                Payment limits are for 1 year unless otherwise specified.
                                            b
                                             Under the Average Crop Revenue Election Program, farmers may receive revenue-based payments
                                            as an alternative to receiving certain other types of farm program payments and must forgo 20
                                            percent of their direct payments.
                                            c
                                             This limit does not apply if more than 66.66 percent of the adjusted gross income—total of nonfarm
                                            adjusted gross income and farm adjusted gross income—was farm income.




                                            Page 43                                                                        GAO-12-256 Crop Insurance
Appendix III: Locations of Participating
               Appendix III: Locations of Participating
               Farmers Receiving More than $40,000 in
               Premium Subsidies, 2011


Farmers Receiving More than $40,000 in
Premium Subsidies, 2011
               Figure 6 shows the locations of participating farmers who received more
               than $40,000 in premium subsidies for 2011. As the figure shows, many
               of these farmers were in the northern and southern plains. According to
               RMA officials, a region might have more farmers who received more than
               $40,000 in premium subsidies because farmers in the region have large-
               acreage farms; produce high-value crops, such as sugar beets; or have
               higher premium rates. For example, the average farm size in North
               Dakota is 1,241 acres, but the average size nationwide is 418 acres. 1 In
               addition, high-value crops, such as sugar beets in North Dakota and fruits
               and vegetables in California, contribute to higher premiums and premium
               subsidies. Regarding premium rates, areas that have a higher risk of crop
               loss generally have higher premium rates. For example, the average
               premium rate in North Dakota is 17 percent, and the average premium
               rate nationwide is 10 percent.




               1
                U.S. Department of Agriculture, National Agricultural Statistics Service, 2007 Census of
               Agriculture (Washington, D.C.: December 2009).




               Page 44                                                        GAO-12-256 Crop Insurance
                                        Appendix III: Locations of Participating
                                        Farmers Receiving More than $40,000 in
                                        Premium Subsidies, 2011




Figure 6: Locations of Participating Farmers Receiving Premium Subsidies of More Than $40,000, 2011




                                        Page 45                                                 GAO-12-256 Crop Insurance
Appendix IV: Information on the Levels of
                                      Appendix IV: Information on the Levels of
                                      Premium Subsidies and Administrative
                                      Expense Subsidies for Individual Farmers


Premium Subsidies and Administrative
Expense Subsidies for Individual Farmers

                                                                                                  Number of farmers by year
Levels of subsidies received by
individual farmers                Subsidy type                                                              2010                  2011
                                                                                                                a
$1-$10,000                        Premium                                                               754,716                678,099
                                                                                                                b
                                  Premium and administrative expense                                    715,822                631,332
$10,001-$20,000                   Premium                                                                 76,818               101,811
                                  Premium and administrative expense                                      92,507               115,092
$20,001-$30,000                   Premium                                                                 25,767                40,775
                                  Premium and administrative expense                                      34,438                49,713
$30,001-$40,000                   Premium                                                                 11,243                20,259
                                  Premium and administrative expense                                      16,118                26,776
$40,001-$50,000                   Premium                                                                  5,374                11,445
                                  Premium and administrative expense                                       8,683                15,758
$50,001-$60,000                   Premium                                                                  2,876                 7,038
                                  Premium and administrative expense                                       4,904                10,222
$60,001-$70,000                   Premium                                                                  1,737                 4,545
                                  Premium and administrative expense                                       2,858                 6,870
$70,001-$80,000                   Premium                                                                    939                 3,040
                                  Premium and administrative expense                                       1,895                 4,690
$80,001-$90,000                   Premium                                                                    676                 2,023
                                  Premium and administrative expense                                       1,283                 3,407
$90,001-$100,000                  Premium                                                                    447                 1,397
                                  Premium and administrative expense                                         765                 2,435
More than $100,000                Premium                                                                  1,260                 4,202
                                  Premium and administrative expense                                       2,580                 8,339
Total farmers                                                                                           881,853                874,634
                                      Source: RMA.

                                      a
                                       For 754,716 participating farmers, 2010 premium subsidies ranged from $1 to $10,000.
                                      b
                                       For 715,822 participating farmers, the sum of 2010 premium subsidies and 2010 administrative
                                      expense subsidies ranged from $1 to $10,000.




                                      Page 46                                                             GAO-12-256 Crop Insurance
Appendix V: Comments from the U.S.
                            Appendix V: Comments from the U.S.
                            Department of Agriculture



Department of Agriculture

Note: GAO’s comments
supplementing thse in
the report text appear at
the end of this appendix.




See comment 1.




                            Page 47                              GAO-12-256 Crop Insurance
                 Appendix V: Comments from the U.S.
                 Department of Agriculture




See comment 2.
See comment 3.


See comment 4.

See comment 5.


See comment 5.



See comment 5.



See comment 5.




See comment 6.


See comment 7.




                 Page 48                              GAO-12-256 Crop Insurance
                  Appendix V: Comments from the U.S.
                  Department of Agriculture




See comment 8.




See comment 9.




See comment 10.




See comment 6.




See comment 11.




See comment 12.




                  Page 49                              GAO-12-256 Crop Insurance
                  Appendix V: Comments from the U.S.
                  Department of Agriculture




See comment 13.




See comment 14.




See comment 15.




                  Page 50                              GAO-12-256 Crop Insurance
                  Appendix V: Comments from the U.S.
                  Department of Agriculture




See comment 16.




                  Page 51                              GAO-12-256 Crop Insurance
               Appendix V: Comments from the U.S.
               Department of Agriculture




               The following are GAO’s comments on the U.S. Department of
               Agriculture’s letter dated February 17, 2012.


               1. As we clearly state in the report, we do not recommend a $40,000
GAO Comments      limit in premium subsidies per crop insurance participant. Instead, as
                  we stated, we used $40,000 as an example of a premium subsidy limit
                  and noted that setting a premium subsidy limit higher or lower would
                  have corresponding effects on cost savings. In this connection, we
                  provided information on the potential savings that would result if
                  premium subsidies were limited to $100,000. Furthermore, limits on
                  premium subsidies would not prevent potentially affected farmers from
                  enrolling all of their crop acres in the crop insurance program and
                  receiving claim payments when a loss occurs. The report also notes
                  that savings could result from reducing the subsidy amount for all
                  farmers participating in the program, or both limiting and reducing
                  these subsidies. In proposing these changes to the crop insurance
                  program, we also identified other considerations that would come into
                  play, including the potential effect on large farms’ financial condition
                  and on participation in the crop insurance program.

               2. We disagree. This report does show regions of the country that would
                  be more affected by a limit on premium subsidies. On page 19, we
                  state that many of the participating farmers who received more than
                  $40,000 in premium subsidies were in the northern and southern
                  plains. Additional information on the locations of participating farmers
                  who received more than $40,000 in premium subsidies for 2011 is
                  presented in appendix III.

               3. An assessment of the availability of credit to the agricultural sector
                  was not the focus of our work, but our review of data from USDA’s
                  Agricultural Resource Management Survey shows that larger farms,
                  which are more likely to be affected by a limit on premium subsidies,
                  generally have stronger financial ratios and credit worthiness than
                  other farms participating in the crop insurance program. (See pages
                  21 and 22 of this report.) Furthermore, since we sent our draft report
                  to USDA for comment, we identified two Federal Reserve Bank
                  reports—one from the Federal Reserve Bank of Chicago, and one
                  from the Federal Reserve Bank of Kansas City—that reported that
                  credit conditions for farmers are favorable. In addition, if premium
                  subsidies were limited, an affected farmer could still purchase crop
                  insurance, although the premiums might not be subsidized or
                  subsidized less than currently. Thus, an affected farmer would not
                  lose access to credit.


               Page 52                                             GAO-12-256 Crop Insurance
Appendix V: Comments from the U.S.
Department of Agriculture




4. USDA did not adjust its estimate of affected crop insurance
   participants and savings in premium subsidies to reflect how a limit on
   premium subsidies might actually be implemented. That is, we
   assume that any subsidy limit would be administered as USDA’s Farm
   Service Agency (FSA) administers payment limits for other farm
   programs—allocating the benefits according to the interest holders in
   the farming operation. Most participants in the crop insurance
   program also participate in other farm programs that FSA administers,
   and many of these other farm programs have payment limits based on
   benefits that are attributed to each interest holder in a farming
   operation. As explained in our methodology, in developing our
   estimate for a potential $40,000 subsidy limit, we used the payment
   share of each interest holder as recorded in FSA’s validated Permitted
   Entity database, which FSA uses to ensure compliance with payment
   limit rules for farm programs. Using FSA’s information on the payment
   share of each interest holder, we attributed subsidies for each crop
   insurance policy to the interest holders in the policy. Therefore, we
   estimated that up to 33,690 participating farmers would have been
   affected in 2011 by a reduced subsidy, for a savings of up to $1 billion
   if a $40,000 subsidy limit were applied. We believe our analysis
   provides a reasonable estimate of the number of participating farmers
   who might be affected by a limit on premium subsidies and the dollars
   that might be saved. (See app. I for more information on our
   methodology.)

5. As we note in this report, a limit on crop insurance premium subsidies
   would affect more farmers in some areas of the country than in other
   areas. We also note in the report that large farms are better
   positioned than smaller farms to pay a higher share of their premiums.
   Furthermore, a higher limit on premium subsidies would affect fewer
   farmers. In addition, limits on farm program benefits already have
   disproportionate impacts. For example, under the Supplemental
   Revenue Assistance Payments program and Noninsured Crop
   Disaster Assistance program, annual payments are limited to
   $100,000, which disproportionately affects farmers in regions that are
   more prone to natural disasters.

    In addition to a limit on premium subsidies, this report also examines
    reducing premium subsidy rates for all farmers, which would have a
    more proportionate effect across states and regions. However, it
    would also reduce subsidies for those who may be less able to afford
    higher premiums, particularly beginning and limited resource farmers,
    as well as socially disadvantaged farmers.




Page 53                                             GAO-12-256 Crop Insurance
Appendix V: Comments from the U.S.
Department of Agriculture




6. We do not agree that it would be virtually impossible to
   administratively track and control a limit on premium subsidies. Most
   farmers participating in the crop insurance program also participate in
   other farm programs that FSA administers. Many of the farm
   programs FSA administers already limit the payments an individual
   can receive. Therefore, we believe that FSA’s methods—which
   account for complicating factors such as the organization of farm
   businesses and multiple crops in multiple counties, and even multiple
   programs—could be applied to a limit on premium subsidies for crop
   insurance and that any addition to administrative burdens would not
   be significant. Moreover, as we stated in our report, premium subsidy
   rates vary by the level of insurance coverage that the farmer chooses
   and the geographic diversity of the crops insured. If RMA is capable of
   tracking these different subsidy rates, we believe USDA can also
   administer a subsidy limit.

7. We believe it would not be impractical to administer a limit on
   premium subsidies because of differences in dates and insurance
   periods. FSA attributes benefits to each individual or entity for each
   program that it administers. For each participant in a given program,
   payments are summed across all entities, crops, and counties for the
   crop year. Regarding livestock insurance, the amount of insurance
   purchased in comparison with crop insurance is very small. Moreover,
   this report did not discuss combining limits on premium subsidies for
   livestock insurance and crop insurance.

8. We do not agree that a limit on premium subsidies would prevent
   farmers from making sound and informed insurance choices. Under
   the crop insurance program, the amounts of a farmer’s premium
   subsidy and premium expense are estimated during the period before
   planting, when the farmer is making insurance choices. However,
   insurance companies determine the actual premium later in the
   growing season and bill the farmer at the end of the growing season.
   Therefore, to the extent that a limit on premium subsidies introduces
   additional uncertainty, it would likely be marginal.

9. We believe it is unlikely that a limit on premium subsidies would affect
   agricultural lenders’ decisions in providing farm operating loans. It is
   not clear how a limit on premium subsidies would introduce so much
   uncertainty about the amount of a farmer’s premium expenses that a
   lender could not decide whether to provide financing. Agricultural
   lenders already deal with a level of uncertainty about farmers’
   revenues and expenses. In addition, lenders could require borrowers
   to purchase crop insurance.


Page 54                                             GAO-12-256 Crop Insurance
Appendix V: Comments from the U.S.
Department of Agriculture




10. As we stated in this report, the amount of savings from a limit on
    premium subsidies may depend on whether, and to what extent,
    farmers and legal entities reorganized their business to avoid or
    lessen the effect of limits on premium subsidies. In addition, some
    farmers would likely begin to report their spouse as a member of the
    farming operation, which, under payment limit rules, enables an
    operation to double the amount of benefits it can receive. Regarding
    potential reorganizations, most of the farmers and legal entities who
    participate in the crop insurance program also participate in FSA
    programs, and many of them have already reorganized their business
    because of these programs’ payment limits. These farmers and legal
    entities would be unlikely to reorganize further in response to a limit
    on premium subsidies. In addition, in some instances, the requirement
    that an individual or entity be actively engaged in farming to receive
    farm program benefits is likely to prevent the creation of entities in
    order to avoid a limit on premium subsidies. Furthermore, the 2008
    farm bill decreased the incentive to reorganize a farming operation in
    order to avoid a limit on farm program payments by eliminating the
    “three-entity rule” and requiring direct attribution of payments to
    individuals.

11. This report includes information about how crop insurance
    participation and coverage levels may relate to spending on ad hoc
    disaster assistance. The report also notes that in view of the nation’s
    budgetary pressures, Congress may be less willing to approve ad hoc
    disaster assistance payments than it has in the past. In addition, the
    Administration’s proposed fiscal year 2013 budget addresses
    participation and ad hoc disaster assistance and states, “With current
    participation rates, the deep premium subsidies are no longer
    needed.”

12. In addition to federal cost savings, our report discussed several
    considerations that would come into play with limits on premium
    subsidies. Furthermore, we noted that FSA has extensive experience
    in administering limits on farm program benefits, which USDA does
    not recognize in its comments. We believe RMA could benefit from
    FSA’s experience in administering payment limits.

13. We recognize that FSA, like most federal agencies, faces resource
    constraints. However, as we have previously reported, effective
    strategies help set priorities and allocate resources to inform decision
    making and help ensure accountability. Such priority setting and
    resource allocation is especially important in a fiscally constrained
    environment.


Page 55                                              GAO-12-256 Crop Insurance
Appendix V: Comments from the U.S.
Department of Agriculture




14. We clarified the language to say that insurance companies should
    receive the results of all inspections that have been completed. This
    effort would not entail additional work on the part of FSA. RMA’s data
    mining contractor told us that it could complete this activity within a
    few days after an inspection was completed.

15. We are pleased that RMA is developing guidance and believe that this
    guidance may be a good first step towards increasing insurance
    companies’ focus on anomalous agents and loss adjusters, who
    warrant greater attention. However, we continue to believe that
    directing insurance companies to focus more attention on these
    agents and loss adjusters during annual performance reviews would
    produce additional benefits.

16. It is unclear from RMA’s response whether it agrees or disagrees with
    our recommendation. However, we continue to believe that the data
    mining contractor needs additional data from insurance company
    reviews in order to improve data mining and specific direction from the
    government to collect these data.




Page 56                                              GAO-12-256 Crop Insurance
Appendix VI: GAO Contact and Staff
                  Appendix VI: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Lisa Shames, (202) 512-3841, or shamesl@gao.gov
GAO Contact
                  In addition to the individual named above, Susan Offutt, Chief Economist;
Staff             Thomas M. Cook, Assistant Director; Kevin S. Bray; Gary T. Brown;
Acknowledgments   Barbara J. El-Osta; Beverly Peterson; Anne Rhodes-Kline; Jeremy
                  Sebest; and Carol Herrnstadt Shulman made key contributions to this
                  report.




                  Page 57                                            GAO-12-256 Crop Insurance
Related GAO Products
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             Crop Insurance: Opportunities Exist to Reduce the Costs of Administering
             the Program. GAO-09-445. Washington, D.C.: April 29, 2009.

             Crop Insurance: Continuing Efforts Are Needed to Improve Program
             Integrity and Ensure Program Costs Are Reasonable. GAO-07-944T.
             Washington, D.C.: June 7, 2007.

             Crop Insurance: Continuing Efforts Are Needed to Improve Program
             Integrity and Ensure Program Costs Are Reasonable. GAO-07-819T.
             Washington, D.C.: May 3, 2007.

             Climate Change: Financial Risks to Federal and Private Insurers in
             Coming Decades Are Potentially Significant. GAO-07-760T. Washington,
             D.C.: April 19, 2007.

             Climate Change: Financial Risks to Federal and Private Insurers in
             Coming Decades Are Potentially Significant. GAO-07-285. Washington,
             D.C.: March 16, 2007.

             Suggested Areas for Oversight for the 110th Congress. GAO-07-235R.
             Washington, D.C.: November 17, 2006.

             Crop Insurance: More Needs to Be Done to Reduce Program’s
             Vulnerability to Fraud, Waste, and Abuse. GAO-06-878T. Washington,
             D.C.: June 15, 2006.

             Crop Insurance: Actions Needed to Reduce Program’s Vulnerability to
             Fraud, Waste, and Abuse. GAO-05-528. Washington, D.C.: September
             30, 2005.

             Crop Insurance: USDA Needs to Improve Oversight of Insurance
             Companies and Develop a Policy to Address Any Future Insolvencies.
             GAO-04-517. Washington, D.C.: June 1, 2004.

             Department of Agriculture: Status of Efforts to Address Major Financial
             Management Challenges. GAO-03-871T. Washington, D.C.: June 10,
             2003.

             Crop Insurance: USDA Needs a Better Estimate of Improper Payments to
             Strengthen Controls Over Claims. GAO/RCED-99-266. Washington, D.C.:
             September 22, 1999.




             Page 58                                            GAO-12-256 Crop Insurance
           Related GAO Products




           Crop Insurance: USDA’s Progress in Expanding Insurance for Specialty
           Crops. GAO/RCED-99-67. Washington, D.C.: April 16, 1999.

           Crop Insurance: Increases in Insured Crop Prices and Premium Rates
           Raise the Administrative Expense Reimbursement Paid to Companies.
           GAO/RCED-98-115R. Washington, D.C.: March 20, 1998.

           Crop Insurance: Opportunities Exist to Reduce Government Costs for
           Private-Sector Delivery. GAO/RCED-97-70. Washington, D.C.: April 17,
           1997.

           Crop Insurance: Federal Program Faces Insurability and Design
           Programs. GAO/RCED-93-98. Washington, D.C.: May 24, 1993.

           Crop Insurance: Program Has Not Fostered Significant Risk Sharing by
           Insurance Companies. GAO/RCED-92-25. Washington, D.C.: January 13,
           1992.




(361259)
           Page 59                                          GAO-12-256 Crop Insurance
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