oversight

Improper Payments: Moving Forward with Governmentwide Reduction Strategies

Published by the Government Accountability Office on 2012-02-07.

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

                             United States Government Accountability Office

GAO                          Testimony before the Subcommittee on
                             Government Organization, Efficiency, and
                             Financial Management, Committee on
                             Oversight and Government Reform, House
                             of Representatives

                             IMPROPER PAYMENTS
For Release on Delivery
Expected at 10:00 a.m. EST
Tuesday, February 7, 2012



                             Moving Forward with
                             Governmentwide Reduction
                             Strategies
                             Statement of Beryl H. Davis, Director
                             Financial Management and Assurance




GAO-12-405T
                                              February 7, 2012

                                              IMPROPER PAYMENT
                                              Moving Forward with Governmentwide Reduction
                                              Strategies
Highlights of GAO-12-405T, a testimony
before the Subcommittee on Government
Organization, Efficiency, and Financial
Management, Committee on Oversight and
Government Reform, House of
Representatives

Why GAO Did This Study                        What GAO Found
Over the past decade, GAO has issued          Federal agencies reported an estimated $115.3 billion in improper payments in
numerous reports and testimonies              fiscal year 2011, a decrease of $5.3 billion from the prior year reported estimate
highlighting improper payment issues          of $120.6 billion. The $115.3 billion estimate was attributable to 79 programs
across the federal government as well         spread among 17 agencies. Ten programs accounted for about $107 billion or 93
as at specific agencies. Fiscal year          percent of the total estimated improper payments agencies reported for fiscal
2011 marked the eighth year of                year 2011. The reported decrease in fiscal year 2011 was primarily related to
implementation of the Improper                three programs—decreases in program outlays for the Department of Labor’s
Payments Information Act of 2002              Unemployment Insurance program, and decreases in reported error rates for the
(IPIA), as well as the first year of
                                              Earned Income Tax Credit program and the Medicare Advantage program.
implementation for the Improper
                                              Further, the Office of Management and Budget reported that agencies recaptured
Payments Elimination and Recovery
Act of 2010 (IPERA). IPIA requires
                                              $1.25 billion in improper payments to contractors, vendors, and healthcare
executive branch agencies to annually         providers in fiscal year 2011. Over half of this amount, $797 million, can be
identify programs and activities              attributed to the Medicare Recovery Audit Contractor program which identifies
susceptible to significant improper           Medicare overpayments and underpayments.
payments, estimate the amount of              The federal government continues to face challenges in determining the full
improper payments for such programs           extent of improper payments. Some agencies have not yet reported estimates for
and activities, and report these              all risk-susceptible programs, such as the Department of Health and Human
estimates along with actions taken to
                                              Services’ Temporary Assistance for Needy Families program. Internal control
reduce them. IPERA, enacted July 22,
                                              weaknesses continue to exist, heightening the risk of improper payments. Some
2010, amended IPIA and expanded
requirements for recovering                   agencies’ estimating methodologies need to be refined. For example, two
overpayments across a broad range of          Department of Defense commercial payment programs were not included in the
federal programs.                             total governmentwide error rate because the estimation methodologies for these
                                              programs were still under development.
This testimony addresses (1) federal
agencies’ reported progress in                A number of actions are under way across government to help advance improper
estimating and reducing improper              payment reduction goals. These actions and future initiatives will be needed to
payments, (2) remaining challenges in         enhance federal government efforts to reduce improper payments. For example,
meeting current requirements to
estimate and report improper
                                              •   Additional information and analysis on the root causes of improper payment
payments and (3) actions that can be              estimates would help agencies target effective corrective actions and
taken to move forward with improper               implement preventive measures. Although agencies were required to report
payment reduction strategies. This                the root causes of improper payments in three categories beginning in fiscal
testimony is primarily based on prior             year 2011, of the 79 programs with improper payment estimates for fiscal
GAO reports, including GAO’s fiscal               year 2011, 42 programs reported the root cause information using the
year 2011 audit of the Financial Report           required categories. In addition, because the three categories are general,
of the United States Government. The              additional analysis is critical to understanding the root causes.
testimony also includes improper              •   Implementing strong preventive controls can help defend against improper
payment information recently                      payments, increasing public confidence and avoiding the difficult “pay and
presented in federal entities’ fiscal year        chase” aspects of recovering improper payments. Preventive controls involve
2011 financial reports.                           activities such as upfront validation of eligibility using electronic data
                                                  matching, predictive analytic tests, and training programs. Further,
                                                  addressing program design issues, such as complex eligibility requirements,
                                                  may also warrant further consideration.
                                              •   Effective detection techniques to quickly identify and recover improper
                                                  payments are also important to a successful reduction strategy. Detection
View GAO-12-405T. For more information,           activities include data mining and recovery audits. Another area for further
contact Beryl H. Davis at (202) 512-2623 or
davisbh@gao.gov.
                                                  exploration is the broader use of incentives to encourage and support states
                                                  in efforts to implement effective preventive and detective controls.
                                                                                      United States Government Accountability Office
Chairman Platts, Ranking Member Towns, and Members of the
Subcommittee:

Thank you for the opportunity to be here today to discuss the issue of
improper payments in federal programs and activities, including efforts by
federal agencies to identify and reduce improper payments. 1 As the
steward of taxpayer dollars, the federal government is accountable for
how its agencies and grantees spend hundreds of billions of taxpayer
dollars annually, including safeguarding those expenditures against
improper payments, and establishing mechanisms to recover those funds
when overpayments occur. It is important to note that not all of the
reported improper payment estimates represent a loss to the government.
For example, errors consisting of insufficient or lack of documentation are
included in the improper payment estimates. Over the past decade, we
have issued numerous reports and testimonies highlighting improper
payment issues across the federal government as well as at specific
agencies. 2

Today, my testimony will focus on:

•   federal agencies’ reported progress in estimating and reducing
    improper payments, and
•   remaining challenges in meeting current requirements to estimate and
    report improper payments.

I will also provide observations on actions that can be taken to move
forward with improper payment reduction strategies.




1
 It is important to recognize that improper payment estimates reported by federal agencies
in fiscal year 2011 are not intended to be an estimate of fraud in federal agencies’
programs and activities. An improper payment is defined as any payment that should not
have been made or that was made in an incorrect amount (including overpayments and
underpayments) under statutory, contractual, administrative, or other legally applicable
requirements. It includes any payment to an ineligible recipient, any payment for an
ineligible good or service, any duplicate payment, any payment for a good or service not
received (except for such payments where authorized by law), and any payment that does
not account for credit for applicable discounts. Office of Management and Budget (OMB)
guidance also instructs agencies to report as improper payments any payments for which
insufficient or no documentation was found.
2
 See the Related GAO Products list at the end of this statement for a selection of the
products related to these issues.




Page 1                                                                        GAO-12-405T
             In preparing this statement, we drew upon our previously issued work
             related to the fiscal year 2011 audit of the Financial Report of the United
             States Government, 3 as well as our other previously issued products
             dealing with improper payments. Our previous products are listed at the
             end of this statement. That work was conducted in accordance with
             generally accepted government auditing standards. We are also including
             improper payment information recently presented in federal entities’ fiscal
             year 2011 performance and accountability reports (PAR) and agency
             financial reports (AFR).


             Fiscal year 2011 marked the eighth year of implementation of the
Background   Improper Payments Information Act of 2002 (IPIA), 4 as well as the first
             year of implementation for the Improper Payments Elimination and
             Recovery Act of 2010 (IPERA). 5 IPIA requires executive branch agencies
             to annually review all programs and activities to identify those that are
             susceptible to significant improper payments, estimate the annual amount
             of improper payments for such programs and activities, and report these
             estimates along with actions taken to reduce improper payments for
             programs with estimates that exceed $10 million. IPERA, enacted
             July 22, 2010, amended IPIA by expanding on the previous requirements
             for identifying, estimating, and reporting on programs and activities
             susceptible to significant improper payments and expanding requirements
             for recovering overpayments across a broad range of federal programs. 6
             IPERA included a new, broader requirement for agencies to conduct
             recovery audits, where cost effective, for each program and activity with
             at least $1 million in annual program outlays. This IPERA provision
             significantly lowers the threshold for required recovery audits from $500


             3
              U.S. Department of the Treasury, 2011 Financial Report of the United States
             Government (Washington, D.C.: Dec. 23, 2011), pp. 211-231.
             4
             Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002).
             5
             Pub. L. No. 111-204, 124 Stat. 2224 (July 22, 2010).
             6
              IPERA defines “significant improper payments” as gross annual improper payments in
             the program exceeding (1) both 2.5 percent of program outlays and $10 million of all
             program or activity payments during the fiscal year reported or (2) $100 million (regardless
             of the improper payment error rate). Further, the threshold for “significant improper
             payments” will be reduced in fiscal year 2014 and each year thereafter to gross annual
             improper payments in the program exceeding (1) both 1.5 percent of program outlays and
             $10 million of all program or activity payments during the fiscal year reported or (2) $100
             million (regardless of the improper payment error rate).




             Page 2                                                                         GAO-12-405T
million 7 to $1 million and expands the scope for recovery audits to all
programs and activities. Another new IPERA provision calls for federal
agencies’ inspectors general to annually determine whether their
respective agencies are in compliance with key IPERA requirements and
to report on their determinations. Under Office of Management and
Budget (OMB) implementing guidance, these reports are required to be
completed within 120 days of the publication of the federal agencies’
annual PAR or AFR, with the fiscal year 2011 reports for most agencies
due on March 15, 2012.

OMB continues to play a key role in the oversight of the governmentwide
improper payments problem. OMB has established guidance for federal
agencies on reporting, reducing, and recovering improper payments 8 and
has established various work groups responsible for developing
recommendations aimed at improving federal financial management
activities related to reducing improper payments.




7
 Section 831 of the National Defense Authorization Act for Fiscal Year 2002, Pub. L. No.
107-107, div. A, 115 Stat. 1012, 1186 (Dec. 28, 2001), required that agencies that enter
into contracts with a total value in excess of $500 million in a fiscal year carry out a cost-
effective program for identifying and recovering amounts erroneously paid to contractors.
IPERA repealed these requirements.
8
 OMB, Circular No. A-136 Revised, Financial Reporting Requirements (Oct. 27, 2011);
OMB Memorandum M-11-16, Issuance of Revised Parts I and II to Appendix C of OMB
Circular A-123 (Apr. 14, 2011); OMB Memorandum M-11-04, Increasing Efforts to
Recapture Improper Payments by Intensifying and Expanding Payment Recapture Audits
(Nov. 16, 2010); and OMB Memorandum M-10-13, Issuance of Part III to OMB Circular A-
123, Appendix. C (Mar. 22, 2010).




Page 3                                                                            GAO-12-405T
                       Federal agencies reported improper payment estimates totaling $115.3
OMB and Agencies       billion in fiscal year 2011, a decrease of $5.3 billion from the revised prior
Reported Progress in   year reported estimate of $120.6 billion. 9 Based on the agencies’
Estimating and         estimates, OMB estimated that fiscal year 2011 improper payments
                       comprised about 4.7 percent of the $2.5 trillion in total spending during
Reducing Improper      that year for the agencies’ related programs (i.e., a 4.7 percent error rate).
Payments               The decrease in the fiscal year 2011 estimate is attributed primarily to
                       decreases in program outlays for the Department of Labor’s
                       Unemployment Insurance program, and decreases in reported error rates
                       for fiscal year 2011 (compared to fiscal year 2010) for the Department of
                       the Treasury’s (Treasury) Earned Income Tax Credit program and the
                       Department of Health and Human Services’ (HHS) Medicare Advantage
                       program.

                       The $115.3 billion in estimated federal improper payments reported for
                       fiscal year 2011 was attributable to 79 programs spread among 17
                       agencies. Ten of these 79 programs account for most of the $115.3 billion
                       of reported improper payments. Specifically, as shown in table 1, these
                       10 programs accounted for about $107 billion or 93 percent of the total
                       estimated improper payments agencies reported for fiscal year 2011.




                       9
                         In their fiscal year 2011 PARs and AFRs, select federal entities updated their fiscal year
                       2010 improper payment estimates to reflect changes since issuance of their fiscal year
                       2010 reports. These updates decreased the governmentwide improper payment estimate
                       for fiscal year 2010 from $125.4 billion to $120.6 billion. Estimated improper payment
                       amounts for fiscal years 2011 and 2010 may include estimates based on prior years’ data,
                       if current reporting year data were not available, as allowed by OMB guidance.




                       Page 4                                                                         GAO-12-405T
Table 1: Improper Payment Dollar Estimates: 10 Programs with the Highest Reported Amounts in Fiscal Year 2011

                                                                   Reported improper
                                                                   payment estimates
                                                                    Dollars      Error rate
Program                       Agency                           (in billions) (percentages)    Reported primary cause(s)
Medicare Fee-for-Service      Health and Human                          $28.8          8.6%   Medically unnecessary services and
                              Services                                                        insufficient documentation
Medicaid                      Health and Human                          $21.9          8.1%   Ineligible or indeterminable eligibility
                              Services                                                        status for Medicaid beneficiaries
Earned Income Tax Credit      Treasury                                  $15.2       23.5%     Complexity of the tax law, structure of
                                                                                              the program, confusion among eligible
                                                                                              claimants, high turnover of eligible
                                                                                              claimants, and unscrupulous return
                                                                                              preparers
Unemployment Insurance        Labor                                     $13.7       12.0%     Overpayments to claimants who
                                                                                              continue to claim benefits after they
                                                                                              return to work, ineligibility, and claimants
                                                                                              who failed to meet active work search
                                                                                              requirements
Medicare Advantage            Health and Human                          $12.4       11.0%     Insufficient documentation, errors in the
                              Services                                                        transfer and interpretation of data, and
                                                                                              payment calculations
Supplemental Security         Social Security                             $4.6         9.1%   Recipients failed to provide accurate and
Income                        Administration                                                  timely reports of new or increased wages
Old Age Survivors’ and        Social Security                             $4.5         0.6%   Computation errors, eligibility errors,
Disability Insurance          Administration                                                  non-verification of earnings, and
                                                                                              incorrect processing of applications or
                                                                                              payments
Supplemental Nutrition        Agriculture                                 $2.5         3.8%   Incomplete or inaccurate reporting of
Assistance                                                                                    income by participant and incorrect
                                                                                              eligibility determination by caseworkers
National School Lunch         Agriculture                                 $1.7      16.0%     Verification errors related to benefit
                                                                                              calculation error, duplicate payments,
                                                                                              insufficient documentation, and fraud or
                                                                                              misrepresentation by program
                                                                                              participants or others
Medicare Prescription         Health and Human                            $1.7         3.2%   Payment errors, payment adjustment
Drug Benefit                  Services                                                        errors, and complexity of program

                                         Source: GAO summary of agencies’ data.



                                         The 10 programs with the highest error rates had rates ranging from 11.0
                                         percent to 28.4 percent. Specifically, as shown in table 2, those 10
                                         programs accounted for $45 billion, or 39 percent of the total estimated
                                         improper payments for fiscal year 2011.




                                         Page 5                                                                              GAO-12-405T
Table 2: Improper Payment Error Rates: 10 Programs with the Highest Reported Rates in Fiscal Year 2011

                                                                   Reported improper
                                                                   payment estimates
                                                                Error rate             Dollars
Program                       Agency                        (percentages)         (in millions)   Reported primary cause(s)
Disaster Assistance Loans     Small Business                           28.4%             $96.3    Loan documentation errors
                              Administration
School Breakfast              Agriculture                              25.0%           $705.0     Authentication and administrative errors,
                                                                                                  including authenticating the accuracy of
                                                                                                  qualifying for program specific
                                                                                                  requirements, criteria, or conditions.
Earned Income Tax Credit      Treasury                                 23.5%        $15,200.0     Complexity of the tax law, structure of
                                                                                                  the program, confusion among eligible
                                                                                                  claimants, high turnover of eligible
                                                                                                  claimants, and unscrupulous return
                                                                                                  preparers
National School Lunch         Agriculture                              16.0%         $1,716.0     Verification errors related to benefit
                                                                                                  calculation error, duplicate payments,
                                                                                                  insufficient documentation, and fraud or
                                                                                                  misrepresentation by program
                                                                                                  participants or others
State Home Per Diem Grants    Veterans Affairs                         13.7%             $97.6    Documentation and administrative errors
                                                                                                  related to ineligible recipients,
                                                                                                  noncompliance with policies and
                                                                                                  procedures, incorrect amounts, ineligible
                                                                                                  goods, and lack of documentation
Supplies and Materials        Veterans Affairs                         13.6%           $221.1     Documentation and administrative errors
                                                                                                  related to noncompliance with policies
                                                                                                  and procedures, lack of documentation,
                                                                                                  ineligible goods, incorrect amounts, and
                                                                                                  discounts not taken
Non-VA Care Fee               Veterans Affairs                         12.4%           $522.9     Verification and documentation and
                                                                                                  administrative errors related to incorrect
                                                                                                  application of payment methodologies,
                                                                                                  lack of documentation, lack of
                                                                                                  authorization, and data entry errors
Unemployment Insurance        Labor                                    12.0%        $13,697.0     Overpayments to claimants who
                                                                                                  continue to claim benefits after they
                                                                                                  return to work, ineligibility, and claimants
                                                                                                  who failed to meet active work search
                                                                                                  requirements
Child Care and Development    Health and Human                         11.2%           $638.0     Documentation and administrative errors
Fund                          Services                                                            due to missing or insufficient
                                                                                                  documentation
Medicare Advantage            Health and Human                         11.0%        $12,390.0     Insufficient documentation, errors in the
                              Services                                                            transfer and interpretation of data, and
                                                                                                  payment calculations
                                         Source: GAO summary of agencies’ data.




                                         Page 6                                                                                 GAO-12-405T
Since the implementation of IPIA in 2004, federal agencies have
continued to identify new programs or activities as risk-susceptible and
report estimated improper payment amounts. The fiscal year 2011
governmentwide estimate of $115.3 billion included improper payment
estimates for nine additional programs that did not report an estimate in
fiscal year 2010, with the HHS Medicare Prescription Drug Benefit (Part
D) program having the highest estimate of the newly included programs.
We view these agencies’ efforts as a positive step towards increasing the
transparency of the magnitude of improper payments. However, three
additional programs providing estimates in fiscal year 2011 were not
included in the governmentwide totals because their estimation
methodologies were still under development. The three excluded
programs were the: Department of Education’s Direct Loan, Department
of Defense’s (DOD) Defense Finance and Accounting Service
Commercial Pay, and DOD’s Army Corps of Engineers Commercial Pay.

A number of federal agencies have reported progress in reducing
improper payment error rates in some programs and activities. For
example, we identified 40 federal agency programs, or about 50 percent
of the total programs reporting improper payment estimates in fiscal year
2011, that reported a reduction in the error rate of estimated improper
payments in fiscal year 2011 when compared to fiscal year 2010 error
rates. We caution, however, that these rates have not been independently
verified or audited. The following are examples of agencies that reported
reductions in program error rates and estimated improper payment
amounts (along with corrective actions to reduce improper payments) in
their fiscal year 2011 PARs, AFRs, or annual reports.

•   Treasury reported that the fiscal year 2011 Earned Income Tax Credit
    (EITC) program’s estimated improper payment amount decreased
    from the fiscal year 2010 amount of $16.9 billion to $15.2 billion,
    which represented a decrease in the error rate from 26.3 percent to
    23.5 percent. Treasury reported that corrective actions taken to
    reduce improper payments primarily focused on completing
    examinations on tax returns that claimed the EITC before issuing the
    EITC portion of the refund, identifying math or other statistical
    irregularities in taxpayer returns, and comparing income information
    provided by the taxpayer with matching information from employers to
    identify discrepancies.

•   HHS reported that the fiscal year 2011 estimated improper payment
    amount for the Medicare Advantage (Part C) program decreased from
    the fiscal year 2010 reported amount of $13.6 billion to $12.4 billion,



Page 7                                                          GAO-12-405T
                            which represented a decrease in the error rate from 14.1 percent to
                            11.0 percent. HHS reported that it reduced payment errors by
                            continuing to routinely implement controls in its payment system to
                            ensure accurate and timely payments, and implementing three key
                            initiatives, including contract level audits, physician outreach, and
                            Medicare Advantage organization guidance and training.

                        In addition, agencies have further developed the use of recovery audits to
                        recapture improper payments. In 2010, the President set goals, as part of
                        the Accountable Government Initiative, for federal agencies to reduce
                        overall improper payments by $50 billion, and recapture at least $2 billion
                        in improper contract payments and overpayments to healthcare providers,
                        by the end of fiscal year 2012. For fiscal year 2011, OMB reported that
                        governmentwide agencies recaptured $1.25 billion in overpayments to
                        contractors and vendors. Over half of this amount, $797 million, can be
                        attributed to the Medicare recovery audit contractor program which
                        identifies improper Medicare payments—both overpayments and
                        underpayments—in all 50 states. Cumulatively, OMB reported $1.9 billion
                        recaptured from overpayments to contractors, vendors, and healthcare
                        providers for fiscal years 2010 and 2011 towards the President’s goal of
                        recapturing at least $2 billion by the end of fiscal year 2012.


                        Despite reported progress in reducing estimated improper payment
Remaining Challenges    amounts and error rates for some programs and activities during fiscal
in Complete and         year 2011, the federal government continues to face challenges in
                        determining the full extent of improper payments. Specifically, some
Accurate Reporting of   agencies have not yet reported estimates for all risk-susceptible programs
Improper Payments       and some agencies’ estimating methodologies need to be refined. We
                        have also found that internal control weaknesses exist, heightening the
                        risk of improper payments occurring. Until federal agencies are able to
                        implement effective processes to completely and accurately identify the
                        full extent of improper payments and implement appropriate corrective
                        actions to effectively reduce improper payments, the federal government
                        will not have reasonable assurance that the use of taxpayer funds is
                        adequately safeguarded. We are currently working on engagements
                        related to improper payment reporting at both DOD and HHS.
                        Furthermore, as I will discuss later in this statement, additional analysis is
                        needed to assess the root causes of improper payments, a key factor in
                        identifying and implementing effective corrective actions.




                        Page 8                                                             GAO-12-405T
We found that not all agencies have developed improper payment
estimates for all of the programs and activities they identified as
susceptible to significant improper payments. Specifically, three federal
entities did not report fiscal year 2011 estimated improper payment
amounts for four risk-susceptible programs. 10 In one example, HHS’s
fiscal year 2011 reporting cited various statutory barriers that hindered it
from reporting improper payment estimated amounts. HHS cited statutory
limitations for its state-administered Temporary Assistance for Needy
Families (TANF) program, 11 which prohibited it from requiring states to
participate in developing an improper payment estimate for the TANF
program. Despite these limitations, HHS officials stated that they will
continue to work with states and explore options to allow for future
estimates for the program. For fiscal year 2011, the TANF program
reported outlays of about $17 billion. For another program, HHS cited the
Children’s Health Insurance Program Reauthorization Act of 2009 12 as
prohibiting HHS from calculating or publishing any national or state-
specific payment error rates for the Children’s Health Insurance Program
(CHIP) until 6 months after the new payment error rate measurement rule
became effective on September 10, 2010. According to its fiscal year
2011 agency financial report, HHS plans to report estimated improper
payment amounts for CHIP in fiscal year 2012. For fiscal year 2011, the
CHIP program reported federal outlays of about $9 billion.

As previously discussed, OMB excluded estimated improper payment
amounts for two DOD programs from the governmentwide total because
those programs were still developing their estimating methodologies—
Defense Finance and Accounting Service (DFAS) Commercial Pay 13 with
fiscal year 2011 outlays of $368.5 billion and U.S. Army Corps of
Engineers Commercial Pay with fiscal year 2011 outlays of $30.5 billion.



10
  The four risk-susceptible programs that did not report a required improper payments
estimate for fiscal year 2011 were the Department of Education’s Federal Family
Education Loan, Federal Communications Commission’s Interstate Telecommunications
Relay Services Fund, and HHS’s Children’s Health Insurance Program and Temporary
Assistance for Needy Families.
11
  The term state-administered refers to federal programs that are managed on a day-to-
day basis at the state level to carry out program objectives.
12
 Pub. L. No. 111-3, 123 Stat. 8 (Feb. 4, 2009).
13
  DOD refers to payments to contractors and vendors collectively as commercial
payments.




Page 9                                                                      GAO-12-405T
In DOD’s fiscal year 2011 agency financial report, DOD reported that
improper payment estimates for these programs were based on improper
payments detected through various pre-payment and post-payment
review processes rather than using methodologies similar to those used
for DOD’s other programs, including statistically valid random sampling or
reviewing 100 percent of payments. In its fiscal year 2011 agency
financial report, DOD stated that it plans to begin statistical sampling of
the Commercial Pay program in fiscal year 2012.

Both GAO 14 and the DOD Inspector General (IG) 15 have previously
reported on weaknesses in DOD’s payment controls, including
weaknesses in its process for assessing the risk of improper payments
and reporting estimated amounts. DOD’s payment controls are hindered
by problems related to inadequate payment processing, poor financial
systems, and inadequate supporting documentation. Nonetheless, the
DOD Comptroller testified in May 2011 that DOD assessed its
commercial payment program as low risk because DOD management
has concluded that it had a highly effective pre-payment examination
process. That process includes a software tool that tests for potential
improper payments before disbursement. 16 However, the DOD IG has
reported 17 that the tool had a false positive 18 rate of more than 95 percent
and that its use was not standardized across payment systems.
Additionally, the DOD IG reported that DOD’s risk of making improper
payments was high and identified deficiencies in DOD’s estimate of high-
dollar overpayments that caused it to underreport the amount of improper



14
  GAO, DOD Financial Management: Weaknesses in Controls over the Use of Public
Funds and Related Improper Payments, GAO-11-950T (Washington, D.C.: Sept. 22,
2011) and Improper Payments: Significant Improvements Needed in DOD’s Efforts to
Address Improper Payment and Recovery Auditing Requirements, GAO-09-442
(Washington, D.C.: July 29, 2009).
15
 DOD, Inspector General, DOD Needs to Improve High Dollar Overpayment Review and
Reporting, D-2011-050 (Arlington, Va.: Mar. 16, 2011).
16
  DOD, Statement of The Honorable Robert F. Hale, Under Secretary of Defense
(Comptroller) before the Subcommittee on Federal Financial Management, Government
Information, Federal Services, and International Security, Committee on Homeland
Security and Governmental Affairs, U.S. Senate (Washington, D.C.: May 25, 2011).
17
 D-2011-050.
18
  A false positive is a payment flagged as a potential improper payment that, after review,
is determined to be proper.




Page 10                                                                        GAO-12-405T
                       payments made. 19 Until DOD fully and effectively implements a
                       statistically valid estimating process for its commercial payments and
                       addresses the known control deficiencies in its commercial payment
                       processes, the governmentwide improper payment estimates are not
                       complete.

                       For fiscal year 2011, two agency auditors reported on compliance issues
                       with IPIA and IPERA as part of their 2011 financial statement audits.
                       Specifically, the Department of Agriculture (USDA) auditors identified
                       noncompliance with the requirements of IPERA regarding the design of
                       program internal controls related to improper payments. In the other
                       noncompliance issue, while HHS estimated an annual amount of
                       improper payments for some of its risk-susceptible programs, a key
                       requirement of IPIA, it did not report an improper payment estimate for its
                       TANF and CHIP programs for fiscal year 2011. Fiscal year 2011 marked
                       the eighth consecutive year that auditors for HHS reported
                       noncompliance issues with IPIA.


                       A number of actions are under way across the federal government to help
Current and Future     advance improper payment reduction goals. These initiatives, as well as
Actions to Move        additional actions in the future, will be needed to advance the federal
                       government efforts to reduce improper payments. Identifying and
Forward with           analyzing the root causes of improper payments is key to developing
Improper Payment       effective corrective actions and implementing the controls needed to
Reduction Strategies   advance the federal government’s efforts to reduce and prevent improper
                       payments. In this regard, implementing strong preventive controls can
                       serve as the front-line defense against improper payments. Proactively
                       preventing improper payments increases public confidence in the
                       administration of benefit programs and avoids the difficulties associated
                       with the “pay and chase” 20 aspects of recovering overpayments. For
                       example, addressing program design issues that are a factor in causing
                       improper payments may be an effective preventive strategy to be


                       19
                         D-2011-050. The IG report stated that DFAS and the Army Corps of Engineers did not
                       review all payment systems for high-dollar overpayments. DFAS did not review
                       approximately $2.2 billion in payments from five entitlement systems and the Corps of
                       Engineers did not complete a timely review of $7.3 billion of commercial payments.
                       20
                         “Pay and chase” refers to the labor-intensive and time-consuming practice of trying to
                       recover overpayments once they have already been made rather than preventing
                       improper payments in the first place.




                       Page 11                                                                       GAO-12-405T
                            considered. Effective monitoring and reporting can also help detect
                            emerging issues. In addition, agencies can also enhance detective
                            controls to identify and recover overpayments. For instance, enhancing
                            incentives for grantees, such as state and local governments, could help
                            increase attention to preventing, identifying, and recovering improper
                            payments.


Identifying and Analyzing   Agencies cited a number of causes for the estimated $115.3 billion in
Root Causes of Improper     reported improper payments, including insufficient documentation;
Payments                    incorrect computations; changes in program requirements; and, in some
                            cases, fraud. Beginning in fiscal year 2011, according to OMB’s
                            guidance, 21 agencies were required to classify the root causes of
                            estimated improper payments into three general categories for reporting
                            purposes: (1) documentation and administrative errors, (2) authentication
                            and medical necessity errors, and (3) verification errors. 22 Information on
                            the root causes of the current improper payment estimates is necessary
                            for agencies to target effective corrective actions and implement
                            preventive measures.

                            While agencies generally reported some description of the causes of
                            improper payments for their respective programs in their fiscal year 2011
                            reports, many agencies did not use the three categories to classify the
                            types of errors and quantify how many errors can be attributed to that
                            category. Of the 79 programs with improper payment estimates in fiscal



                            21
                              OMB, Circular No. A-136 Revised, Financial Reporting Requirements (October 27,
                            2011) and OMB Memorandum M-10-13, Issuance of Part III to OMB Circular A-123,
                            Appendix C (Mar. 22, 2010).
                            22
                              OMB defines these error types as: Documentation and Administrative Errors - Errors
                            caused by the absence of supporting documentation necessary to verify the accuracy of a
                            payment or errors caused by incorrect inputting, classifying, or processing of applications
                            or payments by a relevant Federal agency, State agency, or third party who is not the
                            beneficiary; Authentication and Medical Necessity Errors - Errors caused by an inability to
                            authenticate eligibility criteria through third-party databases or other resources because no
                            databases or other resources exist, or providing a service that was not medically
                            necessary given the patient’s condition; and Verification Errors - Errors caused by the
                            failure or inability to verify recipient information, including earnings, income, assets, or
                            work status, even though verifying information does exist in third-party databases or other
                            resources (in this situation, as contrasted with “authentication” errors, the “inability” to
                            verify may arise due to legal or other restrictions that effectively deny access to an existing
                            database or resource), or errors due to beneficiaries failing to report correct information to
                            an agency.




                            Page 12                                                                          GAO-12-405T
                          year 2011, we found that agencies reported the root causes information
                          using the required categories for 42 programs in their fiscal year 2011
                          PARs and AFRs. Together, these programs represented about $46
                          billion, or 40 percent of the total reported $115 billion in improper payment
                          estimates for fiscal year 2011. Of the $46 billion, the estimated improper
                          payment amounts were spread across the three categories, with
                          documentation and administrative errors being cited most often. We did
                          not calculate the dollar amounts in each category due to the imprecise
                          narratives included in some of the agencies’ reporting of identified
                          causes, which would have required more detailed information and/or
                          detailed examination of the underlying data. Nonetheless, additional
                          analysis regarding the root causes is needed in order to identify and
                          implement effective corrective and preventive actions in the various
                          programs.


Implementing Effective    Many agencies and programs are in the process of implementing
Preventive Controls to    preventive controls to avoid improper payments, including overpayments
Avoid Improper Payments   and underpayments. Preventive controls may involve a variety of
                          activities such as upfront validation of eligibility, predictive analytic tests,
                          training programs, and timely resolution of audit findings. Further,
                          addressing program design issues that are a factor in causing improper
                          payments may be an effective preventive strategy to be considered.

                          Upfront eligibility validation through data sharing. Data sharing allows
                          entities that make payments—to contractors, vendors, participants in
                          benefit programs, and others—to compare information from different
                          sources to help ensure that payments are appropriate. When effectively
                          implemented, data sharing can be particularly useful in confirming initial
                          or continuing eligibility of participants in benefit programs and in
                          identifying improper payments that have already been made. Analyses
                          and reporting on the extent to which agencies are participating in data
                          sharing activities, and additional data sharing efforts that agencies are
                          currently pursuing or would like to pursue is another important element
                          needed to advance the federal government’s efforts to reduce improper
                          payments.

                          For example, the Department of Labor (Labor) reported that its
                          Unemployment Insurance Program utilizes HHS’s National Directory of




                          Page 13                                                               GAO-12-405T
New Hires Database 23 to improve the ability to detect overpayments due
to individuals who claim benefits after returning to work—the largest
single cause of overpayments reported in the program. In June 2011,
Labor established the mandatory use of the database for state benefit
payment control no later than December 2011. Labor also issued a
program letter that included recommended operating procedures for
cross-matching activity for National and State Directories of New Hires.

In another case, to address the issue of inaccuracy of self-reported
financial income on applications for student aid, the Department of
Education (Education), in conjunction with the Internal Revenue Service
(IRS), implemented a 6-month pilot version of an IRS data retrieval tool in
January 2010 for its Pell Grant Program. The tool allows student aid
applicants and, as needed, parents of applicants, to transfer certain tax
return information from the IRS directly to Education’s online application.
Education reported that nearly 3.5 million students used the data
exchange tool, representing approximately 21 percent of the applications
submitted for the 2011 - 2012 academic year.

Predictive analytic technologies. The analytic technologies used by
HHS’s Centers for Medicare and Medicaid Services (CMS) are examples
of preventive techniques that may be useful for other programs to
consider. The Small Business Jobs Act of 2010 requires CMS to use
predictive modeling and other analytic techniques—known as predictive
analytic technologies—both to identify and to prevent improper payments
under the Medicare fee-for-service program. 24 These predictive analytic
technologies will be used to analyze and identify Medicare provider
networks, billing patterns, and beneficiary utilization patterns and detect
those that represent a high risk of fraudulent activity. Through such
analysis, unusual or suspicious patterns or abnormalities can be identified
and used to prioritize additional review of suspicious transactions before
payment is made. The legislation required that contractors selected begin
using these technologies on July 1, 2011, in the 10 states identified by
CMS as having the highest risk of fraud, waste, or abuse in Medicare fee-
for-service payments. Rather than focusing on the 10 states, CMS



23
 The National Directory of New Hires database, maintained by HHS, contains information
on all newly hired employees, quarterly wage reports for all employees, and
unemployment insurance claims nationwide.
24
     Pub. L. No. 111-240, § 4241, 124 Stat. 2504, 2599 (Sept. 27, 2010).




Page 14                                                                    GAO-12-405T
contractors began using these technologies to screen all fee-for-service
claims nationwide prior to payment as of June 30, 2011, through CMS’s
new Fraud Prevention System.

Training programs for providers, staff, and beneficiaries. Training
can be a key element in any effort to prevent improper payments from
occurring. This can include both training staff on how to prevent and
detect improper payments and training providers or beneficiaries on
program requirements. For example, the Medicaid Integrity Institute, an
initiative of CMS’s Medicaid Integrity Group (MIG), trains state-level staff
and facilitates networking by sponsoring free workshops for states. In
addition, the MIG sponsors education programs for providers and
beneficiaries, such as for pharmacy providers, to promote best
prescribing practices and appropriate prescribing guidelines based on
Food and Drug Administration labeling, potentially reducing improper
payments. 25

Timely resolution of audit findings. Standards for Internal Control in
the Federal Government 26 requires that the findings of audits and other
reviews be promptly resolved. Managers are to (1) evaluate findings from
audits and other reviews promptly, including those showing deficiencies
and recommendations reported by auditors and others who evaluate
agencies’ operations; (2) determine proper actions in response to findings
and recommendations from audits and reviews; and (3) complete, within
established time frames, all actions that correct or otherwise resolve the
matters brought to management’s attention.

Program design review and refinement. To the extent that provider
enrollment and eligibility verification problems are identified as a
significant root cause in a specific program, agencies may look to
establish enhanced controls in this area. For example, CMS has taken
steps to strengthen standards and procedures for Medicare provider
enrollment to help reduce the risk of providers intent on defrauding or
abusing the program. 27 Further, exploring whether certain complex and/or


25
 GAO, Medicaid Program Integrity: Expanded Federal Role Presents Challenges to and
Opportunities for Assisting States, GAO-12-288T (Washington D.C.: Dec. 7, 2011).
26
  GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1
(Washington, D.C: Nov. 1999).
27
  GAO, Improper Payments: Reported Medicare Estimates and Key Remediation
Strategies, GAO-11-842T (Washington, D.C.: July 28, 2011).




Page 15                                                                  GAO-12-405T
                        inconsistent program requirements, such as eligibility criteria and
                        requirements for provider enrollment, contribute to improper payments
                        would lend insight to developing effective strategies for enhancing
                        compliance and may identify opportunities for streamlining or changing
                        eligibility or other program requirements.


Implement Effective     Although strong preventive controls remain the frontline defense against
Detective Controls to   improper payments, agencies also need effective detection techniques to
Identify and Recover    quickly identify and recover those overpayments that do occur. Detection
                        activities play a significant role not only in identifying improper payments,
Overpayments            but also in providing data on why these payments were made and, in turn,
                        highlighting areas that need strengthened prevention controls. The
                        following are examples of key detection techniques to be considered.

                        •    Data mining. Data mining is a computer-based control activity that
                             analyzes diverse data for relationships that have not previously been
                             discovered. The central repository of data commonly used to perform
                             data mining is called a data warehouse. Data warehouses store tables
                             of historical and current information that are logically grouped. As a
                             tool in managing improper payments, applying data mining to a data
                             warehouse allows an organization to efficiently query the system to
                             identify potential improper payments, such as multiple payments for
                             an individual invoice to an individual recipient on a certain date, or to
                             the same address. For example, in the Medicare and Medicaid
                             program, data on claims are stored in geographically disbursed
                             systems and databases and are not readily available to CMS’s
                             program integrity analysts. CMS has been working for most of the
                             past decade to consolidate program integrity data and analytical tools
                             for detecting fraud, waste, and abuse. The agency’s efforts led to the
                             initiation of the Integrated Data Repository (IDR) program, which is
                             intended to provide CMS and its program integrity contractors with a
                             centralized source that contains Medicaid and Medicare data from the
                             many disparate and dispersed legacy systems and databases. CMS
                             subsequently developed the One Program Integrity (One PI)
                             program, 28 a web-based portal and set of analytical tools by which




                        28
                          The One PI portal is a web-based user interface that enables a single log-in through
                        centralized, role-based access to the system.




                        Page 16                                                                      GAO-12-405T
      these data can be accessed and analyzed to help identify cases of
      fraud, waste, and abuse based on patterns of paid claims. 29

•     Recovery auditing. While internal control should be maintained to help
      prevent improper payments, recovery auditing is used to identify and
      recover overpayments. The Tax Relief and Health Care Act of 2006
      required CMS to implement a national Medicare recovery audit
      contractor (RAC) program by January 1, 2010. 30 In fiscal year 2011,
      HHS reported that the Medicare Fee-for-Service recovery audit
      program identified $961 million in overpayments and recovered $797
      million nationwide. Further, the Medicaid RAC program was
      established by the Patient Protection and Affordable Care Act. 31 Each
      state must contract with a RAC, which is tasked with identifying and
      recovering Medicaid overpayments and identifying underpayments.
      The final regulations indicated that state Medicaid RACs were to be
      implemented by January 1, 2012. Similar to the Medicare RACs,
      Medicaid RACs will be paid on a contingency fee basis—a percentage
      of any recovered overpayments plus incentive payments for the
      detection of underpayments.

      It is important to note that some agencies have reported statutory or
      regulatory barriers that affect their ability to pursue recovery auditing.
      For example, in fiscal year 2011, the Office of Personnel Management
      (OPM) reported that it faces regulatory barriers that restrict its ability to
      recover overpayments for its Retirement Program. OPM reported that
      based on current law and Treasury’s regulations, financial institutions
      are barred from providing OPM with the information necessary to
      recover various overpayments. Only the Social Security
      Administration, Railroad Retirement Board, and the Department of
      Veterans’ Affairs may receive the information necessary to identify the
      withdrawer to attempt to recover the overpayments because those
      agencies are the only ones named in the law to receive that type of
      information from financial institutions. According to OPM, Treasury


29
  We reported in July 2011 that IDR includes most types of Medicare claims data, but not
the Medicaid data needed to help analysts detect improper payments of Medicaid claims.
See Fraud Detection Systems: Centers for Medicare and Medicaid Needs to Ensure More
Widespread Use, GAO-11-475 (Washington D.C.: July 12, 2011).
30
  Pub. L. No. 109-432, div B., title III, § 302, 120 Stat. 2922, 2991-92 (Dec. 20, 2006),
codified at 42 U.S.C. § 1395ddd(h).
31
    Pub. L. No. 111-148, §6411, 124 Stat. 119, 773 (Mar. 23, 2010).




Page 17                                                                         GAO-12-405T
     has drafted language to address the issue and is working to publish a
     notice of proposed rulemaking to amend its regulation.

     In another instance, USDA reported that Section 281 of the
     Department of Agriculture Reorganization Act of 1994 32 precluded the
     use of recovery auditing techniques because Section 281 provides
     that 90 days after the decision of a state, county, or an area
     committee is final, no action may be taken to recover the amounts
     found to have been erroneously disbursed as a result of the decision
     unless the participant had reason to believe that the decision was
     erroneous. This statute is commonly referred to as the Finality Rule.

•    Federal-state incentives. Another area for further exploration is the
     broader use of incentives for states to implement effective preventive
     and detective controls. 33 Agencies have applied limited incentives and
     penalties for encouraging improved state administration to reduce
     improper payments. Incentives and penalties can be helpful to create
     management reform and to ensure adherence to performance
     standards.



Chairman Platts and Ranking Member Towns, this completes my
prepared statement. I would be happy to respond to any questions that
you or other members of the subcommittee may have at this time.




32
 Pub. L. No. 103-354, § 281, 108 Stat. 3178, 3233 (Oct. 13, 1994), codified, as
amended, at 7 U.S.C. § 7001.
33
  OMB’s implementing guidance for IPERA allows agencies to use up to 25 percent of
funds recovered under a payment recapture audit program, including providing a portion
of funding to state and local governments.




Page 18                                                                      GAO-12-405T
                  For more information regarding this testimony, please contact Beryl H.
Contacts and      Davis, Director, Financial Management and Assurance, at (202) 512-2623
Acknowledgments   or by e-mail at DavisBH@gao.gov. Contact points for our Offices of
                  Congressional Relations and Public Affairs may be found on the last page
                  of this testimony. Individuals making key contributions to this testimony
                  included Jack Warner, Assistant Director; W. Tyler Benson; Francine
                  Delvecchio; Crystal Lazcano; Kerry Porter; and Carrie Wehrly.




                  Page 19                                                       GAO-12-405T
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             Medicaid Program Integrity: Expanded Federal Role Presents Challenges
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             Page 20                                                       GAO-12-405T
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           Page 21                                                      GAO-12-405T
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