oversight

Improper Payments: Remaining Challenges and Strategies for Governmentwide Reduction Efforts

Published by the Government Accountability Office on 2012-03-28.

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

                            United States Government Accountability Office

GAO                         Testimony
                            Before the Subcommittee on Federal Financial
                            Management, Government Information, Federal
                            Services, and International Security, Committee on
                            Homeland Security and Governmental Affairs,
                            U.S. Senate

                            IMPROPER PAYMENTS
For Release on Delivery
Expected at 2:30 p.m. EDT
Wednesday, March 28, 2012



                            Remaining Challenges
                            and Strategies for
                            Governmentwide
                            Reduction Efforts
                            Statement of Beryl H. Davis, Director
                            Financial Management and Assurance




GAO-12-573T
                                                March 28, 2012

                                                IMPROPER PAYMENTS
                                                Remaining Challenges and Strategies for
                                                Governmentwide Reduction Efforts
Highlights of GAO-12-573T, a testimony
before the Subcommittee on Federal Financial
Management, Government Information,
Federal Services, and International Security,
Committee on Homeland Security and
Governmental Affairs, U.S. Senate

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. According to the Office of Management and Budget (OMB), the
across the federal government as well           $115.3 billion estimate was attributable to 79 programs spread among 17
as at specific agencies. Fiscal year            agencies. Ten programs accounted for about $107 billion or 93 percent of the
2011 marked the eighth year of                  total estimated improper payments agencies reported. The reported decrease in
implementation of the Improper                  fiscal year 2011 was primarily related to 3 programs—decreases in program
Payments Information Act of 2002                outlays for the Unemployment Insurance program, and decreases in reported
(IPIA), as well as the first year of
                                                error rates for the Earned Income Tax Credit program and the Medicare
implementation for the Improper
                                                Advantage program. Further, OMB reported that agencies recaptured $1.25
Payments Elimination and Recovery
Act of 2010 (IPERA). IPIA requires
                                                billion in improper payments to contractors and vendors.
executive branch agencies to annually           The federal government continues to face challenges in determining the full
identify programs and activities                extent of improper payments. Some agencies have not reported estimates for all
susceptible to significant improper             risk-susceptible programs, while other agencies’ estimation methodologies were
payments, estimate the amount of                found to be not statistically valid. For example, GAO’s recently completed study
improper payments for such programs             of Foster Care improper payments found that the Administration for Children and
and activities, and report these                Families (ACF) had established a process to calculate a national improper
estimates along with actions taken to
                                                payment estimate for the Foster Care program, which totaled about $73 million
reduce them. IPERA amended IPIA
                                                for fiscal year 2010, the year covered by GAO’s review. However, the estimate
and expanded requirements for
recovering overpayments across a                was not based on a statistically valid methodology and consequently did not
broad range of federal programs.                provide a reasonably accurate estimate of the extent of Foster Care improper
                                                payments. Further, GAO found that ACF could not reliably assess the extent to
This testimony addresses (1) federal            which corrective actions reduced Foster Care improper payments.
agencies’ reported progress in
estimating and reducing improper                A number of strategies are under way across government to help advance
payments; (2) challenges in meeting             improper payment reduction goals. For example,
current requirements to estimate and
                                                •   Additional information and analysis on the root causes of improper payment
evaluate improper payments, including
the results of GAO’s case study of the
                                                    estimates will assist agencies in targeting effective corrective actions and
estimation methodology and corrective               implementing preventive measures. Although agencies were required to
actions for the Foster Care program;                report the root causes of improper payments in three categories beginning in
and (3) possible strategies that can be             fiscal year 2011, of the 79 programs with improper payment estimates that
taken to move forward in reducing                   year, 42 programs reported the root cause information using the required
improper payments. This testimony is                categories.
primarily based on prior GAO reports,           •   Implementing strong preventive controls can help defend against improper
including the report released today on              payments, increasing public confidence and avoiding the difficult “pay and
improper payment estimates in the                   chase” aspects of recovering improper payments. Preventive controls involve
Foster Care program. It also includes               activities such as up-front validation of eligibility using data sharing,
unaudited improper payment                          predictive analytic technologies, and training programs. Further, addressing
information recently presented in                   program design issues, such as complex eligibility requirements, may also
federal entities’ fiscal year 2011                  warrant further consideration.
performance and accountability reports          •   Effective detection techniques to quickly identify and recover improper
and agency financial reports.                       payments are also important to a successful reduction strategy. Detection
                                                    activities include data mining and recovery auditing. Another area for further
                                                    exploration is the broader use of incentives to encourage states in efforts to
View GAO-12-573T. For more information,             implement effective detective controls.
contact Beryl H. Davis at (202) 512-2623 or
davisbh@gao.gov.                                Continuing work to implement and enhance these strategies will be needed to
                                                effectively reduce federal government improper payments.
                                                                                        United States Government Accountability Office
Chairman Carper, Ranking Member Brown, 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 any
overpayments. It is important to note that not all of the reported improper
payment estimates represent a loss to the government. For example,
such estimates include payments where there is insufficient
documentation or a lack of documentation. 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 As requested by the Subcommittee, we recently completed
our study of the improper payment estimation methodology and related
corrective actions for the Department of Health and Human Services’
(HHS) Foster Care program administered by the Administration for
Children and Families (ACF). 3




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, 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
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.
3
 GAO, Foster Care Program: Improved Processes Needed to Estimate Improper
Payments and Evaluate Related Corrective Actions, GAO-12-312 (Washington, D.C.:
Mar. 7, 2012).




Page 1                                                                        GAO-12-573T
                          Today, my testimony will focus on

                          •   federal agencies’ reported progress in estimating and reducing
                              improper payments;
                          •   challenges in meeting current requirements to estimate and evaluate
                              improper payments, including those identified through our case study
                              of the estimation methodology used by HHS’s Foster Care program; 4
                              and
                          •   possible improper payment reduction strategies.

                          In preparing this statement, we drew primarily upon previously issued
                          work related to (1) our fiscal year 2011 audit of the Financial Report of the
                          United States Government, 5 (2) our report released today on improper
                          payment estimates at HHS’s Foster Care program, 6 and (3) 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 unaudited improper payment information that
                          federal entities reported in their fiscal year 2011 performance and
                          accountability reports (PAR), agency financial reports (AFR), or other
                          annual reporting.



Background

Improper Payments         Fiscal year 2011 marked the eighth year of implementation of the
Information Act of 2002   Improper Payments Information Act of 2002 (IPIA), 7 as well as the first
                          year of implementation for the Improper Payments Elimination and
                          Recovery Act of 2010 (IPERA). 8 IPIA requires executive branch agencies



                          4
                          GAO-12-312.
                          5
                           Department of the Treasury, 2011 Financial Report of the United States Government
                          (Washington, D.C.: Dec. 23, 2011), 211-231.
                          6
                          GAO-12-312.
                          7
                          Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002).
                          8
                          Pub. L. No. 111-204, 124 Stat. 2224 (July 22, 2010).




                          Page 2                                                                    GAO-12-573T
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. 9
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 million 10 to $1 million and expands the scope for recovery audits to
all programs and activities. Another 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, federal agencies are required to
complete these reports within 120 days of the publication of their annual
PARs or AFRs, 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 issue. OMB has established guidance for federal




9
 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 for 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).
10
  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.




Page 3                                                                           GAO-12-573T
                    agencies on reporting, reducing, and recovering improper payments 11 and
                    has established various work groups responsible for developing
                    recommendations aimed at improving federal financial management
                    activities related to reducing improper payments.


HHS’s Foster Care   Each year, hundreds of thousands of our nation’s most vulnerable
Program             children are removed from their homes and placed in foster care, often
                    because of abuse or neglect. While states are primarily responsible for
                    providing safe and stable out-of-home care for these children until they
                    are returned safely home, placed with adoptive families, or placed in other
                    arrangements, Title IV-E of the Social Security Act provides states some
                    federal financial support in this area. 12 ACF under HHS is responsible for
                    administering this program and overseeing Title IV-E funds. HHS’s
                    reported fiscal year 2010 outlays to states for their Foster Care programs
                    under Title IV-E totaled more than $4.5 billion, serving over 408,000
                    children, as of September 30, 2010, the most recent data available at the
                    time of our study.

                    Past work by the HHS Office of Inspector General (OIG), GAO, and
                    others have identified numerous deficiencies in state claims associated
                    with the Title IV-E Foster Care program. In particular, the HHS OIG found
                    hundreds of millions of dollars in unallowable claims associated with Title
                    IV-E funding. 13 A 2006 GAO report also found variations in costs states
                    claimed under the Title IV-E program and recommended a number of




                    11
                      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).
                    12
                     Codified, as amended, at 42 U.S.C. §§ 670-679c.
                    13
                      Examples of HHS OIG reports include the following: HHS OIG, Audit of Allegheny
                    County Title IV-E Foster Care Claims From October 1997 Through September 2002, A-
                    03-08-00554 (Jan. 4, 2011); Review of Title IV-E Foster Care Costs Claimed on Behalf of
                    Delinquent Children in Georgia, A-04-07-03519 (June 17, 2010); Review of California's
                    Title IV-E Claims for Payments Made by Los Angeles County to Foster Homes of Relative
                    Caregivers, A-09-06-00023 (Oct. 2, 2009); and Philadelphia County's Title IV-E Claims
                    Based on Contractual Per Diem Rates of $300 or Less for Foster Care Services from
                    October 1997 Through September 2002, A-03-07-00560 (May 19, 2008).




                    Page 4                                                                     GAO-12-573T
                       actions HHS should take to better safeguard federal resources. 14 In
                       addition, annual state-level audits have identified weaknesses in states’
                       use of federal funds, such as spending on unallowed activities or costs
                       and inadequate state monitoring of federal funding. 15

                       As required under IPIA, as amended, HHS has identified the Foster Care
                       program as susceptible to significant improper payments, and has
                       reported annually on estimated improper payment amounts for the
                       program since 2005. 16 For fiscal year 2010, HHS reported estimated
                       improper payments for Foster Care of about $73 million. The reported
                       estimate slightly decreased to about $72 million for fiscal year 2011.

                       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. 17 Based on the agencies’
Estimating and         estimates, OMB estimated that improper payments comprised about 4.7
                       percent of the $2.5 trillion in fiscal year 2011 total spending for the
Reducing Improper      agencies’ related programs (i.e., a 4.7 percent error rate). The decrease
Payments               in the fiscal year 2011 estimate—when compared to fiscal year 2010—is
                       attributed primarily to decreases in program outlays for the Department of
                       Labor’s (Labor) Unemployment Insurance program, and decreases in


                       14
                         GAO, Foster Care and Adoption Assistance: Federal Oversight Needed to Safeguard
                       Funds and Ensure Consistent Support for States’ Administrative Costs, GAO-06-649
                       (Washington, D.C.: June 15, 2006).
                       15
                         Examples of state-level audit reports include the following: California State Auditor,
                       State of California Internal Control and State and Federal Compliance Audit Report for the
                       Fiscal Year Ended June 30, 2010 (Sacramento, Calif.: Mar. 29, 2011); KPMG,
                       Government of the District of Columbia Schedule of Expenditures of Federal Awards and
                       Reports Required by Government Auditing Standards and OMB Circular A-133, Year
                       Ended September 30, 2010 (Washington, D.C.: Jan. 27, 2011); and State of Indiana,
                       State Board of Accounts, State of Indiana Single Audit Report July 1, 2009 to June 30,
                       2010 (Indianapolis, Ind.: Feb. 25, 2011).
                       16
                         In its fiscal year 2005 PAR, HHS reported an improper payment estimate for the Foster
                       Care program for fiscal years 2004 and 2005. According to HHS, the fiscal year 2004 error
                       rate had not been finalized prior to the issuance of its fiscal year 2004 PAR, and thus was
                       not reported in that publication.
                       17
                          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 5                                                                          GAO-12-573T
                                          reported error rates for fiscal year 2011 for the Department of the
                                          Treasury’s (Treasury) Earned Income Tax Credit program, and HHS’s
                                          Medicare Advantage program.

                                          According to OMB, 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, these 10
                                          programs accounted for about $107 billion or 93 percent of the total
                                          estimated improper payments agencies reported for fiscal year 2011.
                                          Table 1 shows the reported improper payment estimates and the reported
                                          primary cause(s) for the estimated improper payments for these 10
                                          programs.

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-       Department of                    $28.8                   8.6    Medically unnecessary services
Service                 Health and                                                      and insufficient documentation
                        Human
                        Services
Medicaid                Department of                      21.9                  8.1    Ineligible or indeterminable
                        Health and                                                      eligibility status for Medicaid
                        Human                                                           beneficiaries
                        Services
Earned Income Tax       Department of                      15.2               23.5      Complexity of the tax law, structure
Credit                  the Treasury                                                    of the program, confusion among
                                                                                        eligible claimants, high turnover of
                                                                                        eligible claimants, and
                                                                                        unscrupulous return preparers
Unemployment            Department of                      13.7               12.0      Overpayment to claimants who
Insurance               Labor                                                           continue to claim benefits after
                                                                                        they return to work, ineligibility, and
                                                                                        claimants who failed to meet active
                                                                                        work search requirements
Medicare Advantage      Department of                      12.4               11.0      Insufficient documentation, errors
                        Health and                                                      in the transfer and interpretation of
                        Human                                                           data, and payment calculations
                        Services
Supplemental Security   Social Security                     4.6                  9.1    Recipients failed to provide
Income                  Administration                                                  accurate and timely reports of new
                                                                                        or increased wages




                                          Page 6                                                                  GAO-12-573T
                                              Reported improper payment estimates
                                                         Dollars                           Error rate
Program                  Agency                     (in billions)                      (percentages)             Reported primary cause(s)
Old Age Survivors’ and Social Security                           4.5                                   0.6       Computation errors, eligibility
Disability Insurance   Administration                                                                            errors, non-verification of earnings,
                                                                                                                 and incorrect processing of
                                                                                                                 applications or payments
Supplemental Nutrition   Department of                           2.5                                   3.8       Incomplete or inaccurate reporting
Assistance               Agriculture                                                                             of income by participant and
                                                                                                                 incorrect eligibility determination by
                                                                                                                 caseworkers
National School Lunch    Department of                           1.7                                 16.0        Verification errors related to benefit
                         Agriculture                                                                             calculation error, duplicate
                                                                                                                 payments, insufficient
                                                                                                                 documentation, and fraud or
                                                                                                                 misrepresentation by program
                                                                                                                 participants or others
Medicare Prescription    Department of                           1.7                                   3.2       Payment errors, payment
Drug Benefit             Health and                                                                              adjustment errors, and complexity
                         Human                                                                                   of program
                         Services
                                         Source: GAO analysis of agencies’ PARs and AFRs for fiscal year 2011.


                                         While the programs identified in the table above represented the largest
                                         dollar amounts of improper payments, 4 of these programs also had
                                         some of the highest program improper payment error rates. 18 As shown in
                                         table 2, the 10 programs with the highest error rates accounted for $45
                                         billion, or 39 percent of the total estimated improper payments, and had
                                         rates ranging from 11.0 percent to 28.4 percent for fiscal year 2011.




                                         18
                                           The four programs with both the highest dollar estimates and highest error rates were
                                         the Earned Income Tax Credit, Unemployment Insurance, Medicare Advantage, and
                                         National School Lunch programs.




                                         Page 7                                                                                           GAO-12-573T
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       Small Business                                                       Loan documentation errors
Assistance     Administration
Loans                                              28.4%               $96.3
School         Department of                                                        Authentication and administrative
Breakfast      Agriculture                                                          errors, including authenticating the
                                                                                    accuracy of qualifying for program
                                                                                    specific requirements, criteria, or
                                                   25.0%             $705.0         conditions
Earned Income Department of the                                                     Complexity of the tax law, structure of
Tax Credit    Treasury                                                              the program, confusion among eligible
                                                                                    claimants, high turnover of eligible
                                                                                    claimants, and unscrupulous return
                                                   23.5%           $15,200.0        preparers
National School Department of                                                       Verification errors related to benefit
Lunch           Agriculture                                                         calculation error, duplicate payments,
                                                                                    insufficient documentation, and fraud
                                                                                    or misrepresentation by program
                                                   16.0%            $1,716.0        participants or others
State Home     Department of                                                        Documentation and administrative
Per Diem       Veterans Affairs                                                     errors related to ineligible recipients,
Grants                                                                              noncompliance with policies and
                                                                                    procedures, incorrect amounts,
                                                                                    ineligible goods, and lack of
                                                   13.7%               $97.6        documentation
Supplies and   Department of                                                        Documentation and administrative
Materials      Veterans Affairs                                                     errors related to noncompliance with
                                                                                    policies and procedures, lack of
                                                                                    documentation, ineligible goods,
                                                                                    incorrect amounts, and discounts not
                                                   13.6%             $221.1         taken
Non-VA Care    Department of                                                        Verification and documentation and
Fee            Veterans Affairs                                                     administrative errors related to
                                                                                    incorrect application of payment
                                                                                    methodologies, lack of documentation,
                                                                                    lack of authorization, and data entry
                                                   12.4%             $522.9         errors
Unemployment Department of Labor                                                    Overpayment to claimants who
Insurance                                                                           continue to claim benefits after they
                                                                                    return to work, ineligibility, and
                                                                                    claimants who failed to meet active
                                                   12.0%           $13,697.0        work search requirements
Child Care and Department of Health                                                 Documentation and administrative
Development    and Human Services                                                   errors caused by missing or insufficient
Fund                                               11.2%             $638.0         documentation




                                        Page 8                                                                     GAO-12-573T
                                   Reported improper payment estimates
                                             Error rate                        Dollars
Program     Agency                       (percentages)                    (in millions)                     Reported primary cause(s)
Medicare    Department of Health                                                                            Insufficient documentation, errors in
Advantage   and Human Services                                                                              the transfer and interpretation of data,
                                                     11.0%                    $12,390.0                     and payment calculation errors
                                    Source: GAO analysis of agencies’ PARs and AFRs for fiscal year 2011.


                                    Since the implementation of IPIA in 2004, federal agencies have worked
                                    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 dollar estimate of the newly included
                                    programs. We view these agencies’ efforts as a positive step toward
                                    increasing the transparency of the magnitude of improper payments
                                    across the federal government. However, OMB did not include three
                                    additional programs providing estimates in fiscal year 2011 in the
                                    governmentwide totals because their estimation methodologies were still
                                    under development. The three excluded programs were the Department
                                    of Education’s (Education) Direct Loan, Department of Defense’s (DOD)
                                    Defense Finance and Accounting Service Commercial Pay, and DOD’s
                                    U.S. Army Corps of Engineers Commercial Pay.

                                    A number of federal agencies have reported progress in reducing
                                    improper payment error rates in some of their 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. However, 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 of tax returns that claimed the EITC before issuing the



                                    Page 9                                                                                               GAO-12-573T
                          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,
                          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—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 improper payments
                      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 improper payments 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
Governmentwide        amounts and error rates for some programs and activities during fiscal
Challenges to         year 2011, the federal government continues to face challenges in
                      determining the full extent of improper payments. Specifically, some
Estimating and        agencies have not yet reported estimates for all risk-susceptible
Evaluating Improper   programs, and some agencies’ estimating methodologies need to be
Payments              refined. 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. In
                      this regard, at the request of this Subcommittee, we recently completed


                      Page 10                                                           GAO-12-573T
                           our review of the improper payment estimation methodology used by
                           HHS’s Foster Care program. As discussed in our report released today, 19
                           we found that the Foster Care program’s improper payment estimation
                           methodology was deficient in all three key areas—planning, selection,
                           and evaluation—and consequently did not result in a reasonably accurate
                           estimate of the extent of Foster Care improper payments. Further, the
                           validity of the reporting of reduced Foster Care program error rates was
                           questionable, and we found that several weaknesses impaired ACF’s
                           ability to assess the effectiveness of corrective actions to reduce improper
                           payments.


Challenges in Developing   We found that not all agencies have developed improper payment
Improper Payment           estimates for all of the programs and activities they identified as
Estimates                  susceptible to significant improper payments. Specifically, three federal
                           entities did not report fiscal year 2011 estimated improper payment
                           amounts for four risk-susceptible programs. 20 In one example, HHS’s
                           fiscal year 2011 reporting cited statutory limitations for its state-
                           administered Temporary Assistance for Needy Families (TANF)
                           program, 21 that 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 22 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


                           19
                                GAO-12-312.
                           20
                             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 programs.
                           21
                             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.
                           22
                            Pub. L. No. 111-3, 123 Stat. 8 (Feb. 4, 2009).




                           Page 11                                                                     GAO-12-573T
report, HHS plans to report estimated improper payment amounts for
CHIP in fiscal year 2012. For fiscal year 2011, HHS reported federal
outlays of about $9 billion for CHIP.

As previously mentioned, 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, 23 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.
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.

Both GAO 24 and the DOD Inspector General (IG) 25 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 inadequate payment processing controls, poor financial systems, and
inadequate supporting documentation. The DOD IG reported in March
2011 that deficiencies in a key component of this process could lead to
erroneously categorizing a high percentage of potential improper
payments as proper. 26 Further, 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 its



23
  DOD refers to payments to contractors and vendors collectively as commercial
payments.
24
  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).
25
 DOD Inspector General, DOD Needs to Improve High Dollar Overpayment Review and
Reporting, D-2011-050 (Arlington, Va.: Mar. 16, 2011).
26
 DOD Inspector General, DOD Needs to Improve High Dollar Overpayment Review and
Reporting.




Page 12                                                                    GAO-12-573T
improper payments. 27 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 will
continue to be incomplete. We are currently working on an engagement
related to improper payment reporting at DOD.

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 for fiscal year 2011 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 program and CHIP. Fiscal year 2011 marked the eighth
consecutive year that auditors for HHS reported noncompliance issues
with IPIA.

We recognize that measuring improper payments for federal programs
and designing and implementing actions to reduce or eliminate them are
not simple tasks, particularly for grant programs that rely on
administration efforts at the state level. The estimation methodologies for
these types of programs may vary considerably because of differences in
program designs across the states. For example, as I will discuss in more
detail later in this statement, the Foster Care program leveraged an
existing process to estimate improper payments that included a review of
a child’s eligibility for Title IV-E federal funding as claimed by the states
administering the program. In another example, the improper payment
estimate for HHS’s Medicaid program is based on the results of three
different reviews—eligibility, fee-for-service, and managed care—of
claims payments made by states to health care providers. The fee-for-
service and managed care reviews both include a data processing review
to validate that claims were processed correctly. The fee-for-service
review also includes a medical necessity determination. The eligibility



27
  DOD Inspector General, DOD Needs to Improve High Dollar Overpayment Review and
Reporting. 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.




Page 13                                                                   GAO-12-573T
                           review identifies payments made for services to beneficiaries that were
                           improperly paid because of erroneous eligibility decisions. We are
                           currently working on an engagement related to improper payment
                           reporting for the Medicaid program. Because of these state differences
                           and complexities within programs, as we previously reported, 28
                           communication, coordination, and cooperation among federal agencies
                           and the states will be critical to effectively estimate national improper
                           payment rates and meet IPIA reporting requirements for state-
                           administered programs.


Case Study: Foster Care    The results of our recently completed study of the improper payment
Program Faces Challenges   estimation methodology used by HHS’s Foster Care program serve to
in Estimating Improper     provide a more detailed perspective on the challenges one federal
                           agency faced in attempting to develop a complete and accurate
Payments and Evaluating    nationwide estimate for a program largely administered at the state level.
Corrective Actions         Further, this case study provides an example of the types of problems
                           that may exist but go undetected because of the lack of independent
                           assessments of the reported information. As we previously testified
                           before this Subcommittee, 29 separate assessments conducted by agency
                           auditors provide a valuable independent validation of agencies’ efforts to
                           report reliable information under IPIA. Independent assessments can also
                           enhance an agency’s ability to identify sound performance measures,
                           monitor progress against those measures, and help establish
                           performance and results expectations. Without this type of validation or
                           other types of reviews performed by GAO or agency OIGs, it is difficult to
                           reliably determine the full magnitude of deficiencies that may exist
                           governmentwide in agencies’ IPIA implementation efforts. For example,
                           our case study of the Foster Care program found that although ACF had
                           established a process to calculate a national improper payment estimate,
                           the estimate was not based on a statistically valid methodology and
                           consequently did not reflect a reasonably accurate estimate of the extent
                           of Foster Care improper payments. Further, without accurate data, the


                           28
                             GAO, Improper Payments: Federal and State Coordination Needed to Report National
                           Improper Payment Estimates on Federal Programs, GAO-06-347 (Washington, D.C.:
                           Apr. 14, 2006).
                           29
                             GAO, Improper Payments: Progress Made but Challenges Remain in Estimating and
                           Reducing Improper Payments, GAO-09-628T (Washington, D.C.: Apr. 22, 2009), and
                           Improper Payments: Status of Agencies’ Efforts to Address Improper Payment and
                           Recovery Auditing Requirements, GAO-08-438T (Washington, D.C.: Jan. 31, 2008).




                           Page 14                                                                 GAO-12-573T
                                validity of the Foster Care program’s reported reductions in improper
                                payments was questionable, and ACF’s ability to reliably assess the
                                effectiveness of its corrective actions was impaired.

Deficiencies in Foster Care’s   For programs administered at the state level such as Foster Care, OMB
Estimation Methodology          guidance provides that statistically valid annual estimates of improper
                                payments may be based on either data for all states or on statistical data
                                from a sample to generate a national dollar estimate and improper
                                payment rate. In this case, ACF took its existing Title IV-E Foster Care
                                program eligibility review process, already in place under the Social
                                Security Act, and also used it for IPIA estimation. ACF provides a national
                                estimated error rate based on a rolling average of error rates identified in
                                states examined on a 3-year cycle. As a result, ACF’s IPIA reporting for
                                each year is based on new data for about one-third of the states and
                                previous years’ data for the remaining two-thirds of the states. To
                                calculate a national estimate of improper payments, ACF uses error rates
                                that span a 3-year period of Title IV-E eligibility reviews in the 50 states,
                                the District of Columbia, and Puerto Rico. ACF applies the percentage
                                dollar error rate from the sample to the total payments for the period
                                under review for each state.

                                ACF’s methodology for estimating Foster Care improper payments was
                                approved by OMB in 2004 with the understanding that continuing efforts
                                would be taken to improve the accuracy of ACF’s estimates of improper
                                payments in the ensuing years. ACF, however, has since continued to
                                generally follow its initial 2004 methodology. When compared to federal
                                statistical guidance and internal control standards, we found it to be
                                deficient in all three phases of its fiscal year 2010 estimation
                                methodology—planning, selection, and evaluation—as summarized in
                                table 3. These deficiencies impaired the accuracy and completeness of
                                the Foster Care program improper payment estimate of $73 million
                                reported for fiscal year 2010.




                                Page 15                                                           GAO-12-573T
Table 3: Deficiencies in ACF’s Methodology to Estimate Foster Care Improper Payments

Estimation methodology phase      Deficiencies by phase
Planning                          •   Methodology is limited to identifying improper payments for only one-third of the total
                                      federal share of foster care expenditures—maintenance payments.
                                  •   The case-level population data used to derive the foster care improper payment estimate
                                      does not contain the associated payment data needed for a direct estimate of the payment
                                      error rate and the total amount of dollars that were improperly paid.
Selection                         •   ACF has not established up-front data quality procedures over the case-level population
                                      data, self-reported by states, prior to sample selection.
                                  •   Sample selection process includes a high percentage of replacement cases due to
                                      inaccurate information contained in the case-level population data.
Evaluation                        •   Methodology does not include procedures on how to identify payment errors related to
                                      underpayments and duplicate payments during the review of sampled cases across
                                      states.
                                  •   Methodology used to aggregate state-level improper payment data does not take into
                                      account each state’s margin of error, which is needed to calculate an overall program
                                      improper payment estimate with a 90 percent confidence level generally required by OMB
                                      guidance.

                                       Source: GAO analysis of ACF’s methodology to estimate Foster Care improper payments.



                                       Planning. ACF’s annual IPIA reporting for the Foster Care program did
                                       not include about two-thirds of program expenditures, as shown in figure
                                       1. Specifically, the estimate included improper payments for only one type
                                       of program payment activity—maintenance payments—which, for fiscal
                                       year 2010, represented 34 percent of the total federal share of
                                       expenditures for the Foster Care program. Administrative and other
                                       payments, such as those related to the operation and development of the
                                       Statewide Automated Child Welfare Information System (SACWIS), were
                                       not considered in ACF’s IPIA estimation process and thus were not
                                       included in the Foster Care program improper payment estimate. OMB’s
                                       December 2004 approval of ACF’s proposed methodology included an
                                       expectation that ACF would develop a plan and timetable to test
                                       administrative expenses by April 2005. ACF has conducted various pilots
                                       in this area since 2007 with the goal of ensuring that improper payment
                                       data for administrative costs are sufficiently reliable and valid without
                                       imposing undue burden on states. Although ACF expects to estimate for
                                       administrative improper payments and recognizes the importance of
                                       doing so, it has not yet taken action to augment its existing methodology.




                                       Page 16                                                                                GAO-12-573T
Figure 1: Foster Care Program Outlays for Fiscal Year 2010 Covered under IPIA
Reporting




Selection. The population of data from which ACF selected its sample—
the Adoption and Foster Care Analysis and Reporting System
(AFCARS) 30—were not reliable because ACF’s sampling methodology
did not provide for up-front data quality control procedures to (1) ensure
that the population of cases was complete prior to its sample selection
and (2) identify inaccuracies in the data field used for sample selection.
Specifically, ACF had to replace a high percentage of cases sampled
from the database of Foster Care cases for the fiscal year 2010 reporting
period because of inaccurate information in AFCARS.

•    Of the original 4,570 sample cases ACF selected for testing in its
     primary and secondary reviews for fiscal year 2010, 298 cases
     (almost 7 percent) had to be replaced with substitutes because the
     selected cases had not received Title IV-E Foster Care maintenance
     payments during the period under review.




30
  AFCARS is the federal information system that collects and processes data on children
in foster care and those who have been adopted under the auspices of state child welfare
agencies. AFCARS serves as the central depository of various nationwide data on the
foster care program, as required by the Title IV-E legislation. ACF uses this system for,
among other purposes, determining and assessing outcomes for children and families,
budget planning and projections, and targeting areas for greater or potential technical
assistance efforts. The data in AFCARS are self-reported and maintained by the states,
and are subject to information system assessment reviews and federally mandated edit
checks by ACF.




Page 17                                                                      GAO-12-573T
•    Of the 298 over-sampled cases used to replace the cases initially
     selected, 63 cases (more than 21 percent) then had to be replaced
     again because those cases had also not received Title IV-E Foster
     Care maintenance payments during the period under review.
•    Further, although we were able to determine how many sampled (or
     over-sampled) cases had to be replaced because available records
     showed no Title IV-E payment was received during the reporting
     period, neither GAO nor ACF were able to determine the extent to
     which the opposite occurred—cases that had received a payment
     (and therefore should have been included in the sample population)
     had not been coded as receiving Title IV-E payments.

Without developing a statistically valid sampling methodology that
incorporates up-front data quality controls to ensure complete and
accurate information on the population, including payment data, ACF
cannot provide assurance that its reported improper payment estimate
accurately and completely represents the extent of improper maintenance
payments in the Foster Care program.

Evaluation. Although ACF’s methodology identified some errors related
to underpayments and duplicate or excessive payments, it did not include
procedures to reliably determine the full extent of such errors. In its fiscal
year 2010 agency financial report, ACF reported that underpayments and
duplicate or excessive payments represented 19 percent and 6 percent,
respectively, or 25 percent of the errors that caused improper payments. 31
However, the extent of underpayments and duplicate or excessive
payment errors identified varied widely by state, and in some instances
were not identified at all. For example, ACF did not identify
underpayments in 31 of 51 state eligibility reviews and did not identify
duplicate or excessive payments in 36 of 51 state eligibility reviews. 32 We
did not assess the validity of the reported data. However, the absence of
such errors for some states seems inconsistent with the general
distribution of errors reported elsewhere. Further, the lack of detailed


31
   The other types of errors identified related to eligibility. These included providers not
licensed or approved, ineligible payments (e.g., therapy), a child not being eligible under
the Aid to Families with Dependent Children program at the time of removal, criminal
records check not completed, judicial determination regarding reasonable efforts to
finalize permanency plan not timely, and no judicial determination of reasonable efforts to
prevent removal.
32
  This analysis was based on the Title IV-E eligibility reviews that comprised the fiscal
year 2010 Foster Care program improper payment estimate.




Page 18                                                                         GAO-12-573T
                              procedures for identifying any such payment errors may have contributed
                              to the variation or to whether the teams found any errors. The purpose of
                              the eligibility reviews is to validate the accuracy of a state’s claim for
                              reimbursement of payments made on behalf of eligible children or the
                              accuracy of federal financial assistance provided to states. Without
                              detailed procedures to guide review teams in the identification of
                              underpayments and duplicate or excessive payments, ACF cannot
                              provide assurance that it has identified the full extent of any such errors in
                              its Foster Care program.

Validity of Reported Foster   The weaknesses we identified in ACF’s methodology to estimate
Care Program Improper         improper payments in the Foster Care program also impaired its ability to
Payment Reductions Is         reliably assess the extent to which its corrective actions reduced Foster
Questionable                  Care program improper payments. For example, although ACF has
                              reported significantly reduced estimated improper maintenance
                              payments, from a baseline error rate of 10.33 percent for 2004 to a 4.9
                              percent error rate for 2010, the validity of ACF’s reporting of reduced
                              improper payment error rates is questionable because the previously
                              discussed weaknesses in its estimation methodology impaired the
                              accuracy and completeness of the reported estimate and error rate. In
                              addition, we found that ACF’s ability to reliably assess the extent to which
                              its corrective actions reduced improper payments was impaired by
                              weaknesses in its requirements for state-level corrective actions. For
                              example, ACF used the number of cases found in error rather than the
                              dollar amount of improper payments identified to determine whether a
                              state was required to implement corrective actions. ACF required states
                              to implement corrective actions through a program improvement plan, if
                              during the Title IV-E primary eligibility review, a state was found to have
                              an error rate exceeding 5 percent of the number of cases reviewed. We
                              identified six states that were found substantially compliant in their
                              primary eligibility reviews as their case error rates were below the
                              established 5 percent threshold. However, the dollar-based improper
                              payment rates for those six states ranged from 5.1 percent to 19.8
                              percent—based on the percentage of improper payment dollars found in
                              the sample. Because dollar-based improper payment rates are not used
                              in applying the corrective action strategy, ACF’s method cannot
                              effectively measure states’ progress over time in reducing improper
                              payments. It also cannot effectively help determine whether further action
                              is needed to minimize future improper payments. This limits the extent to
                              which states are held accountable for the reduction of improper payments
                              in the Foster Care program.




                              Page 19                                                            GAO-12-573T
                            Our report released today includes seven recommendations to help
                            improve ACF’s methodology for estimating improper payments for the
                            Foster Care program and its corrective action process. 33 In commenting
                            on our draft report, HHS agreed that its improper payment estimation
                            efforts can and should be improved, generally concurred with four of our
                            recommendations, and agreed to continue to study the remaining three
                            recommendations. We reaffirm the need for all seven recommendations.


                            A number of actions are under way across the federal government to help
Current and Possible        advance improper payment reduction goals. Completing these initiatives,
Strategies to Move          as well as designing and implementing enhanced strategies in the future,
                            will be needed to effectively reduce the federal government’s improper
Forward in Reducing         payments. Identifying and analyzing the root causes of improper
Improper Payments           payments is key to developing effective corrective actions and
                            implementing the controls needed to reduce and prevent improper
                            payments. In this regard, implementing strong preventive controls are
                            particularly important as these 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” 34
                            aspects of recovering improper payments. For example, addressing
                            program design issues that are a factor in causing improper payments
                            may be an effective preventive strategy. Effective monitoring and
                            reporting will also be important to help detect any emerging improper
                            payment issues. In addition, agencies’ actions to enhance detective
                            controls to identify and recover overpayments could help increase the
                            attention to preventing, identifying, and recovering improper payments.
                            For instance, agency strategies to enhance incentives for grantees, such
                            as state and local governments, will be important.


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



                            33
                             GAO-12-312.
                            34
                              “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 20                                                                       GAO-12-573T
cases, fraud. Beginning in fiscal year 2011, according to OMB’s
guidance, 35 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. 36 Reliable
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 prescribed by
OMB 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 year 2011, we found that agencies reported the root
cause 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 $115.3 billion in
improper payment estimates for fiscal year 2011. Of the $46 billion, the
estimated improper payments amounts were spread across the three
categories, with documentation and administrative errors being cited most
often. We could not calculate the dollar amounts associated with each
category because the narratives included in some of the agencies’
reporting of identified causes were not sufficiently detailed or
documented. Thorough and properly documented analysis regarding the
root causes is critical if federal agencies are to effectively identify and



35
 OMB Circular No. A-136 Revised, Financial Reporting Requirements, and OMB
Memorandum M-10-13, Issuance of Part III to OMB Circular A-123, Appendix C.
36
  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 21                                                                          GAO-12-573T
                          implement corrective and preventive actions across their 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 up-front validation of eligibility, predictive analytic tests,
                          training programs, and timely resolution of audit findings, as described
                          below. Further, addressing program design deficiencies that have caused
                          improper payments may be considered as part of an effective preventive
                          strategy.

                          •      Up-front 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 any improper payments that have already
                                 been made. Also, in June 2010, the President issued a presidential
                                 memorandum, titled Enhancing Payment Accuracy Through a “Do Not
                                 Pay List”, to help prevent improper payments to ineligible recipients. 37
                                 This memorandum also directs agencies to review prepayment and
                                 reward procedures and ensure that a thorough review of available
                                 databases with relevant information on eligibility occurs before the
                                 release of any federal funds. 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, are other important elements that merit
                                 consideration as part of future strategies to advance the federal
                                 government’s efforts to reduce improper payments.
                                 For example, Labor reported that its Unemployment Insurance
                                 program utilizes HHS’s National Directory of New Hires database 38 to
                                 improve the ability to detect overpayments caused by individuals who



                          37
                               75 Fed. Reg. 35953 (June 23, 2010).
                          38
                           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.




                          Page 22                                                                   GAO-12-573T
      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
      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, 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 or their
      parents to transfer certain tax return information from 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. In ongoing work, GAO is
      assessing HHS’s Centers for Medicare and Medicaid Services’ (CMS)
      use of technologies that are intended to support the agency’s efforts
      to prevent payment of fraudulent claims. 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. 39 These predictive analytic technologies are to
      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,
      CMS expects to more effectively identify unusual or suspicious
      patterns or abnormalities that may provide information that could be
      useful in prioritizing additional review of suspicious transactions
      before payment is made. The 2010 act required that CMS’s program
      integrity analysts and contractors 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.
      CMS began using these technologies, available through CMS’s new
      Fraud Prevention System, to screen all Fee-for-Service claims
      nationwide prior to payment as of June 30, 2011.


39
    Pub. L. No. 111-240, § 4241, 124 Stat. 2504, 2599 (Sept. 27, 2010).




Page 23                                                                   GAO-12-573T
•    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
     beneficiaries and providers, such as pharmacy providers, to promote
     best prescribing practices and appropriate prescribing guidelines
     based on Food and Drug Administration labeling, potentially reducing
     improper payments. 40
•    Timely resolution of audit findings. Standards for Internal Control in
     the Federal Government 41 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. 42 Further, exploring whether certain complex
     program requirements, inconsistent program requirements, or both,
     such as eligibility criteria and requirements for provider enrollment,
     contribute to improper payments could be used to lend insight to
     developing effective strategies for enhancing compliance and in



40
 GAO, Medicaid Program Integrity: Expanded Federal Role Presents Challenges to and
Opportunities for Assisting States, GAO-12-288T (Washington D.C.: Dec. 7, 2011).
41
  GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1
(Washington, D.C: November 1999).
42
  GAO, Improper Payments: Reported Medicare Estimates and Key Remediation
Strategies, GAO-11-842T (Washington, D.C.: July 28, 2011).




Page 24                                                                  GAO-12-573T
                              identifying opportunities for streamlining or changing the eligibility or
                              other program control requirements.

Implementing Effective   Although strong preventive controls remain the frontline defense against
Detective Controls to    improper payments, agencies’ improper payment reduction strategies
Identify and Recover     could also consider actions to establish additional effective detection
                         techniques to quickly identify and recover those improper payments that
Overpayments             do occur. Detection activities play a significant role not only in identifying
                         improper payments, but also in providing data on why these payments
                         were made and, in turn, highlighting areas that could benefit from
                         strengthened prevention controls. The following are examples of key
                         detection activities 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 detecting improper payments, data mining of a data warehouse
                              can enable an organization to efficiently identify potential improper
                              payments, such as multiple payments for an individual invoice to an
                              individual recipient on the same 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 that are
                              not readily available to CMS’s program integrity analysts. Over the
                              past decade, CMS has been working 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, 43 a web-based portal and set of
                              analytical tools by which these data can be accessed and analyzed to




                         43
                           The One PI program portal is a web-based user interface that enables a single log-in
                         through centralized, role-based access to the system.




                         Page 25                                                                      GAO-12-573T
      help identify any cases of fraudulent, wasteful, and abusive payments
      based on patterns of paid claims. 44
•     Recovery auditing. While internal control should be maintained to
      help prevent improper payments, recovery auditing could be included
      as a part of agencies’ strategy for identifying and recovering
      contractor 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. 45 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. 46
      Under this program, each state is to contract with a RAC to identify
      and recover Medicaid overpayments and identify any underpayments.
      The final regulations provided 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 improper payments 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 improper payments. Only
      the Social Security Administration, Railroad Retirement Board, and
      the Department of Veterans Affairs have been authorized to receive
      the information necessary to identify the withdrawer to attempt to
      recover any improper payments. According to OPM, Treasury has




44
  We reported in June 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 GAO, Fraud Detection Systems: Centers for Medicare and Medicaid Services Needs
to Ensure More Widespread Use, GAO-11-475 (Washington D.C.: June 30, 2011).
45
  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).
46
    Pub. L. No. 111-148, § 6411, 124 Stat. 119, 773 (Mar. 23, 2010).




Page 26                                                                          GAO-12-573T
     drafted language to address the issue and is working to publish a
     notice of proposed rule making to amend its regulation.

     In another instance, USDA reported that Section 281 of the
     Department of Agriculture Reorganization Act of 1994 47 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.
     As part of its annual improper payments reporting, USDA did not cite
     an alternative approach for implementing a recovery auditing strategy.

•    Federal-state incentives. Another area for further exploration for
     agencies’ improper payment reduction strategies is the broader use of
     incentives for states to implement effective detective controls. 48
     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 Carper, Ranking Member Brown, and Members of the
Subcommittee, this completes my prepared statement. I would be
pleased to respond to any questions that you may have at this time.




47
 Pub. L. No. 103-354, § 281, 108 Stat. 3178, 3233 (Oct. 13, 1994), codified, as
amended, at 7 U.S.C. § 7001.
48
  OMB’s implementing guidance for IPERA allows agencies to use up to 25 percent of
funds recovered under a payment recapture audit program for a financial management
improvement program, including providing a portion of funding to state and local
governments.




Page 27                                                                      GAO-12-573T
                   If you or your staff have any questions about this testimony, please
GAO Contacts and   contact me at (202) 512-2623 or DavisBH@gao.gov. Contact points for
Staff              our Offices of Congressional Relations and Public Affairs may be found
                   on the last page of this testimony. Individuals making key contributions to
Acknowledgments    this testimony included Carla Lewis, Assistant Director; Sophie Brown;
                   Francine DelVecchio; Gabrielle Fagan; and Kerry Porter.




                   Page 28                                                          GAO-12-573T
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           Page 30                                                      GAO-12-573T
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