as we can so as not to keep you any longer than necessary but rather have our discussion as an oversight committee we exist to secure two fundamental principles first americans have a right to know that the money washington takes from them is well spent second americans deserve an efficient effective government that works on their behalf our duty on the oversight and government reform committee is to protect these very important rights our solemn responsibility is to hold government accountable to taxpayers because taxpayers have a right to know what they get from their government we will tirelessly in partnership with citizen watchdogs to deliver the facts to the american people and to bring genuine reform to the federal bureaucracy this is the mission of the oversight and government reform committee today's hearing on improper payments continues our subcommittee's examination of federal financial management issues it also affords us first the opportunity to review the newly enacted improper payments elimination and recovery act of two thousand ten i welcome our witnesses and thank them for their efforts both the written testimony you have provided as well as your testimony you will provide here today the honorable daniel werfel is the controller and director of the office of federal financial management at the office of management and budget and kay daly is the director of financial management and assurance at the government accountability office we are grateful both of you are a part of this hearing as millions of americans file their income taxes today because of a holiday here they have a couple of extra days through monday the th as opposed to the traditional april fifteen it is important for those of us in the federal government to take a step back and remind ourselves of the responsibility we have to spend those tax dollars wisely first and foremost that responsibility means we need to make sure that funds are being spent the way they are intended to be spent unfortunately the total dollar amount of improper payments which could be anything from in improper payments during the fiscal year two thousand and ten as a point of reference the president requested one hundred and twenty five dollars ten cents billion to fund the entire department of veterans affairs in two thousand and twelve better detection and reporting that is a very good thing because as it shows we are identifying the problem the fiscal year two thousand and ten financial report actually found the estimated error rate went down about half a percentage point that being said we still have a responsibility to the people paying their taxes today to do the best we can in handling their hard earned funds the total amount of improper payments is very troubling even with the small drop in the error rate the dollar amount increased incorporating a more stringent risk and performance framework for agencies to measure program outcomes it expands the use of recovery audits and business analytics to help agencies recoup improper payments these are common sense changes  build upon prior requirements focusing on eliminating improper payments goes to the very heart of accountability i believe the american people are looking to us for action and solutions i was pleased to see that both of  witnesses point to examples of success stories in your testimony i would like this hearing to be about those types of successes about solutions technology is certainly a part of the solution and we have access to tools that weren't even invented when the improper payments information act was passed in two thousand and two tools such as continuous transaction monitoring and business intelligence can help the government move towards a prevent and detect model other than the old pay and chase scheme technology can only go so far as always sound internal controls are the better opt for any successful sustainable and cost effective solution agencies need to understand the root causes of errors and to develop better controls to prevent or detect them before the money goes out the door one way to improve internal controls is to have a third party evaluate them i was pleased to see your testimony addressed the issue of shifting audit resources to provide more scrutiny for payment activities mister werfel i see that you make reference to the upcoming report on the cfo act in your testimony and i am looking forward to those recommendations to get additional ideas on how to better leverage our audit resources to focus more on accountability and internal controls again i thank you for your appearance here today and look forward to your testimony with that i yield to the distinguished ranking member mister towns for his opening statement again ms daly welcome i am looking forward to your testimony as well even as the economy begins to recover from the last recession the federal government still faces fiscal challenges in cutting spending and raising revenue this subcommittee has continued to explore ways the government can save money and close the deficit mister werfel the last time you visited with us you gave us an excellent overview of the current financial conditions of the federal government as we looked at the consolidated financial statements today we focus on the reduction of improper payments we look to you and ms daly to provide us with deeper insights on how we can quickly begin to conserve our financial resources by and recapturing improper payments president obama's administration has put forth very robust initiatives to eliminate improper payments which is one of the key components of the efforts to eliminate waste i am encouraged to see that we have some positive results in response to these efforts the president called for a do not pay list in june tw so that we don't keep giving money to the same ineligible recipients repeatedly we now have the verified payment gov website which allows agencies to check recipients eligibility before they receive their federal payments this is a great beginning and i would like to hear more about this effort today the president also asked agencies to be transparent about the amount improper payment and to account to the american public for their actions in addressing these problems i am pleased to see that we now have the payment accuracy gov website that shows exact information this is also a very good response president obama signed the improper payments elimination and recovery act of two thousand and ten into law last july that law became effective in january two thousand and eleven i am looking forward to hearing about our progress under the new law as well a healthy financial future for the united states requires sustained effort from more than one source we must work together we have to watch what we spend get rid of waste increase revenue and reduce improper payments all at the same time created to avoid repeated improper payments and issued two memoranda to agencies to provide guidance in reducing improper payments despite these efforts improper payments grew by sixteen dollars billion in fiscal year two thousand and ten indicating the need for further action therefore congress continued to ramp up efforts to reduce improper payments during the last session congress included language to reduce improper medicare payments in the affordable care act saving up to eighty dollars billion annually congress also passed the improper payments elimination and recovery act as mister towns just indicated introduced by former congressman patrick murphy and co sponsored by many members including yourself mister chairman ipera expanded reporting requirements and improved agencies ability to recover improper payments substantial cost savings there is evidence we already are making progress while the total amount of improper payments grew during the last fiscal year the improper payment rate across the federal government actually fell from five point six five percent to five  while that still is far too high it is important to recognize the progress agencies have achieved as this reduction in improper rates saved the taxpayers four dollars billion and it is progress upon which we can build i want to again thank you for would you like to begin mister werfel thank you chairman platts ranking member towns congressman connolly and distinguished members of the subcommittee i want to thank you for inviting me to testify today i appreciate the opportunity to discuss the federal government's current efforts to prevent reduce and recapture improper payments as well as how the audit process can be improved to focus on key programmatic issues like payment errors as has been discussed in fiscal year two thousand and ten federal agencies estimated approximately one hundred and twenty five dollars billion in improper payments were made to individuals organizations and contractors although not all errors represent fraud all payment errors degrade the integrity of government programs and compromise citizen trust in government as part of the administration's accountable government initiative we have set aggressive goals to prevent fifty dollars billion in improper payments and recapture at least two dollars billion in improper payments between fiscal years two thousand and ten and two thousand and twelve in addition to the enactment of ipera the administration is taking numerous steps to prevent reduce and recapture improper payments first as mentioned earlier in november two thousand and nine the president issued an executive order dedicated to the sole purpose of reducing improper payments the order drives transparency increased agency accountability and new incentives for state and local governments to reduce error second last june the president issued a memorandum to agencies on enhancing payment accuracy through a do not pay list as congressman towns referenced the do not pay list will serve as a single source through which all agencies can check the status of a potential contractor grantee or individual beneficiary by linking the agency to relevant eligibility databases such as the social security administration's death master file and the general service administration's excluded party list the initial portal has been built however full implementation of this initiative will be done over several phases including where we are now which is currently pilot testing the solution with federal agencies as envisioned the do not pay list when fully operational will not just be a data match tool but will leverage cutting edge fraud technology for a detection technology to further reduce the number of improper payments third in march two thousand and ten the president issued a memorandum to agencies directing them to intensify and expand their efforts to recapture error we have set a goal of recovering at least two  improper payments between fiscal years two thousand and ten and two thousand and twelve i am pleased that in this area we are making significant progress in meeting this goal as agencies reported in fiscal year two thousand and ten that they had recaptured six hundred and eighty seven dollars million improper payments which is nearly a three hundred percent increase from prior recoveries as you can see we are working toward preventing and recapturing improper payments across the government however we are continuously looking for better and more creative ways to address these challenges for example a financial statement audit result addressed whether the agency had the appropriate accounting in place to record that a payment has occurred however the audit opinion too often stop short of scrutinizing the integrity of that payment this leads to a result where there is no correlation between an agency's ability to obtain a clean audit opinion on their financial statements and an agency's ability to mitigate instances of improper payments i believe an important improvement that should be considered as we reexamine our federal reporting model is holding the agency accountable as part of their financial statement audit for reporting the various root causes and components of their payment errors identifying those areas of error that are within their direct and immediate control for the agency to mitigate and then having the auditor evaluate whether the agency has taken sufficient action to mitigate the risk associated with such errors i believe this proposed change would reinforce the federal financial community's current focus and ongoing commitment to improving results in this area i want to thank you again for inviting me to testify you chairman platts member towns and congressman connolly i appreciate the opportunity to be here today to discuss the government wide problem of improper payments in federal programs and agencies efforts to address key requirements of the improper payments information act of two thousand and two commonly referred to as ipia for fiscal year two thousand and ten twenty agencies reported improper payment estimates for over seventy programs that totaled over one hundred and twenty five  this is an increase from the fiscal year two thousand and nine estimate of about one hundred and nine dollars billion primarily due to increases in estimated improper payments for four major programs unemployment insurance earned income tax credit medicaid and medicare advantage the agencies administering these programs reported that the increases in the estimates were primarily attributable to an increase in program outlay that was the case for medicaid and medicare advantage programs even though those two programs reported lower error rates both the unemployment insurance and earned income tax credit programs reported higher program outlays and higher error rates for fiscal year two thousand and ten when compared to fiscal year two thousand and nine although overall improper payments rose by about sixteen dollars billion we view this as a positive step because it indicates that agencies have increased their efforts to identify and report improper payments which will ultimately improve transparency over the full magnitude of the improper payment problem this is a critical first step in establishing effective accountability measures to reduce them some agencies reported they had made progress to reduce improper payments in their programs and activities since initiative ipia implementation in two thousand and four we found that more programs are reporting every year and that seventeen agency programs that had reported improper payment error rates from between two thousand and four and two thousand and ten reported reduced error rates in those programs while these error rate reductions are promising some major challenges do remain for example we found that the one hundred and twenty five  improper payment estimate does not reflect the full scope of improper payments across all agencies seven programs that had been identified as susceptible to the risk of improper payments with two thousand and ten outlays totaling about eighty five dollars billion d id not report an estimate most notable of these is the medicare prescription drug benefit program which had outlays of about fifty nine dollars billion in two thousand and ten but has not yet reported a comprehensive estimate of improper payments the program does expect to do so in fiscal year two thousand and eleven during fiscal year two thousand and ten there were a number of actions taken intended to strengthen the framework for reducing and reporting improper payments we noted the president signed the executive order in november two thousand and nine to increase transparency and accountability for improper payments and the president also issued two memoranda in june and march that were intended to expand efforts to recapture improper payments and also use recovery audits in addition to establishing a do not pay list the president also set the goal to reduce improper payments overall by fifty dollars billion and to recapture at least two dollars billion by the end of fiscal year two thousand and twelve in addition in july two thousand and ten the improper payments elimination and recovery act commonly referred to as ipera was passed and is intended to enhance reporting and reduction of improper payments ipera established additional requirements related to federal manager accountability recovery auditing aimed at identifying and reclaiming payments made in error and compliance and noncompliance determinations based on  inspector general assessment of whether an agency is meeting ipera requirements for example ipera required agency managers and the programs to be held accountable for achieving the agency's goal in closing we recognize that measuring improper payments and taking action to reduce them are not simple tasks the ultimate success of the government wide effort to reduce improper payments hinges on each federal agency's diligence and commitment to identify estimate determine the causes of and take corrective actions to reduce improper payments mister chairman ranking member towns and representative connolly i would like to thank you for providing the opportunity  chairman steve horn authored the original improper payments information act and got us on a good track to where we are today almost ten years later it seems we certainly are doing a much better job as i referenced in my statement and  that means we go down and we audit or sample the payment and test its accuracy and the people involved cannot provide us the relevant information for us to do an appropriate validation of whether the payment was accurate or not und longstanding audit principles we don't assume the best we assume the worse and we characterize that as an error that is about one third what happens is later on as that documentation improves we find not all of those payments turned out to be error it revert back to the general error rate that we see in government programs which is about five percent your other question about fraud is something that we are looking at but we don't yet have an exact percentage what we see in the other two thirds of the problem i am being very general now is most often the problem is an inability to validate eligibility or authenticity whether data matches that should be occurring are not occurring or whether there really is at this time no third party data source to validate the current situation in some cases it turns out that our inability to validate eligibility is driven by the fact that we are actually being defrauded that someone has set up a fake identity or a fake account of some kind we believe based on all the  information that we have that is a serious problem but it is not a large percentage of the problem we just don't have the exact percentages at this time in order to do so would take a different approach to our measurement that  would involve a lot of resources and the community as a whole is considering and continues to consider whether to establish a particular fraud metric it would be interesting to hear the interest of this subcommittee on that topic as well  i assume in the area of improper documentation it is safe to believe that a lot of that relates to programs that are state administered such as medicaid where the  administrations of the program fifty different approaches so we see sometimes the controls and the documentation and the rigor with which programs are carried out at the state level vary greatly that is one of the areas you are right we do not have as direct immediate control over how those states are running their operations and what kind of internal controls they are putting into place to maintain good documentation that is why it becomes very significant  specific program the idea of whether it is more fraud or inadvertent lack of documentation medicare fee for service you reference in your testimony the president's efforts to really go after improper payments in this medicare is the largest source of error in the federal government it is obviously the top priority of the administration to address that because as we address and do a better job on that the whole government wide error rate and improper payment that continues to move forward and continues to get refined and they continue to make more and more progress it has multiple elements to it they are holding providers more accountable for documentation they are  working with the provider community to understand what they are required to maintain in terms of documentation so that problem is there there are other elements to medicaid error whether they are doing a better job in identifying coding errors for better automated solutions and contractor review modules that can pick up on these things i think the real driver here and the most promising benefit to medicare is their predictive modeling and their business intelligence and analytics to identify procedures that look anomalous and activities that look anomalous as the information age emerges we become better at norm i actually get a phone call from discover as the member of record saying a big charge has been made five minutes ago if there is a problem with this and you didn't authorize it who had a real financial incentive to do this and they are doing it very well are we reaching out to the private sector or are we trying to reinvent the wheel instead of learning from what they have done mister werfel an excellent question and  directly i think we are going to look back and see one of the most critical moments in the history of our journey in improper payments as being the creation of the recovery accountability and transparency board and some of the innovative things that have been going on at that board they  have really been serving as the major bridge between these cutting edge solutions whether in the credit card industry counter intelligence or otherwise and saying these solutions can be used in programs like medicare and medicaid they demonstrated that during the recovery act where we started to get wind of some of the things they were doing by using data out there in the public sphere gathering enormous quantities of data in real time and then flags there we were basically wowed by what they were able to do so we started bringing in more and more agencies they tell us they don't know what they are more busy doing finding fraud or demoing the solutions to other agencies which i where the fraud is within this data let us see if you can find it not only did the recovery board find it they found fraud that cms had missed they did it using a better more comprehensive different type of algorithm cms is very good for example at finding providers with unusual treatments like here is a provider in texas who had seven of these types of treatment in the last few weeks and that is unusual you don't see that kind of treatment out of a small provider they forensically look at that stuff well the board's tool found identity fraud it found a doctor in texas using a license of a legitimate doctor in north carolina saying this doctor really doesn't exist  and expertise including some of the recovery board expertise driving to improve their overall algorithm it is fantastic and it is going to take time before we see the full impact of the result but they already have an investigation underway with  audit tools although not audits in the true sense of the word typically performed by contractors who specialize in this area they comb through invoices and other documentation that an agency maintains and identify payment recapture audits or recovery audits are actually performed not just in the federal government but in state and local governments and also in the private sector creating partnerships with your funding recipients who now have to be subjected to these payment audits so it took us a while on the learning curve to figure out the right and the appropriate way to ipera included many important provisions aimed at reducing improper payments one provision relates to sanctions for programs that are not complying with the law specifically if any agency is determined not to be in compliance for two consecutive years and the director of omb determines that additional funding would help the agency come in to compliance the head of the agency shall obligate additional funding in an amount determined by the director to intensify compliance efforts would you please explain how you would determine what needs to be done at the agency level mister werfel it is going to be challenging i think one of the most important things that ipera does that i am most excited about is it really integrates the inspector general into this problem more than provide us some degree of a road map in terms of where some of the deficiencies are occurring and where the investments are needed i also think the agencies on the management and payment side are b the agency and the inspector general and have a strong diagnosis of where the money can best be spent where is the most positive return on investment it is not going to be easy but i think with the right partnership vendor the date the payment was made and go back and get it in the broader scheme the way we estimate errors is we pull a small sample size and extrapolate that to a universe for social security exactly the medicare prescription drug benefit program has actually done estimates on subsets of its population but does not have a total comprehensive estimate for that program mister connolly that program has been in place now for how many years  using the expertise of the private sector in the public sector given the amounts we are talking about second in terms of diagnostic tools what are we doing on the diagnostic end to better get a handle on what is the cause are where we need to be i think the private sector is way ahead of us in terms of leveraging the type of information networks to find anomalies and errors but we have isolated examples of success stories almost every agency has a real and is happening today the reality i would argue and my belief is the credit card companies with the networks that they are developing are more sophisticated and ahead of us and we need to catch up your second question i believe was on diagnostics and root causes i think that is an area of real progress that has been made since two thousand and four when we talk to agencies it is not about a lack of understanding of what the privacy act or just the lack of an automated tool to pull it we don't always get the information we need to validate the second is the tougher we make the world for recipients to prevent improper payments it can create other programmatic challenges  i often find myself in a meeting with an agency and say here is how you do it just create a policy that makes it much much more difficult to get a payment error that tends to have reverberations around the rest of the program and empirically sound method is developed for providing an estimate right now the best we know is that it is one hundred and twenty five dollars billion for two thousand and ten we do know there are at least seven major risk susceptible programs that have not reported i can't give you a sense of how much those particular programs may have in improper payments or others where they maybe tightening up their methodologies and moving forward that might provide a more precise estimate for programs that have already reported that happened a year or so ago with the medicare fee for service program they initially reported an estimate for two thousand and nine of about twenty four dollars billion and then applying a more stringent methodology raise do you have a breakdown of how much would be medicare and how much would be medicaid medicare alone our proposals we believe if enacted would have the impact of saving forty two dollars billion over ten years if you combine the legislative proposals we are seeking and some additional funds to do program integrity work  budget and the american people looking forward to getting some of this cleared up over time this has been a long ongoing process it is not a simple task by any means we understand that but keep going with what you are doing mister werfel you know my propensity on some of the hits and foot traffic we get on the site it is a well visited site and we are very excited about that i can't say that we have the perfect architecture of all the different links but there are a lot of different opportunities to get there in particular it is in our usaspending family and i would say that is probably our most visited website in this terrain so i think that is most critical mister lankford i would continue to encourage you to find a central portal that we can promote as a federal government site and say if you are looking for something you can i have the full verification this is the right code this is the right thing how are we hitting that balance between the two where we don't have an individual vendor that is being crushed in the process and having to fight for a year to get the payment they deserve versus finding real aggressively why can't it be more comprehensive why are you waiting until you are ninety five percent confident to go after an error why don't you go after an error when you are eighty percent confident and cast a wider net the issue that it creates more false positives and it creates the that up that would certainly help rather than the cutoff point of saying we think it is reimburse our money to us pay us whatever it may be it provides some sort of interim step that would be very helpful in that process on both sides we want to be able to tell people we are tracking it  people are getting that contact and saying we are watching that helps if more people are finding i had better pull this and have my documentation in place that is a helpful thing it is somewhat disturbing to hear about medicaid dealing with twenty two dollars billion in this abuse fraud have medical necessity issues trying to determine whether the medical procedure should have been performed oftentimes it is as you mentioned things like insufficient documentation commonly reported as one of the key causes of improper payments doing two at once so i was over in national security mister werfel i sent you a letter about a month ago that today happens to be miraculously the deadline policy for this committee is not the two years in which the obama administration had your own party looking over your shoulder it has to be a basis that would transcend any one administration otherwise it is an administrative choice which is not acceptable to the other body that has the obligation for oversight so hopefully your answer will be creative and maybe a yes we will come more often mister lankford was asking about the false system talking about the checks and balances the absence of the ability to track in real time waste fraud and abuse i asked them because we were on the subject how many of you have received a call from visa or master card telling you that there is a suspicious problem virtually every hand went up it was probably eighty percent at least then i asked how many of you had identity theft or your card actually stolen about four hands went up one of whom was on my staff the amazing thing was i asked if anyone was upset and they said of course not why because it reduces the cost of that card if it wasn't for the millions of false positives that are asked and explain the cost of those cards would go up by multiple percentage points because as you know master card eats the losses my question to you is why in the world wouldn't you develop a system that would allow you to basically be false positive ten times twenty times more often ask the question and in an analytical and inexpensive way accept the answers and then sift through those answers why isn't that the approach since it works for visa and master card in real time and for us it doesnt work so well the way we're doing it mister werfel that is a very good question a challenging question and i can assure you congressman i am typically the person at the table pushing for a broader net and a more aggressive posture so that we can drive down errors coming back at me across the table are very legitimate programmatic and policy concerns in particular the concern that setting up these  frozen so let us go back again why wouldn't you send them out and expect responses and not necessarily shut off the payment but simply increase because so much of this to the physicians and others can be done electronically why wouldn't you send out and only when there is a complete absence of response multiple times or if you take what you are presently sending and do stop if you don't get the answer you want  and add nine times more but you don't stop except for the ones you are already stopping all you are really doing is creating the alert improving the system and eventually eliminating some of the false positives if you have a quality circle where you are learning from it why isn't that at least on a pilot basis on your radar screen to basically make medicaid and medicare oversight similar to credit card companies that can do this so automated e the president's fiscal year two thousand and twelve budget appears as though the board success is being rolled into the department of treasury's bureau of public debt for the creation of yet another new system why is it we would spend ten dollars million to take program that has proven its successfulness because it didn't fall into treasury's existing trap it especially makes health care reform look less complicated when you look at all the report froms and the report tos why in the world would we do that isn't it the board proof that you have to do it differently and not simply roll it into one more report ms daly i think i will start costs by leveraging the hardwaresoftware and expertise that he has but he is an independent entity and i would never presume to ask for the keys to his car i want to make sure that he understands that we want to emulate what he is doing because it is a best practice and figure out the best way to emulate it if we can leverage his infrastructure to make our endeavor less expensive and he would agree that is definitely a path forward in terms of treasury i think we can be extremely successful in deploying this technology at treasury treasury makes almost all the payments for the federal government ultimately they take the information from the agency and they cut the checks as i am sure you know that means all this information is flowing centrally into treasury they have what i believe to be the bench strength the expertise and the right network and relationship with the agencies to develop a very powerful fraud detection technology that can centrally utilize some of these credit card neuro networks that you referenced earlier we have to find a place for it and it seems to me that finding the place where all the information converges before the payment goes out seems logical if there are concerns with treasury in terms of their operations lets talk about them  through them and see if we can find corrective actions but from a design standpoint i think we have a strong argument around treasury as being the right location mister issa very good mister chairman chairman deviney has told us he is more than willing to meet with all the parties i would suggest that a less formal environment with the chairman members of our committee and staff and people from your organization might be the best way to strategize whether or not the keys to the car could be handed over in a more efficient action after all these are agencies under the control of the president an executive order in november two thousand and nine another memorandum on  finding the payments in march two thousand and ten followed in june by what i really like a do not pay list is this the first time there has ever been an executive order served under multiple presidents and i have never seen this level of attention to the improper payments problem coming from a president ms norton this looks like a real focus that has been how to evaluate the different agencies for example you have medicare fee for service and improper payment amounts understand those root causes our challenge has been finding the right solutions to answer your question directly eligibility is a key issue across the board for programs generally confirming eligibility and eligibility is often driven by find that overpayments are made in the form of a greater population of children receiving the school lunch subsidy than otherwise would if the requirements were technically followed  experience does that have to do with what it takes to qualify because you would think the same would be true in terms of qualifications being so nailed down the same would be the case with medicare question is the social security administration has a direct connection to the beneficiary it is paying the process is one straight line from the social security administration determining  ibility to the payment and it is a unified system throughout whereas school lunch is fifty different states different state departments of education ms norton medicare fee for service you would think there is a straight saying to the states we are going to give you a block grant of money so they then buy in and have much greater incentive to go after the improper payments than today when we are paying fifty seven percent they are paying forty three they have less incentive  want to work with you on legislative fixes that we need to help you go to the next step also how we can partner with the administration on getting the department of transportation and the postal service to comply with the original improper payments act to