You are given two reports by the government agency.  

Report 1:
Puerto Rico, which has approximately 3.3 million residents according to U.S. Census Bureau (Census) estimates, is the largest and most populous territory of the United States. As a territory, Puerto Rico is subject to congressional authority, though Congress has granted it broad authority over matters of internal governance—notably, by approving Puerto Rico’s constitution in 1952. Individuals born in Puerto Rico are U.S. citizens and can migrate freely to the states. Puerto Rico and its residents are generally subject to the same federal laws as the states and their residents, except in cases where specific exemptions have been made, such as with certain federal programs. For example, Puerto Rico residents generally have full access to Social Security and unemployment insurance; however, for some programs, such as Medicaid, federal funding in Puerto Rico is restricted as compared to funding in the states. Residents of Puerto Rico are exempt from paying federal income tax on income from sources in Puerto Rico. Residents are required to pay federal income tax on income from sources outside of Puerto Rico. They are also required to pay federal employment taxes, such as Social Security and Medicare taxes, on their income regardless of where it was earned. Puerto Rico residents are also ineligible for certain federal tax credits. Corporations located in Puerto Rico are generally subject to the same federal tax laws as corporations located in a foreign country. Corporations in Puerto Rico are generally exempt from federal taxes on profits except as such profits are effectively connected to a trade or business in the states, and so long as those profits remain held outside of the states. Additionally, these corporations were subject to a withholding tax on certain investment income from the United States not connected to a trade or business. Under the 2017 Public Law 115-97, starting in 2018 U.S. corporations that are shareholders in foreign corporations, such as those organized under Puerto Rico law, generally do not owe tax on dividends received from those foreign corporations. Prior to this law, dividend payments to U.S. corporate shareholders were considered taxable interest for the U.S. parent corporation. Prior to 1996, a federal corporate income tax credit—the possessions tax credit—was available to certain U.S. corporations that located in Puerto Rico. In general, the credit equaled the full amount of federal tax liability related to an eligible corporation’s income from its operations in a possession—including Puerto Rico—effectively making such income tax- free. In 1996, the tax credit was repealed, although corporations that were existing credit claimants were eligible to claim credits through 2005. Puerto Rico’s economy is in a prolonged period of economic contraction. According to data from Puerto Rico’s government, Puerto Rico’s economy grew in the 1990s and early 2000s. However, between 2005 and 2016— the latest year for which data were available as of March 1, 2018—Puerto Rico’s economy experienced year-over-year declines in real output in all but two years, as measured by real gross domestic product (GDP). From 2005 to 2016, Puerto Rico’s real GDP fell by more than 9 percent (from $82.8 billion to $75.0 billion in 2005 dollars). Puerto Rico’s gross national product (GNP) followed a similar pattern over the same period, declining by more than 11 percent from 2005 to 2016 (from $53.8 billion to $47.7 billion in 2005 dollars). Figure 1 shows Puerto Rico’s real GDP and GNP growth rates from 1991 through 2016. The decline in Puerto Rico’s output has, in more recent years, occurred in conjunction with a decline in Puerto Rico’s population. According to Census estimates, Puerto Rico’s population declined from a high of approximately 3.8 million people in 2004 to 3.3 million people in 2017, a decline of 12.8 percent. This population loss closely matched the decline in real output. From 2004 to 2016, Puerto Rico’s real GNP fell by 9.5 percent, while its real GNP per capita increased by 1.6 percent over the same time period. In addition to Puerto Rico’s declining population, the territory also has a lower share of employed persons compared to the United States as a whole. As of 2017, approximately 37 percent of Puerto Rico residents were employed compared to approximately 60 percent for the United States as a whole. Puerto Rico’s employment-to-population ratio reached highs in 2005 and 2006 when it was approximately 43 percent, according to data from the Federal Reserve Bank of St. Louis. According to data from the Bureau of Labor Statistics (BLS), between 2005 and 2017, Puerto Rico’s unemployment rate fluctuated between 10.2 percent and 17.0 percent, with an average of 13.1 percent. During the same period, the nationwide unemployment rate fluctuated between 4.1 percent and 10.0 percent, with an average of 6.5 percent. These factors have combined to leave Puerto Rico with a small and declining labor force. From January 2006 to December 2017—the latest month for which data were available as of March 1, 2018—Puerto Rico’s labor force decreased from approximately 1.4 million persons to 1.1 million persons, according to data from BLS. Puerto Rico’s government has operated with a deficit—where expenses exceed revenues—in each fiscal year since 2002, and its deficits grew over time (see figure 2). Puerto Rico’s governmental activities can be divided among the primary government and component units. Puerto Rico’s primary government provides and funds services such as public safety, education, health care, and economic development. Puerto Rico’s component units are legally separate entities for which its government is nonetheless financially accountable, and provide services such as public transportation, highways, electricity, and water. In fiscal year 2014, the latest for which audited financial data are available, the Puerto Rico government collected $32.5 billion in revenue, of which $19.3 billion was collected by the primary government, and $13.2 billion was collected by the component units. That year Puerto Rico’s government spent $38.7 billion, of which $22.0 billion was spent directly by the primary government, while $16.7 billion was spent by the government’s various component units. The Puerto Rico Electric Power Authority (PREPA), which operates the territory’s electricity generation and distribution infrastructure, represented the largest component unit expenditure in fiscal year 2014. Figures 3 and 4 show a breakdown of expenses for Puerto Rico’s primary government and its component units, respectively. Puerto Rico’s government spending accounts for more than a third of the territory’s GDP. In fiscal year 2014—the latest year for which audited spending data were available as of March 1, 2018—primary government expenditures of $22.0 billion represented 21 percent of the territory’s GDP. Including component spending, total public expenditures were $38.7 billion, which represented 38 percent of the territory’s GDP. By comparison, our prior work has shown that in 2014, total state and local government expenditures represented about 14 percent of GDP for the United States as a whole, excluding territories. Federal government expenditures were 20 percent of GDP for the United States as a whole in 2014. Puerto Rico’s total public debt as a share of its economy has grown over time. In 2002, the value of its debt was 42 percent of the territory’s GDP, and 67 percent of its GNP. Both of these ratios grew over time such that by 2014, Puerto Rico’s total public debt was 66 percent of the territory’s GDP and 99 percent of its GNP. Figure 5 compares Puerto Rico’s total public debt to its GDP and GNP, in both aggregate and per capita. As of the end of fiscal year 2014, the last year for which Puerto Rico issued audited financial statements, Puerto Rico had $67.8 billion in net public debt outstanding, or $68.1 billion excluding accounting adjustments that are not attributed in the financial statements to specific agencies. Of the $68.1 billion, $40.6 billion was owed by Puerto Rico’s primary government, and $27.6 billion was owed by its component units, as shown in figure 6 (these amounts do not sum to $68.1 billion because of rounding). The growth of Puerto Rico’s total debt resulted in greater annual debt servicing obligations. In fiscal year 2002, it cost Puerto Rico $2.7 billion to service its debt, representing about 12 percent of Puerto Rico’s $21.6 billion in total public revenue for that year. By fiscal year 2014, Puerto Rico’s annual debt service cost rose to $5.0 billion, representing just over 15 percent of Puerto Rico’s $32.5 billion in total public revenue for that year. Following years of expenditures that exceeded revenue, and a growing debt burden, in August 2015, Puerto Rico failed to make a scheduled bond payment. Since then, Puerto Rico has defaulted on over $1.5 billion in debt. In June 2016, Congress enacted and the President signed PROMESA in response to Puerto Rico’s fiscal crisis. PROMESA established a Financial Oversight and Management Board for Puerto Rico (Oversight Board), and granted it broad powers of fiscal and budgetary control over Puerto Rico. PROMESA also established a mechanism through which the Oversight Board could petition U.S. courts on Puerto Rico’s behalf to restructure debt. Under federal bankruptcy laws, Puerto Rico is otherwise prohibited from authorizing its municipalities and instrumentalities from petitioning U.S. courts to restructure debt. The Oversight Board petitioned the U.S. courts to restructure debt on behalf of Puerto Rico’s Highways and Transportation Authority and the Government Employees Retirement System on May 21, 2017 and on behalf of PREPA on July 2, 2017. In addition to its debt obligations, Puerto Rico also faces a large financial burden from its pension obligations for public employees. Puerto Rico’s public pension systems had unfunded liabilities of approximately $49 billion as of the end of fiscal year 2015, the most recent year for which data are available. Unfunded pension liabilities are similar to other kinds of debt because they constitute a promise to make a future payment or provide a benefit. Based on interviews with current and former Puerto Rico officials, federal officials, and other relevant experts, as well as a review of relevant literature, the factors that contributed to Puerto Rico’s financial condition and levels of debt related to: (1) Puerto Rico’s government running persistent deficits and (2) its use of debt to cope with deficits. As previously mentioned, Puerto Rico’s government has operated with a deficit in all years since 2002, and deficits grew over time. To cope with its deficits, Puerto Rico’s government issued debt to finance operations, rather than reduce its fiscal gap by cutting spending, raising taxes, or both. Through interviews with current and former Puerto Rico officials; federal officials; experts in Puerto Rico’s economy, the municipal securities markets, and state and local budgeting and debt management; as well as a review of relevant literature, we identified three groups of factors that contributed to Puerto Rico’s persistent deficits: (1) inadequate financial management and oversight practices, (2) policy decisions, and (3) prolonged economic contraction. Some of the factors in these groups may be interrelated. To cope with its persistent deficits, Puerto Rico issued debt to finance operations. In reviewing 20 of Puerto Rico’s largest bond issuances from 2000 to 2017, totaling around $31 billion, we found that 16 were issued exclusively to repay or refinance existing debt and to fund operations. According to ratings agency officials and experts in state and local government, states rarely issue debt to fund operations, and many states prohibit this practice. According to former Puerto Rico officials and experts on Puerto Rico’s economy, high demand for Puerto Rico debt and the Government Development Bank for Puerto Rico (GDB) facilitating rising debt levels enabled Puerto Rico to continue to use debt to finance operations. Puerto Rico issued a relatively large amount of debt, given the size of its population. Based on an analysis of fiscal year 2014 comprehensive annual financial reports of the 50 states and Puerto Rico, Puerto Rico had the second highest amount of outstanding debt among states and territories, while its population falls between the 29th and 30th most populous states. By comparison, California, the state with the largest amount of outstanding debt, is the most populated state. Various factors drove demand for Puerto Rico municipal bonds, even as the government’s financial condition deteriorated. Triple tax exemption: According to a former Puerto Rico official, Federal Reserve Bank of New York officials, and an expert on Puerto Rico’s economy, Puerto Rico’s municipal bonds were attractive to investors because interest on the bonds was not subjected to federal, state, or local taxes, regardless of where the investors resided. In contrast, investors may be required to pay state or local taxes on interest income earned from municipal securities issued by a state or municipality in which they do not reside. Investment grade bond ratings: Puerto Rico maintained investment grade bond ratings until February 2014, even as its financial condition was deteriorating. Credit ratings inform investment decisions by both institutional investors and broker dealers. According to a current Puerto Rico official and an expert on Puerto Rico’s economy, investment grade ratings for Puerto Rico municipal bonds may have driven demand for these securities in the states. Based on interviews with ratings agency officials and a review of rating agency criteria, we found that Puerto Rico may have maintained its investment grade rating for two reasons. First, Puerto Rico could not seek debt restructuring under federal bankruptcy laws, prior to the passage of PROMESA in 2016. According to rating agency officials, bonds with assumed bankruptcy protection tend to rate higher than those without such protection. Second, legal frameworks that prioritize debt service are often viewed as positive for credit ratings, according to rating agency criteria. In the event that the Puerto Rico government does not have sufficient resources to meet appropriations for a given fiscal year, Puerto Rico’s constitution requires that the government pay interest and amortization on the public debt before disbursing funds for other purposes in accordance with the order of priorities established by law. The prior Puerto Rico Governor cited this constitutional provision as providing the authority to redirect revenue streams from certain entities to the payment of general obligation debt. This redirection of revenue streams is commonly known as a clawback. Lack of transparency on its financial condition: Municipal market analysts told us that untimely financial information made it difficult for institutional and individual investors to assess Puerto Rico’s financial condition, which may have resulted in investors not being able to fully take the investment risks into account when purchasing Puerto Rico debt. According to one report, between 2010 and 2016 municipal issuers issued their audited financial statements an average of 200 days after the end of their fiscal years. However, between fiscal years 2002 and 2014, Puerto Rico issued its statements an average of 386 days after the end of its fiscal year, according to our analysis of Puerto Rico’s audited financial statements. Moreover, Puerto Rico had not issued its fiscal years 2015 and 2016 audited financial statements as of March 1, 2018, or 975 and 609 days after the end of those fiscal years, respectively. Estate tax structures: Puerto Rico residents had incentive to invest in municipal bonds issued in Puerto Rico over those issued in the United States because of federal and Puerto Rico estate tax structures. Current and former Puerto Rico officials told us that this incentive drove demand among Puerto Rico residents for bonds issued in Puerto Rico. For federal estate tax purposes, Puerto Rico residents are generally considered non-U.S. residents and non-citizens for all of their U.S.-based property, including investments. Estates of Puerto Rico residents are required to pay the prevailing federal estate tax— which ranges from 18 percent to 40 percent depending on the size of an estate—for any U.S.-based property valued over $60,000. In contrast, prior to 2017, all Puerto Rico-based property was only subject to the Puerto Rico estate tax of 10 percent. Puerto Rico’s estate tax was repealed in 2017. In addition to financing from the municipal bond markets, GDB also provided an intragovernmental source of financing. Prior to April 2016, GDB acted as a fiscal agent, trustee of funds, and intergovernmental lender for the Government of Puerto Rico. GDB issued loans to Puerto Rico’s government agencies and public corporations to support their operations. GDB provided loans to government entities valued at up to 60 percent of GDB’s total assets, as shown in Figure 11. In general, these entities did not fulfill the terms of their borrowing agreements with GDB, while they independently accessed the municipal bond market. Additionally, according to GDB’s audited financial statements, GDB did not reflect loan losses in its audited financial statements until 2014 because it presumed that Puerto Rico’s legislature would repay loans through the general fund or appropriations, as generally required by the acts that approved such loans. Facing non-repayment of public sector loans, GDB took on debt to maintain liquidity. According to GDB documents, repayment of amounts owed to GDB was a main reason for the creation of the Puerto Rico Sales Tax Financing Corporation (COFINA), an entity backed by a new sales tax, through which Puerto Rico issued some of its debt. Though initially intended as a means to repay GDB and other debt, COFINA bonds were also used to finance operations. Through our interviews and an assessment of relevant literature, we identified three potential federal actions that could help address some of the factors that contributed to unsustainable indebtedness in Puerto Rico. Consistent with the provision in PROMESA that was the statutory requirement for this work, we focused on actions that were non-fiscal in nature—that is, actions that would not increase the federal deficit. There are tradeoffs for policymakers to consider when deciding whether or how to implement any policy. For each action, we describe a specific challenge as it relates to debt accumulation in Puerto Rico, identify a possible federal response to the challenge, and describe other considerations for policymakers. To help address the factors that contributed to the high demand for Puerto Rico debt relative to other municipal debt, legislative and executive branch policymakers could further ensure that municipal securities issuers provide timely, ongoing, and complete disclosure materials to bondholders and the public. Specifically, Congress could authorize SEC to establish requirements for municipal issuers on the timing, frequency, and content of initial and continuing disclosure materials. In general, the municipal securities market is less regulated and transparent than other capital markets, such as equity markets. For example, SEC’s authority to directly establish or enforce initial and continuing disclosure requirements for issuers—including those in Puerto Rico—is limited. SEC requires that underwriters (sellers of municipal securities) reasonably determine that issuers have undertaken continuing disclosure agreements (CDA) to publicly disclose ongoing annual financial information, operating data, and notices of material events. However, federal securities laws do not provide SEC with the authority to impose penalties on municipal issuers for noncompliance with CDAs, which may limit any incentive for issuers to comply with SEC disclosure and reporting guidance. As a result, SEC has limited ability to compel issuers to provide continuing disclosure information. As previously discussed, the Puerto Rico government often issued its audited financial statements in an untimely manner, thus failing to meet its contractual obligations to provide continuing disclosures for securities it issued. SEC could not directly impose any consequences on Puerto Rico’s government for failing to adhere to the terms of, or enforce compliance with, the CDAs. Additionally, as previously discussed, municipal market analysts told us that untimely financial information made it difficult for institutional and individual investors to assess Puerto Rico’s financial condition. Timely disclosure of information would help investors make informed decisions about investing in municipal securities and help protect them against fraud involving the securities. These disclosures would be made to investors at the time of purchasing securities and throughout the term of the security, including when material changes to an issuer’s financial condition occur. According to SEC staff, enhanced authority could prompt more municipal issuers to disclose financial information, including audited financial statements, in a timelier manner. For example, SEC staff said that if the agency had required that issuers provide timely financial statements at the time of issuing a municipal security, this may have precluded Puerto Rico from issuing its $3.5 billion general obligation bond in 2014. However, any rulemaking SEC would or could take as a result of enhanced authority would depend on a number of factors, such as compliance with other SEC guidance and related laws. Since this action would apply to all U.S. municipal securities issuers, it has policy and implementation implications that extend well beyond Puerto Rico. For example, establishing and enforcing initial and continuing disclosure requirements for municipal securities issuers could place additional burdens on state and local issuers, and not all municipal issuers use standardized accounting and financial reporting methods. As a result, state and local governments may need to spend resources to adjust financial reporting systems to meet standardized reporting requirements. However, in a 2012 report proposing this action, SEC said it could mitigate this burden by considering content and frequency requirements that take into account, and possibly vary by, the size and nature of the municipal issuer, the frequency of issuance of securities, the type of municipal securities offered, and the amount of outstanding securities. To help address the factors that contributed to the high demand for Puerto Rico debt relative to other municipal debt, Congress could ensure that investors residing in Puerto Rico receive the same federal investor protections as investors residing in states. Specifically, Congress could subject all investment companies in Puerto Rico to the Investment Company Act of 1940, as amended (1940 Act). In recent years, the House and Senate separately have passed legislation that would achieve this action. Certain investment companies in Puerto Rico and other territories— specifically, those whose securities are sold solely to the residents of the territory in which they are located—are exempt from the 1940 Act’s requirements. The 1940 Act regulates investment companies, such as mutual funds that invest in securities of other issuers and issue their own securities to the investing public. It imposes several requirements on investment companies intended to protect investors. For example, it requires that investment companies register with SEC and disclose information to investors about the businesses and risks of the companies in which they invest, and the characteristics of the securities that they issue. It also restricts investment companies from engaging in certain types of transactions, such as purchasing municipal securities underwritten by affiliated companies. According to a former Puerto Rico official, some broker-dealers in Puerto Rico underwrote Puerto Rico municipal securities issuances and investment companies managed by affiliated companies of these underwriters purchased the securities, packaged them into funds, and marketed the funds to investors residing in Puerto Rico. This practice would be prohibited or restricted for investment companies subject to the 1940 Act, as it might result in investment companies not acting in the best interests of their investors. If all Puerto Rico investment companies had been subject to the 1940 Act, they would have been prohibited or restricted from investing in Puerto Rico municipal bonds underwritten by affiliated companies. Also, these investment companies may have further disclosed the risks involved in Puerto Rico municipal bonds to Puerto Rico investors. As a result, demand for Puerto Rico municipal bonds from Puerto Rico investment companies and residents may have been lower had the 1940 Act requirements applied to all Puerto Rico investment companies, and it may have been more difficult for the Puerto Rico government to issue debt to finance deficits. SEC staff told us that industry groups had raised objections to extending the 1940 Act provisions to all investment companies in Puerto Rico. These industry groups noted that, among other things, certain investment companies would have difficulty meeting the 1940 Act’s leverage and asset coverage requirements and adhering to some restrictions on affiliated transactions. However, SEC staff noted that under certain legislation that passed the House or Senate separately, as described above, Puerto Rico investment companies would have three years to come into compliance if they were newly subject to the 1940 Act. Further, under that legislation, after three years, investment companies in Puerto Rico could also request an additional three years to come into compliance. Regarding affiliated company restrictions, SEC has previously waived some requirements for investment companies if they are unable to obtain financing by selling securities to unaffiliated parties with an agreement to repurchase those securities at a higher price in the future, known as repurchase agreements. According to SEC staff, SEC would consider allowing companies in Puerto Rico to enter into reverse repurchase agreements with their affiliates if the 1940 Act applied to them. To help address the factors that contributed to the high demand for Puerto Rico debt relative to other municipal debt, Congress could remove the triple tax exemption for Puerto Rico’s municipal securities. This action would mean that interest income from Puerto Rico municipal securities earned by investors residing outside of Puerto Rico could be taxed by states and local governments, while still being exempt from federal income taxes, similar to the current tax treatment of municipal bond income in the states. As mentioned previously, former Puerto Rico officials and experts in municipal securities told us that the triple tax exemption fueled investor demand and enabled Puerto Rico to continue issuing bonds despite deteriorating financial conditions. Some of the demand for Puerto Rico municipal securities came from certain U.S. municipal bond funds. These funds concentrated their investments in one state to sell to investors within that state, but also included Puerto Rico bonds in their portfolios. Puerto Rico bond yields generally were higher than state bonds yields, according to industry experts. When added to a fund, the higher yields from Puerto Rico bonds would increase the overall return on investment yield of a fund. Modifying the triple tax exemption for Puerto Rico’s municipal securities might result in reduced demand for Puerto Rico’s debt. In response to reduced demand for its debt, Puerto Rico’s government may need to address any projected operating deficits by decreasing spending, raising revenues, or both. According to U.S. Treasury officials, this action could increase the proportionate share of investors in Puerto Rico debt that reside in Puerto Rico, because of reduced demand from investors in the states. In the event of a future debt crisis, this could result in a concentration of financial losses within Puerto Rico. Also, debt financing allows governments to make needed capital investments and provides liquidity to governments, and can be a more stable funding source to manage fiscal stress. Reduced market demand for Puerto Rico’s bonds could make access to debt financing difficult, as the Puerto Rico bond market may not support the Puerto Rico government’s future borrowing at reasonable interest rates, according to Treasury officials. Alternately, a variant of this action would be to retain the triple tax exemption for Puerto Rico debt only for bonds related to capital investments rather than for deficit financing, according to Treasury officials. Various provisions in PROMESA were intended to help Puerto Rico improve its fiscal condition. PROMESA requires that the Oversight Board certify fiscal plans for achieving fiscal responsibility and access to capital markets. The intent of the fiscal plans is to eliminate Puerto Rico’s structural deficits; create independent revenue estimates for the budget process; and improve Puerto Rico’s fiscal governance, accountability, and controls, among other things. From March 2017 to April 2017, the Oversight Board certified the fiscal plans the Government of Puerto Rico developed for the primary government and certain component units, such as PREPA. As a result of the effects of Hurricanes Irma and Maria, the Oversight Board requested that the Government develop updated fiscal plans. Although the Government of Puerto Rico developed and submitted updated fiscal plans, the Oversight Board did not certify them, with the exception of the plan for GDB. Instead, in April 2018, the Oversight Board certified fiscal plans it developed itself, as PROMESA allows. PROMESA also requires the Oversight Board to determine whether or not Puerto Rico’s annual budgets, developed by the Governor, comply with the fiscal plans prior to being submitted to Puerto Rico’s legislature for approval. Technical assistance is another area where the federal government has taken action to help Puerto Rico address its fiscal condition. In 2015, Congress first authorized Treasury to provide technical assistance to Puerto Rico, and has continued to reauthorize the technical assistance, most recently through September 30, 2018. For example, Treasury officials told us that they helped Puerto Rico’s Planning Board develop a more accurate macroeconomic forecast, which should enable Hacienda to develop more accurate revenue estimates and receipt forecasts. Treasury officials also told us that the agency began helping Puerto Rico improve its collection of delinquent taxes—for example, by helping Hacienda develop an office dealing with Puerto Rico’s largest and most sophisticated taxpayers, which are often multinational corporations. With Puerto Rico focused on hurricane recovery efforts, Treasury and the Puerto Rico government are reassessing the types of assistance that Treasury might provide in the future, according to Treasury officials. Current and former Puerto Rico government officials and experts on Puerto Rico’s economy also told us that the federal government could further help Puerto Rico address its persistent deficits through federal policy changes that are fiscal in nature. For example, it could change select federal program funding rules—at a cost to the federal government—such as eliminating the cap on Medicaid funding and calculating the federal matching rate similar to how the rate is calculated in the states. Likewise, the Congressional Task Force on Economic Growth in Puerto Rico (Congressional Task Force), as established by PROMESA, issued a report in December 2016 that recommended changes to federal laws and programs that would spur sustainable long- term economic growth in Puerto Rico, among other recommendations. In addition to federal actions that could address the factors that contributed to Puerto Rico’s fiscal condition and debt levels, the Puerto Rico government plans to take various actions. For example, according to current Puerto Rico officials and the Puerto Rico government’s April 2018 fiscal plan, the government is: Planning to implement an integrated new information technology system for financial management, to include modernized revenue management and accounting and payroll systems. Hacienda officials stated that they are in the process of developing a project schedule for this long-term effort. Developing a new public healthcare model in which Puerto Rico’s government pays for basic services and patients pay for premium services. The government will begin implementing the new healthcare model in fiscal year 2019 and expects to achieve annual savings of $841 million by fiscal year 2023. Collaborating with the private sector for future infrastructure and service projects, including for reconstruction efforts related to Hurricanes Irma and Maria, which it expects will stimulate Puerto Rico’s weakened economy. We also asked Puerto Rico officials about progress made toward addressing many of the factors we identified. However, they did not provide us this information. We provided a draft of this report for review to Treasury, SEC, the Federal Reserve Bank of New York, the Government of Puerto Rico, and the Oversight Board. Treasury and SEC provided technical comments, which we incorporated as appropriate. The Federal Reserve Bank of New York and the Oversight Board had no comments. We received written comments from the Government of Puerto Rico, which are reprinted in appendix II. In its comments, the Government of Puerto Rico generally agreed with the factors we identified that contributed to Puerto Rico’s financial condition and levels of debt. It also provided additional context on Puerto Rico’s accumulation of debt, such as Puerto Rico’s territorial status and its effect on federal programs in Puerto Rico and outmigration. The Government of Puerto Rico also noted that the federal actions we identified to address factors contributing to Puerto Rico’s unsustainable debt levels did not include potential actions that were fiscal in nature or that addressed Puerto Rico’s long-term economic viability. As we note in the report, we excluded fiscal actions from our scope, consistent with the provision in PROMESA that was the statutory requirement for this work. We excluded potential actions that could promote economic growth in Puerto Rico because these actions would address debt levels in Puerto Rico only indirectly and because the Congressional Task Force on Economic Growth in Puerto Rico already recommended actions for fostering economic growth in Puerto Rico in its December 2016 report. We are sending copies of the report to the appropriate congressional committees, the Government of Puerto Rico, the Secretary of the Treasury, the Chairman of the Securities and Exchange Commission, and other interested parties. In addition, this report is available at no charge on the GAO website at http://gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-6806 or krauseh@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Our objectives were to describe (1) the factors that contributed to Puerto Rico’s financial condition and levels of debt; and (2) federal actions that could address the factors that contributed to Puerto Rico’s financial condition and levels of debt. Consistent with the provision in the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) that was the statutory requirement for this work, we focused on actions that would not increase the federal deficit. For both objectives we interviewed current Puerto Rico officials from several agencies—the Puerto Rico Department of Treasury (Hacienda in Spanish), Government Development Bank for Puerto Rico (GDB), the Puerto Rico Office of Management and Budget (Spanish acronym OGP), Fiscal Agency and Financial Advisory Authority (FAFAA), and the Puerto Rico Electric Power Authority. We also interviewed 13 former Puerto Rico officials that held leadership positions at Hacienda, GDB, or OGP, or a combination thereof. These former officials served between 1997 and 2016 for various gubernatorial administrations associated with the two political parties in Puerto Rico that held the governorship during that period. We also interviewed officials from the U.S. Department of the Treasury (Treasury), the Securities and Exchange Commission (SEC), the Federal Reserve Bank of New York, and the Financial Oversight and Management Board for Puerto Rico (created by PROMESA). Additionally, we conducted another 13 interviews with experts on Puerto Rico’s economy, the municipal securities markets, state and territorial budgeting and debt management—including credit rating agencies—and with select industry groups in Puerto Rico. We selected the experts we interviewed based on their professional knowledge closely aligning with our engagement objectives, as demonstrated through published articles, congressional testimonies, and referrals from agency officials or other experts. To describe the factors that contributed to Puerto Rico’s financial condition and levels of debt, we reviewed our prior work related to Puerto Rico’s financial condition and levels of public debt. We also collected and analyzed additional financial data from Puerto Rico’s audited financial statements for the fiscal years 2002 to 2014, the last year for which audited financial statements were available. To determine how the Puerto Rico government used bond proceeds, we reviewed a nongeneralizable sample of Puerto Rico bonds prospectuses issued between 2000 and 2017 from the Electronic Municipal Market Access database of the Municipal Securities Rulemaking Board. We reviewed literature—including academic reports, congressional hearing transcripts, and credit rating agency reports—that described Puerto Rico’s economy and factors that contributed to Puerto Rico’s levels of debt. We also reviewed credit rating agency reports that described Puerto Rico’s municipal debt and the agencies’ methodologies for rating municipal debt. We also collected and reviewed Puerto Rico government documents related to budget formulation and execution, debt issuance, and financial management. We considered factors to include, but not be limited to, macroeconomic trends, federal policies, and actions taken by Puerto Rico government officials. Our review focused largely, though not exclusively, on conditions that contributed to the debt crisis during those years for which we collected financial data on Puerto Rico, fiscal years 2002 to 2014. Finally, we also conducted a thematic analysis of the summaries of our interviews to identify common patterns and ideas. Although these results are not generalizable to all current and former officials and experts with this subject-matter expertise, and do not necessarily represent the views of all the individuals we interviewed, the thematic analysis provided greater insight and considerations for the factors we identified. To describe federal actions that could address the factors that contributed to Puerto Rico’s financial condition and levels of debt, we reviewed our prior reports and documents from Treasury and SEC, conducted a literature review, and conducted various interviews. Specifically, we met with federal agencies with subject-matter expertise or whose scope of responsibilities related to these actions, as well as with current and former Puerto Rico officials and municipal securities experts. Consistent with PROMESA, we omitted from our scope: (1) actions that could increase the federal deficit (i.e., fiscal options), (2) actions that could be taken by the Puerto Rico government, (3) actions that could infringe upon Puerto Rico’s sovereignty and constitutional parameters, and (4) actions that would imperil America’s homeland and national security. We considered actions that could promote economic growth in Puerto Rico as outside of scope, as they could address debt levels in Puerto Rico indirectly, rather than directly, and because a study issued by the Congressional Task Force on Economic Growth in Puerto Rico already identified actions that Congress and executive agencies could take to foster economic growth in Puerto Rico. We also considered actions that could address Puerto Rico’s unfunded pension liability as outside of our scope. The actions we identified may also help avert future unsustainable debt levels in other territories; however, we did not assess whether and how each action would apply to other territories. We conducted this performance audit from January 2017 to May 2018 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Jeff Arkin (Assistant Director), Amy Radovich (Analyst in Charge), Pedro Almoguera, Karen Cassidy, Daniel Mahoney, A.J. Stephens, and Justin Snover made significant contributions to this report.

 

 Report 2:
CMS has four principal programs: Medicare, Medicaid, CHIP, and the health-insurance marketplaces. See table 1 for information about the four programs. As discussed earlier, Medicare and Medicaid are CMS’s largest programs and have been growing steadily (see fig. 1). CBO projects that, in 2026, under current law, Medicare spending will reach $1.3 trillion. Medicaid is also expected to continue to grow—program spending is projected to increase 66 percent to over $950 billion by fiscal year 2025, and more than half of the states have chosen to expand their Medicaid programs by covering certain low-income adults not historically eligible for Medicaid coverage, as authorized under the Patient Protection and Affordable Care Act of 2010 (PPACA). The two programs’ use of managed-care delivery systems to provide care has also increased. For example, the number and percentage of Medicare beneficiaries enrolled in Medicare Part C has grown steadily over the past several years, increasing from 8.7 million (20 percent of all Medicare beneficiaries) in calendar year 2007 to 17.5 million (32 percent of all Medicare beneficiaries) in calendar year 2015. As of July 1, 2015, nearly two-thirds of all Medicaid beneficiaries were enrolled in managed- care plans and about 40 percent of expenditures in fiscal year 2015 were for health-care services delivered through managed care. CMS receives appropriations to carry out antifraud activities through several funds including the Health Care Fraud and Abuse Control (HCFAC) program and the Medicaid Integrity Program. The HCFAC program was established under the Health Insurance Portability and Accountability Act of 1996 to coordinate federal, state, and local law- enforcement efforts to address health-care fraud and abuse and to conduct investigations and audits, among other things. In fiscal year 2016, CMS received $560 million through the HCFAC program appropriations. The Medicaid Integrity Program, established by the Deficit Reduction Act of 2005, supports contracts to audit and identify overpayments in Medicaid claims, and provides technical assistance for states’ program-integrity efforts. According to CMS, it received $75 million every year since fiscal year 2009 through the Medicaid Integrity Program appropriations. According to CMS, in fiscal year 2016, total program-integrity obligations to address fraud, waste, and abuse for Medicare and Medicaid were $1.45 billion. As mentioned previously, we designated Medicare and Medicaid as high- risk programs starting in 1990 and 2003, respectively, because their size, scope, and complexity make them vulnerable to fraud, waste, and abuse. Similarly, the Office of Management and Budget (OMB) designated all parts of Medicare as well as Medicaid “high-priority” programs because these programs report $750 million or more in estimated improper payments in a given year. We also highlighted challenges associated with improper payments in Medicare and Medicaid in our annual report on duplication and opportunities for cost savings in federal programs. Improper payments are a significant risk to the Medicare and Medicaid programs and can include payments made as a result of fraud. Improper payments are payments that are either made in an incorrect amount (overpayments and underpayments) or those that should not be made at all. For example, CMS estimated in fiscal year 2016 that the Medicare fee-for-service (FFS) improper payment rate was 11 percent (approximately $41 billion) and the Medicaid improper payment rate was 10.5 percent (approximately $36 billion). Improper payment measurement does not specifically identify or estimate improper payments due to fraud. Health-care fraud can take many forms, and a single case can involve more than one scheme. Schemes may include fraudulent billing for services not provided, services provided that were not medically necessary, and services intentionally billed at a higher level than appropriate. These fraud schemes may include compensating providers, beneficiaries, or others for participating in the fraud scheme. Fraud can be regionally focused or can target particular service areas such as home-health services, or durable medical equipment such as wheelchairs. Fraud may also have nonfinancial effects. For example, patients may be subjected to harmful or unnecessary services by fraudulent providers. Fraud can be perpetrated by different actors, such as providers, beneficiaries, health-insurance plans, as well as organized crime. Fraud and “fraud risk” are distinct concepts. Fraud is challenging to detect because of its deceptive nature. Additionally, once suspected fraud is identified, alleged fraud cases may be prosecuted. If the court determines that fraud took place, then fraudulent spending may be recovered. Fraud risk exists when individuals have an opportunity to engage in fraudulent activity, have an incentive or are under pressure to commit fraud, or are able to rationalize committing fraud. When fraud risks can be identified and mitigated, fraud may be less likely to occur. Although the occurrence of one or more cases of health-care fraud indicates there is a fraud risk, a fraud risk can exist even if fraud has not yet been identified or occurred. Suspicious billing patterns, certain types of health-care providers, or complexities in program design may indicate a risk of fraud. Information to help identify potential fraud risks may come from various sources, including whistleblowers, agency officials, contractors, law-enforcement agencies, beneficiaries, or providers. According to federal standards and guidance, executive-branch agency managers are responsible for managing fraud risks and implementing practices for combating those risks. Federal internal control standards call for agency management officials to assess the internal and external risks their entities face as they seek to achieve their objectives. The standards state that as part of this overall assessment, management should consider the potential for fraud when identifying, analyzing, and responding to risks. Risk management is a formal and disciplined practice for addressing risk and reducing it to an acceptable level. In July 2015, GAO issued the Fraud Risk Framework, which provides a comprehensive set of key components and leading practices that serve as a guide for agency managers to use when developing efforts to combat fraud in a strategic, risk-based way. The Fraud Risk Framework describes leading practices in four components: commit, assess, design and implement, and evaluate and adapt, as depicted in figure 2. The Fraud Reduction and Data Analytics Act of 2015, enacted in June 2016, requires OMB to establish guidelines for federal agencies to create controls to identify and assess fraud risks and design and implement antifraud control activities. The act further requires OMB to incorporate the leading practices from the Fraud Risk Framework in the guidelines. In July 2016, OMB published guidance about enterprise risk management and internal controls in federal executive departments and agencies. Among other things, this guidance affirms that managers should adhere to the leading practices identified in the Fraud Risk Framework. Further, the act requires federal agencies to submit to Congress a progress report each year for 3 consecutive years on the implementation of the controls established under OMB guidelines, among other things. CMS’s antifraud efforts for its four principal programs are part of the agency’s broader program-integrity approach to address fraud, waste, and abuse. CMS’s Center for Program Integrity (CPI) is the agency’s focal point for program integrity across the programs. According to CMS, its approach to program-integrity allows it to “address the whole spectrum of fraud, waste, and abuse.” For example, CMS describes its program- integrity activities as addressing unintentional errors resulting from providers being unaware of recent policy changes on one end of the spectrum, through somewhat more-serious patterns of abuse such as billing for a more-expensive service than was performed (known as upcoding), and finally up to serious fraudulent activities, such as billing for services that were not provided. CMS then aims to target its corrective actions to fit the risk. See figure 3 for CMS’s description of the spectrum of fraud, waste, and abuse that its program-integrity activities aim to address. Within its program-integrity activities, CMS has established several control activities that are specific to managing fraud risks, while others serve broader program-integrity purposes. According to CMS officials, the agency’s antifraud control activities mainly focus on providers in Medicare FFS. Officials told us that when CPI began operating, its primary focus was developing program integrity for Medicare FFS and, as a result, it is the most “mature” of all of CPI’s programs. CMS’s specific fraud control activities include, for example, the Fraud Prevention System (FPS), a predictive-analytics system that helps identify potentially fraudulent payments in Medicare FFS, and the Unified Program Integrity Contractors (UPIC), which detect and investigate aberrant provider behavior and potential fraud in Medicare and Medicaid. Other control activities serve broader program-integrity purposes such as to reduce improper payments resulting from error, waste, and abuse in addition to preventing or detecting potential fraud. For example, CMS provides education and outreach to Medicare providers and beneficiaries on issues identified through data analyses in order to reduce improper payments and to increase their awareness of fraud. HHS and CMS department- and agency-wide strategic plans guide CMS’s program-integrity activities—including antifraud activities. The program-integrity goals identified in the HHS strategic plan primarily focus on improper payments and are driven by statutory requirements. For example, the HHS strategic plan for fiscal years 2014–2018 includes performance goals of reducing the percentage of improper payments made under Medicare FFS and Medicare Parts C and D. One antifraud- focused goal in the HHS strategic plan is to increase the percentage of Medicare providers and suppliers identified as high risk that receive administrative actions, such as suspending payments to providers or revoking providers’ billing privileges. HHS and CMS department- and agency-wide strategic plans also include an emphasis on fraud prevention and early detection—a leading practice in the Fraud Risk Framework—and moving away from a “pay-and-chase” model. For example, the HHS strategic plan calls for “fostering early detection and prevention of improper payments by focusing on preventing bad actors from enrolling or remaining in Medicare and Medicaid” and to “use public-private partnerships to prevent and detect fraud across the health care industry by sharing fraud-related information and data between the public and private sectors.” As a part of this emphasis on prevention, CMS developed FPS in response to the Small Business Jobs Act of 2010, which required CMS to implement predictive-analytics technologies. Also, the Patient Protection and Affordable Care Act of 2010 (PPACA) included provisions to strengthen Medicare and Medicaid’s provider enrollment standards and procedures, among other program-integrity provisions. CMS works with an extensive and complex network of stakeholders to manage fraud risks in its four principal programs. In Medicaid and CHIP, CMS partners with and oversees the 50 states and the District of Columbia. Until the Deficit Reduction Act of 2005 expanded CMS’s role in Medicaid program integrity to provide effective federal support and assistance to states’ efforts to combat fraud, waste, and abuse, states were primarily responsible for Medicaid program integrity. Each state has its own Medicaid program-integrity unit, Medicaid Fraud Control Unit (MFCU), and state audit organization. CMS also uses numerous contractors to conduct the majority of its program-integrity activities. Since the enactment of Medicare in 1965, contractors have played an integral role in the administration of the program. The original Medicare program was designed so that the federal government contracted with health insurers or similar organizations experienced in handling physician and hospital claims to pay Medicare claims. Later, the Health Insurance Portability and Accountability Act of 1996 required the Secretary of Health and Human Services to enter into contracts to promote the integrity of the Medicare program. According to CMS officials, in fiscal year 2016 contractors received 92 percent of CMS’s program-integrity funding. Medicare and Medicaid program- integrity contractors play a variety of roles: (1) processing and reviewing claims, (2) conducting site visits of providers enrolling in Medicare, (3) auditing claims and recovering overpayments, (4) performing data analysis, and (5) investigating aberrant claims and provider behaviors, among other things. States also use contractors in many of these roles for managing program integrity. Additionally, multiple private health-insurance plans in Medicare Parts C and D and over 200 health-insurance plans in Medicaid managed care also carry out program-integrity activities. For the health-insurance marketplaces, CMS is responsible for operating the federally facilitated marketplace and overseeing the state-based marketplaces. CMS also developed the Federal Data Services Hub, which acts as a portal for exchanging information between state-based marketplaces, the federally facilitated marketplace, and state Medicaid agencies, among other entities, as well as other external partners, including other federal agencies, such as the Internal Revenue Service. Finally, law- enforcement groups, including the joint Department of Justice (DOJ) and HHS OIG Medicare Fraud Strike Force Teams, identify, investigate, and prosecute instances of fraud in CMS programs. See figure 4 for a depiction of CMS’s stakeholder network for managing fraud risks. This figure illustrates approximate numbers of stakeholders (through the concentration of dots), but not the extent of individual stakeholder roles. CMS provides oversight to, or partners with, these stakeholders to manage fraud risks. For oversight, CMS creates policies and guidance to direct stakeholders’ antifraud efforts, such as Medicare and Medicaid program-integrity manuals and the Medicaid Provider Enrollment Compendium. CMS also provides technical assistance to states in areas such as provider enrollment and data analysis. In areas where CMS does not have a primary role, it acts as a partner by collaborating and coordinating program-integrity and antifraud activities. For example, CMS is directly responsible for Medicare program integrity, but, in Medicaid and CHIP, states are the first line of program-integrity efforts. Similarly, CMS maintains control over Medicare FFS program integrity, but within Medicare managed care, it provides guidance for health- insurance plans to carry out their own program-integrity activities. In the health-insurance marketplaces, CMS reviews state-based marketplaces’ procedures for verifying applicant eligibility for coverage. For example, it conducts annual reviews of the state-based marketplaces, which include a review of states’ fraud, waste, and abuse policies. See figure 5 for a further description of CMS’s and various stakeholders’ roles and responsibilities in fraud risk management. CMS also facilitates collaboration among federal, state, and private entities for managing fraud risks. In 2012, CMS created the Healthcare Fraud Prevention Partnership (HFPP) to share information with public and private stakeholders and to conduct studies related to health-care fraud, waste, and abuse. According to CMS, as of October 2017, the HFPP included 89 public and private partners, including Medicare- and Medicaid-related federal and state agencies, law-enforcement agencies, private health-insurance plans (payers), and antifraud and other health- care organizations. The HFPP has conducted studies that pool and analyze multiple payers’ claims data to identify providers with patterns of suspect billing across payers. In a recent report, participants separately told us that the HFPP’s studies helped them to identify and take action against potentially fraudulent providers and payment vulnerabilities of which they might not otherwise have been aware, and fostered both formal and informal information sharing. CMS’s relationships with stakeholders were varied in terms of maturity and extent of information sharing, according to stakeholders we interviewed. While some relationships between CMS and stakeholders have been long-standing, some are developing, and others exist on an ad hoc basis. For example, CMS has had a long-standing relationship with state Medicaid program-integrity units, by collaborating through monthly meetings of the Medicaid Fraud and Abuse Technical Advisory Group, sending fraud alerts, and offering courses through the Medicaid Integrity Institute. However, in our interviews with state program-integrity units, and as we recently reported, some state Medicaid agencies shared concerns about the communication, level of policy guidance, and technical support provided by and received from CMS for managing fraud risks in Medicaid. This concern was echoed by state audit officials, with whom CMS recently initiated coordination to build relationships that would facilitate state auditing of Medicaid programs. CMS also has varying relationships with its law-enforcement partners. For example, the relationship between CMS and DOJ’s Health Care Fraud unit, which leads the DOJ and HHS OIG Medicare Fraud Strike Force Teams, has been ad hoc. According to CMS and DOJ officials, the interactions between the agencies have been based on specific fraud cases such as coordination of national takedowns when DOJ provided CMS with the names of providers committing fraud so that CMS could suspend them consistently with the timing of the enforcement efforts. According to CMS officials, they coordinate more with HHS OIG, working together on payment suspensions and revocations for OIG cases, or working with it to take administrative actions against large providers. CMS’s antifraud efforts partially align with the Fraud Risk Framework. Consistent with the framework, CMS has demonstrated commitment to combating fraud by creating a dedicated entity to lead antifraud efforts. It has also taken steps to establish a culture conducive to fraud risk management, although it could expand its antifraud training to include all employees. CMS has taken some steps to identify fraud risks in Medicare and Medicaid; however, it has not conducted a fraud risk assessment or developed a risk-based antifraud strategy for Medicare and Medicaid as defined in the Fraud Risk Framework. CMS has established monitoring and evaluation mechanisms for its program-integrity control activities that, if aligned with a risk-based antifraud strategy, could enhance the effectiveness of fraud risk management in Medicare and Medicaid. The commit component of the Fraud Risk Framework calls for an agency to commit to combating fraud by creating an organizational culture and structure conducive to fraud risk management. This component includes establishing a dedicated entity to lead fraud risk management activities. Within CMS, the Center for Program Integrity (CPI) serves as the dedicated entity for fraud, waste, and abuse issues in Medicare and Medicaid, which is consistent with the Fraud Risk Framework. CPI was established in 2010, in response to a November 2009 Executive Order on reducing improper payments and eliminating waste in federal programs. This formalized role, according to CMS officials, elevated the status of program-integrity efforts, which previously were carried out by other parts of CMS. As an executive-level Center—on the same level with five other executive-level Centers at CMS, such as the Center for Medicare and the Center for Medicaid and CHIP Services—CPI has a direct reporting line to executive-level management at CMS. The Fraud Risk Framework identifies a direct reporting line to senior-level managers within the agency as a leading practice. According to CMS officials, this elevated organizational status offers CPI heightened visibility across CMS, attention by CMS executive leadership, and involvement in executive- level conversations. Additionally, in 2014, CMS established a Program Integrity Board that has brought together senior officials across CMS Centers on a monthly basis to coordinate on fraud and program-integrity vulnerabilities. According to CPI officials, the board is one of the mechanisms through which CPI engages other executive-level offices at CMS. CPI chairs the meetings and typically develops meeting agendas to solicit information from and disseminate information to other CMS units or stakeholders. Further, the board may establish small working groups, known as integrated project teams, to address specific vulnerabilities. For example, according to CMS officials, in 2016 the board established a Marketplace integrated project team to resolve potential fraud eligibility and enrollment issues in the federally facilitated marketplace using the Fraud Risk Framework. CPI has further demonstrated commitment to addressing fraud, waste, and abuse through several organizational changes with the goal of improving coordination and communication of program-integrity activities across Medicare and Medicaid. Most recently, in 2014, CPI reorganized its structure to align functional areas across Medicare and Medicaid, where possible. Previously, separate units within CPI administered their own program-integrity activities for Medicare and Medicaid programs. For example, CPI established a Provider Enrollment and Oversight Group, responsible for provider screening and enrollment functions in both Medicare and Medicaid. According to CMS officials, if CPI employees identify an issue in provider enrollment in Medicare, the same CPI employees also consider how this issue applies to Medicaid. According to CMS officials, the reorganization has helped CPI to look at vulnerabilities in a crosscutting way and to facilitate communication across programs. Similarly, since 2016, CPI began shifting contracting functions from separate Medicare and Medicaid regional contractors that identify and investigate cases of potential fraud and conduct audits to five regional UPICs responsible for a range of program-integrity and fraud-specific activities in both Medicare FFS and Medicaid. According to CMS, the purpose of the UPICs is to coordinate provider investigations across Medicare and Medicaid, improve collaboration with states by providing a mutually beneficial service, and increase contractor accountability through coordinated oversight. CMS officials told us that UPIC integration is a cornerstone of CMS’s contract management strategy and would help to ensure communication and coordination across Medicare and Medicaid program-integrity efforts. CMS plans to award all the UPIC contracts by the end of 2017, ultimately phasing out the ZPICs and Medicaid Integrity Contractors. The commit component of the Fraud Risk Framework also includes creating an organizational culture to combat fraud at all levels of the agency. Consistent with the Fraud Risk Framework, CMS has promoted an antifraud culture by demonstrating a senior-level commitment to combating fraud through public statements, increased resource levels, and internal and external coordination. In addition to HHS and CMS strategic documents discussed earlier, CMS and CPI leaders have testified publicly about CMS’s commitment to preventing fraud and protecting taxpayers and beneficiaries. For example, CPI’s former Director testified in May 2016 before the House Committee on Energy and Commerce’s Subcommittee on Oversight and Investigations that “CMS is deeply committed to our efforts to prevent waste, fraud and abuse in Medicare and Medicaid programs, protecting both taxpayers and the beneficiaries that we serve.” More recently, CMS’s new Administrator testified in her February 2017 confirmation hearing regarding her intent to prioritize efforts around preventing fraud and abuse. CPI’s budget and resources have increased over time to support its ongoing program-integrity mission. According to CMS, program-integrity obligations for Medicare and Medicaid increased from about $1.02 billion in fiscal year 2010 to $1.45 billion in fiscal year 2016. According to CMS officials, the Health Care Fraud and Abuse Control (HCFAC) account, one of the primary sources of CPI funding, has never received a funding reduction. Additionally, in 2015, CPI received additional funding based on a discretionary cap adjustment to HCFAC. Similarly, CPI staff resources have increased over time. According to CMS, CPI’s full-time equivalent positions increased from 177 in 2011 to 419 in 2017. Consistent with leading practices in the Fraud Risk Framework to involve all levels of the agency in setting an antifraud tone, CPI has also worked collaboratively with other CMS Centers. In addition to engaging executive-level officials of other CMS Centers through the Program Integrity Board, CPI has worked collaboratively with other Centers within CMS to incorporate antifraud features into new program design or policy development and established regular communication at the staff level. For example: Center for Medicare and Medicaid Innovation (CMMI). When developing the Medicare Diabetes Prevention Program, CMMI officials told us they worked with CPI’s Provider Enrollment and Oversight Group and Governance Management Group to develop risk-based screening procedures for entities that would enroll in Medicare to provide diabetes-prevention services, among other activities. The program was expanded nationally in 2016, and CMS determined that an entity may enroll in Medicare as a program supplier if it satisfies enrollment requirements, including that the supplier must pass existing high categorical risk-level screening requirements. Center for Medicaid and CHIP Services (CMCS). CMCS officials told us they worked closely with CPI to issue Medicaid guidance and best practices to states on home and community-based services that incorporate program-integrity provisions. A senior CMCS official told us that, to address fraud, CMS has requested that states include provider information on claims to determine whether providers are meeting eligibility criteria. Center for Medicare (CM). In addition to building safeguards into programs and developing policies, CM officials told us that there are several standing meetings, on monthly, biweekly, and weekly bases, between groups within CM and CPI that discuss issues related to provider enrollment, FFS operations, and contractor management. A senior CM official also told us that there are ad hoc meetings taking place between CM and CPI: “We interact multiple times daily at different levels of the organization. Working closely is just a regular part of our business.” CMS has also demonstrated its commitment to addressing fraud, waste, and abuse to its stakeholders. Representatives of CMS’s extensive stakeholder network whom we interviewed—state officials, contractors, and officials from public and private entities—generally recognized the agency’s commitment to combating fraud. In our interviews with stakeholders, officials observed CMS’s increased commitment over time to address fraud, waste, and abuse and cited examples of specific CMS actions. State officials, for example, told us that the Medicaid Integrity Institute, a training center coordinated jointly by CMS and DOJ, has been a helpful resource for states to build capacity to address fraud and program integrity. CMS contractors told us that CMS’s commitment to combating fraud is incorporated into contractual requirements, such as requiring (1) data analysis for potential fraud leads and (2) fraud- awareness training for providers. Officials from entities that are members of the HFPP, specifically, a health-insurance plan and the National Health Care Anti-Fraud Association, added that CMS’s effort to establish the HFPP and its ongoing collaboration and information sharing reflect CMS’s commitment to combat fraud in Medicare and Medicaid. The Fraud Risk Framework identifies training as one way of demonstrating an agency’s commitment to combating fraud. Training and education intended to increase fraud awareness among stakeholders, managers, and employees, serves as a preventive measure to help create a culture of integrity and compliance within the agency. The Fraud Risk Framework discusses requiring all employees to attend training upon hiring and on an ongoing basis thereafter. To increase awareness of fraud risks in Medicare and Medicaid, CMS offers and requires training for stakeholder groups such as providers, beneficiaries, and health-insurance plans. Specifically, through its National Training Program and Medicare Learning Network, CMS makes available training materials on combating Medicare and Medicaid fraud, waste, and abuse. These materials help to identify and report fraud, waste, and abuse in CMS programs and are geared toward providers, beneficiaries, as well as trainers and other stakeholders. Separately, CMS requires health-insurance plans working with CMS to provide annual fraud, waste, and abuse training to their employees. However, CMS does not offer or require similar fraud-awareness training for the majority of its workforce. For a relatively small portion of its overall workforce—specifically, contracting officer representatives who are responsible for certain aspects of the acquisition function—CMS requires completion of fraud and abuse prevention training every 2 years. According to CMS, 638 of its contracting officer representatives (or about 10 percent of its overall workforce) completed such training in 2016 and 2017. Although CMS offers fraud-awareness training to others, the agency does not require fraud-awareness training for new hires or on a regular basis for all employees because the agency has focused on providing process-based internal controls training for its employees. While fraud-awareness training for contracting officer representatives is an important step in helping to promote fraud risk management, fraud- awareness training specific to CMS programs would be beneficial for all employees. Such training would not only be consistent with what CMS offers to or requires of its stakeholders and some of its employees, but would also help to keep the agency’s entire workforce continuously aware of fraud risks and examples of known fraud schemes, such as those identified in successful OIG investigations. Such training would also keep employees informed as they administer CMS programs or develop agency policies and procedures. Considering the vulnerability of Medicare and Medicaid programs to fraud, waste, and abuse, without regular required training CMS cannot be assured that its workforce of over 6,000 employees is continuously aware of risks facing its programs. Although CMS has shown commitment to combating fraud, at times CPI’s efforts to combat fraud compete with other mission priorities, such as (1) ensuring beneficiary access to health-care services and (2) limiting provider burden. CPI leadership has been aware of this inherent challenge. For example, at a congressional hearing in May 2016, CPI’s Director stated that “our efforts strike an important balance: protecting beneficiary access to necessary health care services and reducing the administrative burden on legitimate providers and suppliers, while ensuring that taxpayer dollars are not lost to fraud, waste, and abuse.” Beneficiary access to care. In accordance with its mission statement, providing and improving beneficiaries’ access to health care is a CMS priority. CMS’s commitment to providing access to high-quality care and coverage is reflected in the agency’s mission statement and is one of its four strategic goals. As a result, before taking administrative actions against a Medicare Part A provider, such as a hospice, or providers in rural areas, CMS officials told us that they first look at whether there is a sufficient number of providers in an area by running a provider search by provider county and adjacent counties and considering how heavily populated an area is with Medicare beneficiaries. According to these officials, rather than taking an administrative action against a provider that would limit beneficiaries’ access to services, the agency may enter into a corrective action plan with the provider. CMS officials told us that revoking a provider’s enrollment in Medicare, an option available to CMS in cases of provider noncompliance or misconduct, is rare. Administrative burden on providers. According to CMS documents and officials, concern over placing undue burden on providers—the majority of whom are presumed to be honest—provides a counterforce to implementing program-integrity control activities. CMS’s web page entitled Reducing Provider Burden states: “CMS is committed to reducing improper payments but must be mindful of provider burden because medical review is a resource-intensive process for both the healthcare provider and the Medicare review contractor.” Two CMS contractors told us that they scaled back or did not pursue audits of providers’ documentation because of provider burden or sensitivity considerations. One contractor removed providers from audit samples after some providers opposed having to supply multiple medical records. CPI officials told us that they want to reduce provider burden in a logical manner. For example, according to CMS officials, in the Medicare FFS Recovery Audit Program, CMS established limits on Additional Documentation Requests, which are requests for medical documentation supporting a claim being reviewed. CMS requires such documentation adjustments so that they align with a providers’ claim denial rates. Providers with low denial rates will have lower documentation requirements, while providers with high denial rates will have higher documentation requirements, thus adjusting provider burden based on demonstrated compliance. The assess component of the Fraud Risk Framework calls for federal managers to plan regular fraud risk assessments and to assess risks to determine a fraud risk profile. Identifying fraud risks is one of the steps included in the Fraud Risk Framework for assessing risks to determine a fraud risk profile. CMS has taken steps to identify some fraud risks through several control activities that target areas the agency has designated as higher risk within Medicare and Medicaid, including specific provider types, such as home health agencies, and specific geographic locations. As discussed earlier, CMS officials told us that CPI initially focused on developing control activities for Medicare FFS and considers these activities to be the most mature of all CPI efforts to address fraud risks. CMS has identified fraud risks in the following selected examples, which are not an exhaustive list of its control activities. Data analytics to assist investigations in Medicare FFS. In 2011, CMS implemented FPS, a data-analytic system that screens all Medicare FFS claims to identify health-care providers with suspect billing patterns for further investigation. Medicare FFS contractors—ZPICs and UPICs— have used FPS to identify and prioritize leads for investigations of potential fraud by high-risk Medicare FFS providers. Contractors told us that FPS allows them to quickly identify and triage leads. CMS’s guidance requires contractors to prioritize investigations with the greatest program impact or urgency and identifies required criteria for prioritizing investigations, such as patient abuse or harm, multistate fraud, and high dollar amount of potential overpayments. One contractor we interviewed developed a risk-prioritization model that incorporated CMS’s required criteria, such as patient harm, as well as additional criteria, such as provider spikes in billing, into a tool that automatically creates a provider risk score to help the contractor focus and prioritize investigative resources. Prior authorization for Medicare FFS services or supplies. CMS published a final rule in December 2015 that identifies a master list of durable medical equipment, prosthetics, orthotics, and supplies for which CMS can require prior authorization before suppliers submit a Medicare FFS claim. In this rule, CMS identified 135 items that are frequently subject to unnecessary utilization and stated that the agency expects the final rule to result in savings in the form of reduced unnecessary utilization, fraud, waste, and abuse. Under this program, prior authorization is a condition of payment for claims. CMS can choose which items on the master list to subject to prior authorization. For example, in March 2017, it began requiring prior authorization for selected power wheelchairs in four states and expanded the prior authorization program for these items to all states in July 2017. CMS also began to test the use of prior authorization on a voluntary basis through a series of fixed-length demonstrations for items and services that have been associated with high levels of improper payments, including high incidences of fraud in some cases, and unnecessary utilization in certain geographic areas. For example, CMS began implementing a voluntary prior authorization demonstration in September 2012 for other power mobility devices, such as power scooters, in seven states where historically there has been extensive evidence of fraud and improper payments. CMS expanded the demonstration to an additional 12 states in October 2014, for a total of 19 states. According to the initial Federal Register notice, CMS planned to use the demonstration to develop improved methods for investigation and prosecution of fraud to protect federal funds from fraudulent actions and the resulting improper payments. Under the demonstration, providers and suppliers are encouraged—but not required—to submit a request for prior authorization for certain items before they provide the item to the beneficiary and submit a claim for payment. Revised provider screening and enrollment processes for Medicare FFS and Medicaid FFS. In response to PPACA, in 2011 CMS implemented a revised screening process for providers and suppliers who enroll in Medicare and Medicaid based on identified provider risk categories. CMS placed all Medicare provider and supplier types into one of three risk categories—limited, moderate, or high—based on its assessment of the potential risk of fraud, waste, and abuse each provider and supplier type poses. For example, CMS designated prospective (newly enrolling) home health agencies and prospective suppliers of durable medical equipment, prosthetics, orthotics, and supplies in the high-risk category. According to the final rule and our interviews with CMS officials, CMS developed these risk-based categories based on its review and synthesis of various information sources about the fraud risks posed by each provider and supplier type, including (1) the agency’s experience with claims data used to identify potentially fraudulent billing practices, (2) expertise of contractors responsible for investigating and identifying Medicare fraud, and (3) GAO and OIG reports. CMS designated specific screening activities for each risk category, with increased requirements for moderate- and high-risk provider and supplier types. For example, moderate- and high-risk providers and suppliers must receive preenrollment site visits, and high-risk providers and suppliers also are subject to fingerprint-based criminal-background checks. As part of the revised screening process, beginning in September 2011, CMS also undertook its first program-wide effort to rescreen, or revalidate, the enrollment records of about 1.5 million existing Medicare FFS providers and suppliers, to determine whether they remain eligible to bill Medicare. Temporary provider enrollment moratoriums for certain providers and geographic areas for Medicare FFS and Medicaid FFS. CMS identified certain provider types and geographic areas as high risk for fraud and used its authority under PPACA to implement temporary moratoriums to suspend enrollment of such Medicare and Medicaid providers in those areas. For example, in July 2016, CMS extended temporary moratoriums statewide on the enrollment of new Medicare Part B nonemergency ambulance suppliers and Medicare home health agencies statewide in six states, as applicable. The statewide moratoriums also apply to Medicaid. According to the Federal Register notice, CMS imposed the temporary moratoriums based on qualitative and quantitative factors suggesting a high risk of fraud, waste, or abuse, such as law-enforcement expertise with emerging fraud trends and investigations. CMS’s data analysis also confirmed the agency’s determination of a high risk of fraud, waste, and abuse for these provider and supplier types within certain geographic areas, according to the notice. Medicaid state program integrity reviews and desk reviews. CMS tailored state Medicaid program-integrity reviews to areas it identified as high risk for improper payments, such as personal care services, which may also be at high risk for fraud. In March 2017, we reported that, from fiscal years 2014 through 2016, CMS conducted focused reviews of state program-integrity efforts in 31 states, reviewing 10 or 11 states annually. For each state, CMS tailored its focused reviews to the state’s managed care plans and relevant other high-risk areas, including provider enrollment and screening, nonemergency medical transportation, and personal care services. CMS and state officials we spoke with as part of that work told us that the tailored oversight had been beneficial and helped identify areas for improvement. CMS has also initiated desk reviews of state program-integrity efforts. According to CMS, these desk reviews allow the agency to provide states with customized program- integrity oversight. Vulnerability tracking system for Medicare. CPI recently initiated an effort to centralize and formalize a vulnerability tracking process for Medicare, which could support identification of specific fraud risks, both in Medicare and possibly Medicaid. As described by CPI officials, the process aims to collect information on fraud-related vulnerabilities from CMS employees, contractors, and other sources, such as GAO and HHS OIG reports. The assess component of the Fraud Risk Framework calls for federal managers to plan regular fraud risk assessments and assess risks to determine a fraud risk profile. Furthermore, federal internal control standards call for agency management to assess the internal and external risks their entities face as they seek to achieve their objectives. The standards state that, as part of this overall assessment, management should consider the potential for fraud when identifying, analyzing, and responding to risks. The Fraud Risk Framework states that, in planning the fraud risk assessment, effective managers tailor the fraud risk assessment to the program by, among other things, identifying appropriate tools, methods, and sources for gathering information about fraud risks and involving relevant stakeholders in the assessment process. Fraud risk assessments that align with the Fraud Risk Framework involve (1) identifying inherent fraud risks affecting the program, (2) assessing the likelihood and impact of those fraud risks, (3) determining fraud risk tolerance, (4) examining the suitability of existing fraud controls and prioritizing residual fraud risks, and (5) documenting the results. (See fig. 6.) Although, as discussed earlier, CMS has identified some fraud risks posed by providers in Medicare FFS and, to a lesser degree, Medicaid FFS, the agency has not conducted a fraud risk assessment for either the Medicare or Medicaid program. Such a risk assessment would provide the detailed information and insights needed to create a fraud risk profile, which, in turn, is the basis for creating an antifraud strategy. According to CMS officials, CMS has not conducted a fraud risk assessment for Medicare or Medicaid because, within CPI’s broader approach of preventing and eliminating improper payments, its focus has been on addressing specific vulnerabilities among provider groups that have shown themselves particularly prone to fraud, waste, and abuse. With this approach, however, it is unlikely that CMS will be able to design and implement the most-appropriate control activities to respond to the full portfolio of fraud risks. A fraud risk assessment consists of discrete activities that build upon each other. Specifically: Identifying inherent fraud risks affecting the program. As discussed earlier, CMS has taken steps to identify fraud risks. However, CMS has not used a process to identify inherent fraud risks from the universe of potential vulnerabilities facing Medicare and Medicaid programs, including threats from various sources. According to CPI officials, most of the agency’s fraud control activities are focused on fraud risks posed by providers. The Fraud Risk Framework discusses fully considering inherent fraud risks from internal and external sources in light of fraud risk factors such as incentives, opportunities, and rationalization to commit fraud. For example, according to CMS officials, the inherent design of the Medicare Part C program may pose fraud risks that are challenging to detect. A fraud risk assessment would help CMS identify all sources of fraudulent behaviors, beyond threats posed by providers, such as those posed by health-insurance plans, contractors, or employees. Assessing the likelihood and impact of fraud risks and determining fraud risk tolerance. CMS has taken steps to prioritize fraud risks in some areas, but it has not assessed the likelihood or impact of fraud risks or determined fraud risk tolerance across all parts of Medicare and Medicaid. Assessing the likelihood and impact of inherent fraud risks would involve consideration of the impact of fraud risks on program finances, reputation, and compliance. Without assessing the likelihood and impact of risks in Medicare or Medicaid or internally determining which fraud risks may fall under the tolerance threshold, CMS cannot be certain that it is aware of the most-significant fraud risks facing these programs and what risks it is willing to tolerate based on the programs’ size and complexity. Examining the suitability of existing fraud controls and prioritizing residual fraud risks. CMS has not assessed existing control activities or prioritized residual fraud risks. According to the Fraud Risk Framework, managers may consider the extent to which existing control activities—whether focused on prevention, detection, or response—mitigate the likelihood and impact of inherent risks and whether the remaining risks exceed managers’ tolerance. This analysis would help CMS to prioritize residual risks and to determine mitigation approaches. For example, CMS has not established preventive fraud control activities in Medicare Part C. Using a fraud risk assessment for Medicare Part C and closely examining existing fraud control activities and residual risks, CMS could be better positioned to address fraud risks facing this growing program and develop preventive control activities. Further, without assessing existing fraud control activities and prioritizing residual fraud risks, CMS cannot be assured that its current control activities are addressing the most-significant risks. Such analysis would also help CMS determine whether additional, preferably preventive, fraud controls are needed to mitigate residual risks, make adjustments to existing control activities, and potentially scale back or remove control activities that are addressing tolerable fraud risks. Documenting the risk-assessment results in a fraud risk profile. CMS has not developed a fraud risk profile that documents key findings and conclusions of the fraud risk assessment. According to the Fraud Risk Framework, the risk profile can also help agencies decide how to allocate resources to respond to residual fraud risks. Given the large size and complexity of Medicare and Medicaid, a documented fraud risk profile could support CMS’s resource-allocation decisions as well as facilitate the transfer of knowledge and continuity across CMS staff and changing administrations. Senior CPI officials told us that the agency plans to start a fraud risk assessment for Medicare and Medicaid after it completes a separate fraud risk assessment of the federally facilitated marketplace. This fraud risk assessment for the federally facilitated marketplace eligibility and enrollment process is being conducted in response to a recommendation we made in February 2016. In April 2017, CPI officials told us that this fraud risk assessment was largely completed, although in September 2017 CPI officials told us that the assessment was undergoing agency review. CPI officials told us that they have informed CM and CMCS officials that there will be future fraud risk assessments for Medicare and Medicaid; however, they could not provide estimated timelines or plans for conducting such assessments, such as the order or programmatic scope of the assessments. Once completed, CMS could use the federally facilitated marketplace fraud risk assessment and apply any lessons learned when planning for and designing fraud risk assessments for Medicare and Medicaid. According to the Fraud Risk Framework, factors such as size, resources, maturity of the agency or program, and experience in managing risks can influence how the entity plans the fraud risk assessment. Additionally, effective managers tailor the fraud risk assessment to the program when planning for it. The large scale and complexity of Medicare and Medicaid as well as time and resources involved in conducting a fraud risk assessment underscore the importance of a well-planned and tailored approach to identifying the assessment’s programmatic scope. Planning and tailoring may involve decisions to conduct a fraud risk assessment for Medicare and Medicaid programs as a whole or divided into several subassessments to reflect their various component parts (e.g., Medicare FFS, Medicaid managed care) as well as determining the timing and order of assessments (e.g., concurrently or consecutively for Medicare and Medicaid). CMS’s existing fraud risk identification efforts as well as communication channels with stakeholders could serve as a foundation for developing a fraud risk assessment for Medicare and Medicaid. The leading practices identified in the Fraud Risk Framework discuss the importance of identifying appropriate tools, methods, and sources for gathering information about fraud risks and involving relevant stakeholders in the assessment process. CMS’s fraud risk identification efforts discussed earlier could provide key information about fraud risks and their likelihood and impact. Further, existing relationships and communication channels across CMS and its extensive network of stakeholders could support building a comprehensive understanding of known and potential fraud risks for the purposes of a fraud risk assessment. For example, the fraud vulnerabilities identified through data analysis and information sharing with states, health-insurance plans, law-enforcement organizations, and contractors through the HFPP could inform a fraud risk assessment. CPI’s Command Center missions—facilitated collaboration sessions that bring together experts from various disciplines to improve the processes for fraud prevention in Medicare and Medicaid—could bring together experts to identify potential or emerging fraud vulnerabilities or to brainstorm approaches to mitigate residual fraud risks. As CMS makes plans to move forward with a fraud risk assessment for Medicare and Medicaid, it will be important to consider the frequency with which the fraud risk assessment would need to be updated. While, according to the Fraud Risk Framework, the time intervals between updates can vary based on the programmatic and operating environment, assessing fraud risks on an ongoing basis is important to ensure that control activities are continuously addressing fraud risks. The constantly evolving fraud schemes, the size of the programs in terms of beneficiaries and expenditures, as well as continual changes in Medicare and Medicaid programs—such as development of innovative payment models and increasing managed-care enrollment—call for constant vigilance and regular updates to the fraud risk assessment. The design and implement component of the Fraud Risk Framework calls for federal managers to design and implement a strategy with specific control activities to mitigate assessed fraud risks and collaborate to help ensure effective implementation. According to the Fraud Risk Framework, effective managers develop and document an antifraud strategy that describes the program’s approach for addressing the prioritized fraud risks identified during the fraud risk assessment, also referred to as a risk-based antifraud strategy. A risk- based antifraud strategy describes existing fraud control activities as well as any new fraud control activities a program may adopt to address residual fraud risks. In developing a strategy and antifraud control activities, effective managers focus on fraud prevention over detection, develop a plan for responding to identified instances of fraud, establish collaborative relationships with stakeholders, and create incentives to help effectively implement the strategy. Additionally, as part of a documented strategy, management identifies roles and responsibilities of those involved in fraud risk management activities; describes control activities as well as plans for monitoring and evaluation, creates timelines, and communicates the antifraud strategy to employees and stakeholders, among other things. As discussed earlier, CMS has some control activities in place to identify fraud risk in Medicare and Medicaid, particularly in the FFS program. However, CMS has not developed and documented a risk-based antifraud strategy to guide its design and implementation of new antifraud activities and to better align and coordinate its existing activities to ensure it is targeting and mitigating the most-significant fraud risks. Antifraud strategy. CMS officials told us that CPI does not have a documented risk-based antifraud strategy. Although CMS has developed several documents that describe efforts to address fraud, the agency has not developed a risk-based antifraud strategy for Medicare and Medicaid because, as discussed earlier, it has not conducted a fraud risk assessment that would serve as a foundation for such strategy. In 2016, CPI identified five strategic objectives for program integrity, which include antifraud elements and an emphasis on prevention. However, according to CMS officials, these objectives were identified from discussions with CMS leadership and various stakeholders and not through a fraud risk assessment process to identify inherent fraud risks from the universe of potential vulnerabilities, as described earlier and called for in the leading practices. These strategic objectives were presented at an antifraud conference in 2016, but were not announced publicly until the release of the Annual Report to Congress on the Medicare and Medicaid Integrity Programs for Fiscal Year 2015 in June 2017. Stakeholder relationships and communication. CMS has established relationships and communicated with stakeholders, but, without an antifraud strategy, stakeholders we spoke with lacked a common understanding of CMS’s strategic approach. Prior work on practices that can help federal agencies collaborate effectively calls for a strategy that is shared with stakeholders to promote trust and understanding. Once an antifraud strategy is developed, the Fraud Risk Framework calls for managers to collaborate to ensure effective implementation. Although some CMS stakeholders were able to describe various CMS program- integrity priorities and activities, such as home health being a fraud risk priority, the stakeholders could not communicate, articulate, or cite a common CMS strategic approach to address fraud risks in its programs. Incentives. The Fraud Risk Framework discusses creating incentives to help ensure effective implementation of the antifraud strategy once it is developed. Currently, some incentives within stakeholder relationships may complicate CMS’s antifraud efforts. As discussed earlier, CMS is a partner and provides oversight to states’ program-integrity functions. Officials from one state told us that they were reluctant to share their program vulnerabilities because CMS would use this information to later audit the state. Among contractors, CMS encourages information sharing through conferences and workshops; however, competition for CMS business among contractors can be a disincentive to information sharing. CMS officials acknowledged this concern and said that they expect contractors to share information related to fraud schemes, outcomes of investigations, and tips for addressing fraud, but not proprietary information such as algorithms to risk-score providers. Without developing and documenting an antifraud strategy based on a fraud risk assessment, as called for in the design and implement component of the Fraud Risk Framework, CMS cannot ensure that it has a coordinated approach to address the range of fraud risks and to appropriately target and allocate resources for the most-significant risks. Considering fraud risks to which the Medicare and Medicaid programs are most vulnerable, in light of the malicious intent of those who aim to exploit the programs, would help CMS to examine its current control activities and potentially design new ones with recognition of fraudulent behavior it aims to prevent. This focus on fraud is distinct from a broader view of program integrity and improper payments by considering the intentions and incentives of those who aim to deceive rather than well-intentioned providers who make mistakes. Also, continued growth of the programs, such as growth of Medicare Part C and Medicaid managed care, call for consideration of preventive fraud control activities across the entire network of entities involved. Further, considering the large size and complexity of Medicare and Medicaid and the extensive stakeholder network involved in managing fraud in the programs, a strategic approach to managing fraud risks within the programs is essential to ensure that a number of existing control activities and numerous stakeholder relationships and incentives are being aligned to produce desired results. Once developed, an antifraud strategy that is clearly articulated to various CMS stakeholders would help CMS to address fraud risks in a more coordinated and deliberate fashion. Thinking strategically about existing control activities, resources, tools, and information systems could help CMS to leverage resources while continuing to integrate Medicare and Medicaid program-integrity efforts along functional lines. A strategic approach grounded in a comprehensive assessment of fraud risks could also help CMS to identify future enhancements for existing control activities, such as new preventive capabilities for FPS or additional fraud factors in provider enrollment and revalidation, such as provider risk scoring, to stay in step with evolving fraud risks. The evaluate and adapt component of the Fraud Risk Framework calls for federal managers to evaluate outcomes using a risk-based approach and adapt activities to improve fraud risk management. Furthermore, according to federal internal control standards, managers should establish and operate monitoring activities to monitor the internal control system and evaluate the results, which may be compared against an established baseline. Ongoing monitoring and periodic evaluations provide assurances to managers that they are effectively preventing, detecting, and responding to potential fraud. CMS has established monitoring and evaluation mechanisms for its program-integrity activities that it could incorporate into an antifraud strategy. In Medicare, CMS has taken steps to measure the rate of fraud in a particular service area. We have previously reported that agencies may face challenges measuring outcomes of fraud risk management activities in a reliable way. These challenges include the difficulty of measuring the extent of deterred fraud, isolating potential fraud from legitimate activity or other forms of improper payments, and determining the amount of undetected fraud. Despite these challenges, CMS has taken steps to estimate a fraud baseline—meaning the rate of probable fraud—in the home health benefit. In fiscal year 2016, CMS conducted a pretest in the Miami-Dade area of Florida to evaluate its potential measurement approach that could later be used in a nationwide study of probable fraud among home health agencies. The pretest was not a random sample and was not intended to produce a rate of fraud, but instead was intended to test the interview instruments and data-collection methodology CMS might use in a study nationwide. CMS and its contractor collected information from home health agencies, the attending providers, and Medicare beneficiaries in the Miami-Dade area in order to test these interview instruments. CMS completed this pretest, but, according to CMS officials, the agency does not yet have plans to roll out a nationwide study that would estimate a probable fraud rate for the Medicare FFS home health benefit. In its 2015 annual report to Congress, CMS stated that “documenting the baseline amount of fraud in Medicare is of critical importance, as it allows officials to evaluate the success of ongoing fraud prevention activities.” CMS officials working on the pilot told us that having an estimate of the rate of fraud in home health benefits would allow CMS to reliably assess its efforts at eliminating or reducing fraud. Without a baseline, officials said, the agency cannot know whether its antifraud efforts are as effective as they could be. We previously reported that the lack of a baseline for the amount of health-care fraud that exists limits CMS’s ability to determine whether its activities are effectively reducing health care fraud and abuse. A baseline estimate could provide an understanding of the extent of fraud and, with additional information on program activities, could help to inform decision making related to allocation of resources to combat health-care fraud. As described in the Fraud Risk Framework, in the absence of a fraud baseline, agencies can gather additional information on the short-term or intermediate outcomes of some antifraud initiatives, which may be more readily measured. For example, CMS has developed some performance measures to provide a basis for monitoring its progress towards meeting the program-integrity goals set in the HHS Strategic Plan and Annual Performance Plan. Specifically, CMS measures whether it is meeting its goal of “increasing the percentage of Medicare FFS providers and suppliers identified as high risk that receive an administrative action.” CMS does not set specific antifraud goals for other parts of Medicare or Medicaid; other CMS performance measures relate to measuring or reducing improper payments in CHIP, Medicaid, and the various parts of Medicare. CMS uses return-on-investment and savings estimates to measure the effectiveness of its Medicare program-integrity activities and FPS. For example, CMS uses return-on-investment to measure the effectiveness of FPS and, in response to a recommendation we made in 2012, CMS developed outcome-based performance targets and milestones for FPS. CMS has also conducted individual evaluations of its program-integrity activities, such as an interim evaluation of the prior-authorization demonstration for power mobility devices that began in 2012 and is currently implemented in 19 states. Commensurate with greater maturity of control activities in Medicare FFS compared to other parts of Medicare and Medicaid, monitoring and evaluation activities for Medicare Parts C and D and Medicaid are more limited. For example, CMS calculates savings for its program-integrity activities in Medicare Parts C and D, but not a full return-on-investment. CMS officials told us that calculating costs for specific activities is challenging because of overlapping activities among contractors. CMS officials said they continue to refine methods and develop new savings estimates for additional program-integrity activities. According to the Fraud Risk Framework, effective managers develop a strategy and evaluate outcomes using a risk-based approach. In developing an effective strategy and antifraud activities, managers consider the benefits and costs of control activities. Ongoing monitoring and periodic evaluations provide reasonable assurance to managers that they are effectively preventing, detecting, and responding to potential fraud. Monitoring and evaluation activities can also support managers’ decisions about allocating resources, and help them to demonstrate their continued commitment to effectively managing fraud risks. As CMS takes steps to develop an antifraud strategy, it could include plans for refining and building on existing methods such as return-on- investment or savings measures, and setting appropriate targets to evaluate the effectiveness of all of CMS’s antifraud efforts. Such a strategy would help CMS to efficiently allocate program-integrity resources and to ensure that the agency is effectively preventing, detecting, and responding to potential fraud. For example, while doing so would involve challenges, CMS’s strategy could detail plans to advance efforts to measure a potential fraud rate through baseline and periodic measures. Fraud rate measurement efforts could also inform risk assessment activities, identify currently unknown fraud risks, align resources to priority risks, and develop effective outcome metrics for antifraud controls. Such a strategy would also help CMS ensure that it has effective performance measures in place to assess its antifraud efforts beyond those related to providers in Medicare FFS, and establish appropriate targets to measure the agency’s progress in addressing fraud risks. As CMS makes plans to move forward with a strategy and to further develop evaluation and monitoring mechanisms, it will be important to share its efforts with stakeholders. The Fraud Risk Framework states that effective managers communicate lessons learned from fraud risk management activities to stakeholders. For example, CMS could be a leader to states in measuring the effectiveness of program-integrity efforts. Officials in three of the four states we spoke with expressed interest in receiving CMS guidance on how to measure the effectiveness of their Medicaid program-integrity efforts, such as by providing models for how to calculate return-on-investment. Medicare and Medicaid provide health insurance to over 129 million Americans, but the size—in terms of number of beneficiaries and amount of expenditures—as well as complexity of these programs make them inherently susceptible to fraud and improper payments. CMS currently manages these risks across its programs as part of a broader approach to identifying and controlling for multiple sources of improper payments and by developing relationships with an extensive network of stakeholders. In Medicare and Medicaid specifically, we note that CMS has taken many important steps toward implementing a strategic approach for managing fraud. However, the agency could benefit by more fully aligning its efforts with the four components of the Fraud Risk Framework. CMS is well positioned to leverage its fraud risk management efforts— such as demonstrated leadership for combating fraud, existing control activities, and stakeholder relationships—to provide additional antifraud training, as well as to develop an antifraud strategy based on fraud risk assessments for Medicare and Medicaid. We recognize that the effort may be challenging, given the size and complexity of Medicare and Medicaid, and the need to balance antifraud activities with CMS’s other mission priorities. However, by not employing the actions identified in the Fraud Risk Framework and incorporating them in its approach to managing fraud risks, CMS is missing a significant opportunity to better ensure employee vigilance against fraud, and to organize and focus its many antifraud and program-integrity activities and related resources into a comprehensive strategy. Such a strategy would (1) provide reasonable assurance that CMS is targeting the most-significant fraud risks in its programs and (2) help protect the government’s substantial and growing investments in these programs. We are making the following three recommendations to CMS: The Administrator of CMS should provide fraud-awareness training relevant to risks facing CMS programs and require new hires to undergo such training and all employees to undergo training on a recurring basis. (Recommendation 1) The Administrator of CMS should conduct fraud risk assessments for Medicare and Medicaid to include respective fraud risk profiles and plans for regularly updating the assessments and profiles. (Recommendation 2) The Administrator of CMS should, using the results of the fraud risk assessments for Medicare and Medicaid, create, document, implement, and communicate an antifraud strategy that is aligned with and responsive to regularly assessed fraud risks. This strategy should include an approach for monitoring and evaluation. (Recommendation 3) We provided a draft of this report to HHS and DOJ for comment. HHS provided written comments, which are reprinted in appendix I. DOJ did not have comments. HHS and DOJ also provided technical comments, which we incorporated as appropriate. In commenting on this report, HHS agreed with our three recommendations. Specifically, in response to our first recommendation to provide required fraud-awareness training to all employees, HHS stated that it will develop and implement a fraud-awareness training plan to ensure all CMS employees receive training. Regarding our second recommendation to conduct fraud risk assessments for Medicare and Medicaid, HHS stated that it is currently conducting a fraud risk assessment on the federally facilitated marketplace and, when this assessment is complete, will apply the lessons learned in assessing this program to fraud risk assessments of Medicare and Medicaid. In response to our third recommendation to create, document, implement, and communicate an antifraud strategy that is aligned with and responsive to regularly assessed fraud risks, HHS stated that it will develop respective risk-based antifraud strategies after completing fraud risk assessments for Medicare and Medicaid. We are sending copies of this report to the Acting Secretary of Health and Human Services, the Administrator of CMS, the Assistant Attorney General for Administration at DOJ, as well as appropriate congressional committees and other interested parties. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-6722 or bagdoyans@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this report are listed in appendix II. In addition to the contact named above, Tonita Gillich (Assistant Director), Irina Carnevale (Analyst-in-Charge), Michael Duane, Laura Sutton Elsberg, and Catrin Jones made key contributions to this report. Also contributing to the report were Lori Achman, James Ashley, Colin Fallon, Leslie V. Gordon, Maria McMullen, Sabrina Streagle, and Shana Wallace.

Question: Write a one-page summary of the report 1.

Answer: Puerto Rico has roughly $70 billion in outstanding debt and $50 billion in unfunded pension liabilities and since August 2015 has defaulted on over $1.5 billion in debt. The effects of Hurricanes Irma and Maria will further affect Puerto Rico's ability to repay its debt, as well as its economic condition. In response to Puerto Rico's fiscal crisis, Congress passed the Puerto Rico Oversight, Management, and Economic Security Act (PROMESA) in 2016, which included a provision for GAO to review Puerto Rico's debt. This report describes the factors that contributed to Puerto Rico's financial condition and levels of debt and federal actions that could address these factors. Consistent with PROMESA, GAO focused on actions that would not increase the federal deficit. To address these objectives, GAO reviewed documents and interviewed officials from the Puerto Rico and federal governments and conducted a review of relevant literature. GAO also interviewed former Puerto Rico officials and experts in Puerto Rico's economy, the municipal securities markets, and state and territorial budgeting, financial management, and debt practices, as well as officials from the Financial Oversight and Management Board for Puerto Rico (created by PROMESA). GAO is not making recommendations based on the federal actions identified because policymakers would need to consider challenges and tradeoffs related to implementation. The Puerto Rico government generally agreed with the factors we identified and provided additional information. GAO incorporated technical comments from SEC as appropriate. The factors that contributed to Puerto Rico's financial condition and levels of debt relate to (1) the Puerto Rico government running persistent annual deficits—where expenses exceed revenues—and (2) its use of debt to cope with deficits. Based on a literature review and interviews with current and former Puerto Rico officials, federal officials, and other relevant experts, GAO identified factors that contributed to Puerto Rico's persistent deficits: The Puerto Rico government's inadequate financial management and oversight practices. For example, the Puerto Rico government frequently overestimated the amount of revenue it would collect and Puerto Rico's agencies regularly spent more than the amounts Puerto Rico's legislature appropriated for a given fiscal year. Policy decisions by Puerto Rico's government. For example, Puerto Rico borrowed funds to balance budgets and insufficiently addressed public pension funding shortfalls. Puerto Rico's prolonged economic contraction. Examples of factors contributing to the contraction include outmigration and the resulting diminished labor force, and the high cost of importing goods and energy. Additional factors enabled Puerto Rico to use debt to finance its deficits, such as high demand for Puerto Rico debt. One cause of high demand was that under federal law, income from Puerto Rico bonds generally receives more favorable tax treatment than income from bonds issued by states and their localities. Based on an assessment of relevant literature and input from current and former Puerto Rico officials, federal officials, and other relevant experts, GAO identified three potential federal actions that may help address some of these factors. GAO also identified considerations for policymakers related to these actions. Modify the tax exempt status for Puerto Rico municipal debt. Making interest income from Puerto Rico bonds earned by investors residing outside of Puerto Rico subject to applicable state and local taxes could lower demand for Puerto Rico debt. However, reduced demand could hinder Puerto Rico's ability to borrow funds for capital investments or liquidity. Apply federal investor protection laws to Puerto Rico. Requiring Puerto Rico investment companies to disclose risks with Puerto Rico bonds and adhere to other requirements could lower demand for the bonds. However, this action could also limit Puerto Rico's ability to borrow funds. Modify the Securities and Exchange Commission's (SEC) authority over municipal bond disclosure requirements. SEC could be allowed to require timely disclosure of materials—such as audited financial statements—associated with municipal bonds. Over the past decade, Puerto Rico often failed to provide timely audited financial statements related to its municipal bonds. Timely disclosure could help investors make informed decisions about investing in municipal bonds. However, a broad requirement could place additional burdens on all U.S. municipal issuers, such as the costs of standardizing reporting.