Background

In conducting their operations, farmers are exposed to financial losses  because of production risks—droughts, floods, and other natural  disasters—as well as price risks. The federal government has played an  active role in helping to mitigate the effects of these risks on farm income  by promoting the use of crop insurance. RMA has overall responsibility for  administering the federal crop insurance program, including controlling  costs and protecting against fraud, waste, and abuse. RMA partners with  15 private insurance companies that sell and service the federal  program’s insurance policies and share a percentage of the risk of loss  and opportunity for gain associated with the policies.
Through the federal crop insurance program, farmers insure against  losses on more than 100 crops. These crops include major crops—such  as corn, cotton, soybeans, and wheat, which accounted for three-quarters  of the acres enrolled in the program in 2011—as well as nursery crops  and certain fruits and vegetables. For the purposes of this report, we  generally refer to participants in the federal crop insurance program as  participating farmers.
Most crop insurance policies are either production-based or revenue- based. For production-based policies, a farmer can receive a payment if  there is a production loss relative to the farmer’s historical production per  acre. Revenue-based policies protect against crop revenue loss resulting  from declines in production, price, or both. The federal government  encourages farmers’ participation in the federal crop insurance program  by subsidizing their insurance premiums and acting as the primary  reinsurer for the private insurance companies that take on the risk of  covering, or “underwriting,” losses to insured farmers. A common  measure of crop insurance program participation is the percentage of  planted acres nationwide for major crops that are enrolled in the program.
In addition, the federal government pays administrative expense  subsidies to insurance companies as an allowance that is intended to  cover their expenses for selling and servicing crop insurance policies. In  turn, insurance companies use these subsidies to cover their overhead  expenses, such as payroll and rent, and to pay commissions to insurance  agencies and agents. Companies also incur expenses associated with  verifying—adjusting—the amount of loss claimed. These expenses  include, for example, loss adjusters’ compensation and their travel  expenses to farmers’ fields. The financial relationships among the federal  government, private insurance companies, agents, and farmers are  illustrated in figure 1.
For 2011, the federal government’s subsidy costs were about $7.4 billion  for crop insurance premiums and about $1.3 billion for administrative  expenses. Crop insurance premium subsidies are not payments to  farmers, but they can be considered a financial benefit. Without a  premium subsidy, a participating farmer would have to pay the full amount  of the premium. The administrative expense subsidies also can be  considered a subsidy to farmers; with these subsidies, crop insurance  premiums are lower than they would otherwise be if the program followed  commercial insurance practices. In private insurance, such as automobile  insurance, these administrative expenses typically are included in the  premium that a policy holder pays.
ARPA and the 2008 farm bill set premium subsidy rates, that is, the  percentage of the premium paid by the government. Premium subsidy  rates vary by the level of insurance coverage that the farmer chooses and  the geographic diversity of the crops insured. For most policies, the  statutory subsidy rates range from 38 percent to 80 percent. Table 1  shows the total costs of subsidies for all crop insurance premiums and  administrative expenses for 2000 through 2011. The table shows that  premium subsidies have generally increased since 2000, both in dollars  and as a percentage of total premiums. The premium subsidy rates,  authorized by ARPA, became effective in 2001. Premium subsidies  increased, as a percentage of total premiums, from 37 percent in 2000 to  60 percent in 2001. In addition, premium subsidies rose as crop prices  increased.
As crop prices increase, the value of the crops being insured increases,  which results in higher crop insurance premiums and premium subsidies.  For example, the prices of major crops were substantially higher in 2011  than in 2006, and premium subsidies in 2011 (about $7.4 billion) were  substantially higher than in 2006 (about $2.7 billion). USDA forecasts that  the prices of major crops—corn, cotton, soybeans, and wheat—will  continue to be substantially higher than 2006 prices through 2016.  Administrative expense subsidies also increased because of higher crop  prices. However, RMA capped administrative expense subsidies in the  2011 standard reinsurance agreement (SRA), a cooperative financial  agreement between USDA and insurance companies. These changes  became effective in 2011. As a result, administrative expense subsidies  were lower in 2011 than they otherwise would have been.

		Crop Insurance Participation and Disaster Assistance Payments

The federal government provides crop insurance subsidies to farmers in  part to achieve high crop insurance participation and coverage levels,  which are intended, according to USDA economists, to reduce or  eliminate the need for ad hoc disaster assistance payments to help  farmers recover from natural disasters, which can be costly. For example,  under three separate congressionally authorized ad hoc crop disaster  programs, USDA provided $7 billion in disaster assistance payments to  farmers whose crops were damaged or destroyed by natural disasters  from 2001 through 2007.
Congress established a standing disaster program in the 2008 farm bill— the Supplemental Revenue Assistance Payments Program. Under this  program, Congress funded a $3.8 billion permanent trust fund and  directed the Secretary of Agriculture to make crop disaster assistance  payments to eligible farmers who suffer crop losses on or before  September 30, 2011. USDA—through FSA—began making disaster  payments under this program in early 2010 for crop losses incurred in  2008. To qualify for a disaster assistance payment under this program, a  farmer must have purchased either federal crop insurance coverage or be  covered under the Noninsured Crop Disaster Assistance Program for all  crops of economic significance on their farming operation. Without  reauthorization, the Supplemental Revenue Assistance Payments  Program will not make payments on losses caused by natural disasters  that occurred after September 30, 2011.
Farmers’ participation in the federal crop insurance program and  spending on ad hoc disaster assistance have been policy issues for more  than 30 years. According to a 2005 USDA publication, Congress passed  the Federal Crop Insurance Act in 1980 to strengthen participation in the  crop insurance program with the goal of replacing the costly disaster  assistance programs.acres enrolled in the program, the percentage of eligible acres of major  crops and the percentage of a crop’s market value insured—the coverage  level. According to the USDA publication, the government has historically   Crop insurance participation can be measured by  attempted to increase participation by subsidizing premiums. Under the  1980 law, the government offered premium subsidy rates of up to 30  percent. However, by 1994, less than 40 percent of eligible acreage was  enrolled in the program, and Congress had passed ad hoc disaster  assistance totaling nearly $11 billion. In order to increase participation,  according to the USDA publication, the Federal Crop Insurance Reform  Act of 1994 increased premium subsidy rates. Farmers responded by  enrolling more acres. Enrollment was about 100 million acres in 1993  before the act and about 182 million acres in 1997. Under ARPA,  premium subsidy rates increased again in 2001. Farmers subsequently  purchased more insurance at higher coverage levels. With the increases  in acres enrolled and coverage levels, premium subsidy costs increased.  The 2005 USDA publication noted that by 2004 premium subsidies  totaled nearly $2.5 billion and had become an increasingly costly way of  encouraging participation. As shown in table 1, premium subsidies  reached $7.4 billion in 2011.

		Potential for Fraud, Waste, and Abuse in the Federal Crop Insurance Program

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

		Data Mining to Prevent and Detect Fraud, Waste, and Abuse

RMA uses data mining—a technique for extracting knowledge from large  volumes of data—to detect potential cases of fraud, waste, or abuse by  (1) developing scenarios of potential program abuse by farmers,  insurance agents, and loss adjusters and (2) querying the database  containing crop insurance data and information on weather, soil, and land  surveys to generate reports and lists of participating farmers with  anomalous claim payments. RMA has contracted with the Center for  Agribusiness Excellence, located at Tarleton State University in  Stephenville, Texas, to conduct data mining since 2001. Following USDA  written procedures, RMA and the insurance companies are to use data  mining results to conduct reviews of the claims to determine if there is  actual fraud, waste, or abuse. The data mining tools that RMA uses  include the following:
List of farmers with anomalous claim payments. Through data mining,  RMA develops a list of farmers with anomalous claim payments.RMA annually provides this list to FSA, which assists RMA in  monitoring these farmers. Under USDA guidance, FSA county offices  are to conduct two inspections (postplanting and preharvest) for each  policy these farmers hold. FSA county offices are then to report to  RMA on whether they inspected the crop and, if so, whether the  inspection determined that (1) the inspected farmer’s crop was in  good condition; (2) the inspected farmer’s crop was not in good  condition, but other farmers’ crops in the local area were in good  condition; or (3) the inspected farmer’s crop was not in good  condition, and other farmers’ crops in the local were also not in good  condition.
List of insurance agents and adjusters with anomalous losses. ARPA  requires the Secretary of Agriculture to establish procedures that RMA  can use to develop a list of insurance agents and loss adjusters with  anomalous losses—losses that are higher than those of their peers in  the same geographic area—and to review this list to determine  whether the anomalous losses are the result of fraud, waste, or  abuse. RMA uses data mining and scenarios it has developed for  fraud, waste, and abuse to identify these insurance agents and  adjusters.
The RMA contractor’s data mining reports identify individual farmers with  anomalous claim payments or insurance agents and adjusters with  anomalous losses, but these anomalies only indicate potential cases of  fraud, waste or abuse. These claims and losses may be legitimate,  resulting from unusual weather or other conditions on a farm. As such, a  portion of each list inevitably represents “false positives”—farmers whose  claims were valid. To determine if there is actual fraud, waste, or abuse,  RMA or the insurance company must engage in additional review. Such  reviews may require RMA or the company to, among other things,  analyze the claims, appraisal sheets, special adjuster reports,  photographs, and receipts for inputs, such as seeds and fertilizer. These  reviews are needed to determine the validity of the data mining reports;  providing feedback on the reports’ validity to the data mining contractor  enables RMA’s contractor to refine its data mining tools, thereby  improving the detection of fraud, waste and abuse.

		Standard Reinsurance Agreement

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

		Farm Programs’ Income and Payment Limits and Other Eligibility Standards

Unlike the crop insurance program, many USDA farm programs— including income support programs, conservation programs, and disaster  assistance programs—have statutory income and payment limits that  apply to individual farmers and legal entities. Income limits set the  maximum amount of income that a person or legal entity can earn and  still remain eligible for certain farm program payments. For example, a  person or legal entity with an average adjusted gross farm income (over  the preceding 3 tax years) exceeding $750,000 is generally ineligible for  direct payments. Payment limits set the maximum payment amount that  a person or legal entity can receive per year from a farm program. For  example, for direct payments, the payment limit in the 2008 farm bill is  generally $40,000 per person or legal entity. For a disaster assistance  program, the annual payment limit is $100,000 per person or legal  entity. Additional income and payment limits for selected farm programs  are described in appendix II.
GAO, Farm Program Payments: USDA Needs to Strengthen Regulations and Oversight  to Better Ensure Recipients Do Not Circumvent Payment Limitations, GAO-04-407  (Washington, D.C.:  Apr. 30, 2004).
Revenue Election Program payments under the 2008 farm bill,individual or entity must be “actively engaged in farming.” To be  considered actively engaged in farming, an individual must, among other  things, make significant contributions to a farming operation in (1) capital,  land, or equipment and (2) personal labor or active personal  management. An entity is considered actively engaged in farming if,  among other things, the entity separately makes a significant contribution  of capital, land, or equipment, and its members collectively make a  significant contribution of personal labor or active personal management.  In addition, participants in many farm programs who farm in areas  identified as having highly erodible land or a wetland must comply with  certain land and environmental conservation requirements for payment  eligibility purposes. Participants who fail to abide by or apply approved  conservation practices on land identified as highly erodible or a wetland  are subject to payment reductions or total ineligibility for program  payments.

	A Limit on Crop Insurance Subsidies Would Lower Program Costs

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

		A Potential Limit on Crop Insurance Subsidies Would Have Resulted in Savings for 2011

Without limits on the premium subsidies in the crop insurance program,  the nearly 900,000 farmers participating in the program received premium  subsidies of $4.7 billion in 2010 and $7.4 billion in 2011. Applying limits  on premium subsidies to participating farmers, similar to the payment  limits for other farm programs, would lower program costs and save  federal dollars, according to our analysis of RMA data. Using a limit of  $40,000 per participating farmer for premium subsidies for this period— the limit applied to direct payments—we identified significant potential  savings to the federal government—savings of up to $358 million for 2010  and $1 billion for 2011.
The amount of these savings may depend on whether, and the extent to  which, farmers and legal entities reorganized their business to avoid or  lessen the effect of limits on premium subsidies. As we have previously  reported regarding payment limits for other farm programs, some farming  operations may reorganize to overcome payment limits to maximize their  farm program benefits.  For these farmers and legal entities, it is unclear  whether further reorganization to lessen the effect of limits on premium  subsidies would occur. In addition, in some instances, the requirement  that an individual or entity be actively engaged in farming to receive farm  program benefits is likely to prevent the creation of entities in order to  avoid a limit on premium subsidies. Finally, some farmers would likely  begin to report their spouse as a member of the farming operation, which  under payment limit rules enables an operation to double the amount of  benefits it can receive.
In particular, if a $40,000 limit on premium subsidies had been applied in  2010, up to 13,309 farmers—1.5 percent of all participating farmers— would have seen their subsidies reduced, for an annual savings of up to  $358 million to the federal government. For 2011, if the limit had been  applied, up to 33,690 farmers—3.9 percent of all participating farmers— would have received reduced subsidies, at an annual savings of up to $1  billion. The number of participating farmers receiving more than $40,000  in premium subsidies increased from 2010 to 2011 because crop prices  increased. Higher crop prices increased the value of crops insured,  resulting in higher crop insurance premiums and hence a higher subsidy  level. Figures 2 and 3 provide more information about the distribution of  premium subsidies among participating farmers in 2010 and 2011. The  figures show the number of participating farmers by the level of premium  subsidies that individual farmers (i.e., persons or legal entities) received.
GAO-04-407. Since we issued this report, the 2008 farm bill decreased the incentive to  reorganize a farming operation in order to avoid a limit on farm program payments by  eliminating the “three-entity rule” and requiring direct attribution of payments to individuals.
In 2010, the average value of the premium subsidies received by  participating farmers was $5,339. Thirty-seven participating farmers  each received more than $500,000 in premium subsidies. The  participating farmer receiving the most in premium subsidies—a total  of about $1.8 million—was a farming operation organized as a  corporation that insured cotton, tomatoes, and wheat across two  counties in one state. In addition, the cost of the administrative  expense subsidies that the government spent on behalf of this  corporation was about $309,000. Another of the 37 participating  farmers was an individual who insured corn, forage, potatoes,  soybeans, sugar beets, and wheat across 23 counties in six states, for  a total of about $1.6 million in premium subsidies. In addition, the cost  of the administrative expense subsidies that the government spent on  behalf of this farmer was about $443,000.
In 2011, the average value of the premium subsidies received was  $8,312. Fifty-three of these farmers each received more than  $500,000 in premium subsidies. The largest recipient was a  corporation that insured nursery crops across three counties in one  state, for a total of about $2.2 million in premium subsidies. In  addition, the administrative expense subsidies that the government  spent on behalf of this corporation totaled about $816,000. Another of  the 53 farmers was an individual who insured canola, corn, dry beans,  potatoes, soybeans, sugar beets, and wheat across eight counties in  two states, for a total of about $1.3 million in premium subsidies. In  addition, the administrative expense subsidies that the government  spent on behalf of this farmer totaled about $499,000.
Alternatively, recent studies—noting the rising cost of premium  subsidies—have proposed reducing premium subsidy rates for all  participating farmers to achieve savings.subsidy rate for 2010 and 2011 had been reduced by 10 percentage  points—from 62 percent to 52 percent—for all participating farmers, the  annual cost savings for those years would have been about $759 million  and $1.2 billion, respectively.
For example, if the premium  We also examined the effect on costs for the federal crop insurance  program of applying a crop insurance subsidy limit to administrative  expense subsidies, as well as premium subsidies. Additional savings  would be realized, according to our analysis. For example, if a limit of  $40,000 per farmer for both premium subsidies and administrative  expense subsidies had been applied to the crop insurance program for  2011, up to 52,693 farmers (6 percent of all participating farmers) would  have seen their subsidies reduced, at an annual savings of up to nearly  $1.8 billion to the federal government. In contrast, applying limits to  premium subsidies alone would have resulted in a savings of about $1  billion. Additional information about the 2010 and 2011 cost of premium  subsidies and administrative expense subsidies by farmer is in appendix  IV.

		Limiting or Reducing Premium Subsidies Raises Other Considerations

In addition to federal cost savings, we identified a number of other  considerations that may come into play in deciding whether to limit  premium subsidies to individual farmers. These considerations include (1)  the potential effect on the financial condition of large farms (i.e., those  with annual gross sales of $1 million or more), whose owners are most  likely to be affected by subsidy limits; (2) the availability of other risk  management tools against crop losses, such as marketing contracts; and  (3) the potential effect on beginning and smaller farmers. In addition, we  identified considerations associated with either limiting premium subsidies  to large farmers or reducing premium subsidy rates for all farmers.
The application of limits of $40,000 in premium subsidies to farmers  participating in the federal crop insurance program would primarily affect  farmers who have large farms. For example, as discussed earlier, using  our data for 2011, these participating farmers represented 3.9 percent of  the farmers participating in the crop insurance program in 2011 and  accounted for 32.6 percent of the premium subsidies. In view of the  insured value of these farmers’ crops, they likely had annual gross sales  approaching or exceeding $1 million. In addition, the insured value of  these farmers’ crops represented about 26 percent of the total value of  insured crops in 2011. Limiting premium subsidies to farmers may raise  concerns about how these limits could affect large farms’ financial  condition. Based on our review of data from USDA’s Agricultural  Resource Management Survey on the financial condition of farms, by  farm size, large farms are better positioned than smaller farms to pay a  higher share of their premiums. Specifically, according to the USDA data:
During 2008 and 2009, the most recent years for which USDA data  were available, the largest farms with crop insurance coverage (i.e.,  those with annual gross sales of $1 million or more) earned an  average annual net farm income of about $561,000. In contrast, the  next two farm categories (farms with annual gross sales of from  $500,000 to $1 million and farms with annual gross sales of from  $250,000 to $500,000) had average annual net farm incomes of about  $184,000 and $92,000, respectively.
The largest farms with crop insurance coverage had higher relative  profitability as measured by rate of return on equity, which is the ratio  of net farm income to the net worth of the farm. These farms had an  average rate of return on equity of 8.8 percent. In contrast, the next  two farm categories had rates of 4.5 percent and 1.9 percent,  respectively.
The largest farms had higher debt-to-asset ratios than the next two  farm categories,covering principal payments and interest on term debt was greater.  Furthermore, a high debt-to-asset ratio is not necessarily a problem,  as long as the rate of return on assets exceeds the interest rate on the  funds borrowed. On average, farms with sales greater than $5 million  generate more net cash income per dollar of assets than other farms,  and the larger gross cash income can be used to pay interest or  reduce loan balances.  but the largest farms’ ability to service debt by  In addition, regarding the financial condition of large farms, a related  consideration is the global competiveness of U.S. agriculture. According  to critics of limits on farm program benefits, larger farms should not be  penalized for the economies of size and efficiencies they have achieved,  and farm programs should help make U.S. farmers more competitive in  global markets.
If the large farmers affected by a limit on premium subsidies were to  reduce their coverage, they may be able to self-insure through a variety of  risk management methods, including the following:
Marketing contracts. Marketing contracts reduce price risks and are  already used by many large farmers. These contracts are either  verbal or written agreements between a buyer and a farmer that set a  price for a commodity before harvest or before the commodity is ready  to be marketed.
Futures contracts and hedging. A futures contact is a financial  contract obligating the buyer to purchase an asset (or the seller to sell  an asset), such as a commodity, at a predetermined future date and  price. Futures contracts detail the quality and quantity of the  underlying asset and are standardized to facilitate trading on a futures  exchange. Futures can be used to hedge on the price movement of  the underlying asset. For example, a producer of corn could use  futures to lock in a certain price and manage risk (hedge).
Crop and other enterprise diversification. Diversification is a risk  management strategy that involves participating in more than one  activity. A crop farm, for example, may have several productive  enterprises (i.e., several different crops or both crops and livestock),  or may operate nonadjacent parcels so that local weather disasters  are less likely to reduce yields for all crops simultaneously.
Liquid credit reserves. Farmers may maintain liquid credit reserves,  such as an open line of credit, to generate cash quickly to meet  financial obligations in the face of an adverse event. Liquid credit  reserves reflect unused borrowing capacity.
Private insurance. Certain agricultural risks—such as the risks  associated with hail and other weather events damage—are insured  by private companies without subsidized premiums.
Unlimited premium subsidies for individual farmers and farm entities may  compound challenges that beginning and smaller farmers already face.  For example, we reported in 2007 that the challenges facing beginning  farmers include obtaining capital to purchase land and that the rising cost  of land, driven in part by farm program subsidies, may make it difficult for  beginning farmers to purchase land. According to USDA studies, farm  program payments and other benefits, such as premium subsidies, result  in higher prices to buy or rent land because, in some cases, the benefits  go directly to landowners—resulting in higher land value—and in other  cases the benefits go to tenants, prompting landlords to raise rental  rates. Furthermore, a recent USDA report explained how farm program  payments may provide an advantage to larger farms.report, “For some farmers, payments may provide opportunities to  increase the size of their operation. A steady stream of income may allow  recipients to gain access to higher levels of credit or may allow them to  increase their rental or purchase bids for land. This may provide  opportunities for them to increase in size while driving out competition  from smaller farms that don’t have access to the same levels of capital,  which can impact the overall structure of agriculture.”
We identified additional considerations associated with either limiting  premium subsidies to large farms or reducing premium subsidy rates for  all farmers.
Premium subsidy limits or reduced premium subsidy rates could lead to  lower participation in the federal crop insurance program and higher  disaster assistance payments to farmers. In the past, Congress has  authorized ad hoc disaster assistance payments to help farmers whose  crops were damaged or destroyed by natural disasters. However, in view  of the nation’s budgetary pressures, Congress may be less willing to  approve such payments than it has in the past. In addition, according to a   the increasing importance of crop  Congressional Budget Office report,insurance to private lenders who provide farm loans may cause farmers  to continue to participate in the crop insurance program, even if premium  subsidies were reduced. Furthermore, assuming they are eligible to  purchase unsubsidized crop insurance, farmers could still enroll all of  their eligible crop acres in the program, making them eligible to receive  claim payments on these acres. In the event of a loss, farmers who chose  to maintain crop insurance coverage as they had in the past would then  have the same level of protection.
As a member of the World Trade Organization, the United States has  made commitments to limit domestic agricultural support that is most  likely to distort trade. Under the current World Trade Organization  agreement, the United States is committed to spending no more than  $19.1 billion per year on this support. Keeping this domestic agricultural  support below this limit is likely to be a consideration of policymakers  when they are developing or modifying farm programs. In August 2011,  when the United States reported its domestic agricultural support for 2009  to the World Trade Organization, it included the value of crop insurance  premium subsidies—$5.4 billion—in its submission as nonproduct- specific support. This $5.4 billion was the largest amount reported as  nonproduct-specific support, which totaled $6.1 billion. However, under  the current agreement, nonproduct-specific support in 2009 did not count  toward the United States’ limit of $19.1 billion.

	RMA Has Not Maximized the Use of Data Mining Tools, Largely Because of Competing Priorities

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

		Letters to Farmers Have Prevented Fraud, Waste, and Abuse, but RMA Has Not Fully Used This Data Mining Tool

Using data mining, RMA has identified farmers with anomalous claim  payments (listed farmers), as called for under USDA procedures  developed pursuant to an ARPA requirement. In addition, as described in  these procedures, at RMA’s request, FSA has sent letters informing these  farmers that an official in the FSA county office would inspect the crop in  at least one of their fields during the growing season and report the  results of the field inspection to RMA. For example, in 2010—the most  recent year for which data are available—RMA asked FSA to send letters  to 1,747 listed farmers for each of their 2,452 policies with anomalous  claim payments. RMA officials told us that the letters act as a warning and  have substantially reduced total claims, by an estimated $838 million from  2001 through 2010. According to RMA officials, about two-thirds of the  farmers who receive a letter from FSA reduce or stop filing claims for at  least 2 or 3 years following receipt of the letter, and one-third of farmers  make additional anomalous claims after being placed on the list; some of  these claims are likely to be legitimate.
The value of identifying farmers with anomalous claim payments may be  undermined, however, by the fact that FSA does not complete all field  inspections, and neither FSA nor RMA has a process to ensure that the  results of all completed inspections are accurately reported, in  accordance with USDA’s written procedures. In particular, in 2009 and  2010, RMA did not have field inspection results for 20 percent and 28  percent, respectively, of the fields for farmers listed as having anomalous  claim payments. Four states—California, Colorado, Florida, and Texas— accounted for more than 40 percent of the missing data. For example, in  Florida, FSA inspected a field for 8 of the 88 farmers with anomalous  claim payments, according to our review of RMA records. If FSA does not  complete all field inspections requested by RMA, not all farmers who  have had anomalous claim payments will be subject to a review,  increasing the likelihood that fraud, waste, or abuse may occur without  detection. Table 2 shows the number of requests RMA made for FSA field  inspections and the percentage of fields inspected for 2009 and 2010 in  selected states.
We identified three reasons for the absence of FSA field inspections.  First, we found that FSA state offices are not required to monitor the  completion of field inspections conducted by FSA county offices during  the growing season. Without FSA state office monitoring of RMA- requested field inspections, FSA county offices may have less incentive  to complete them. The FSA state offices in the six states we reviewed  varied in how closely they monitor these field office inspections. In  particular, in Minnesota and North Dakota, FSA state offices monitored  completion of field inspections and, in 2010, in these states, FSA county  offices had 111 and 183 field inspections to conduct, respectively, and  completed 97 percent and 92 percent, respectively, of these inspections.  In Minnesota, according to an FSA official we spoke with, the state office  “encouraged” completion of field inspections by e-mailing all of the state’s  FSA county offices a list of offices that had not completed their  inspections. In North Dakota, a state FSA official attributed the state’s  high rate of completed inspections largely to the fact that the state office  monitors the rate of field inspections during the growing season,  encouraging county offices that have not completed their inspections to  do so. In contrast, California, Colorado, and Florida each had from 24 to  85 inspections to conduct and completed from none to 44 percent of  these inspections. FSA officials from California and Florida agreed that it would be a good practice to monitor the completion of field inspections  during the growing season at the state or district level to hold the county  offices accountable.
Second, FSA state officials in two of the four states with low inspection  rates told us that insufficient resources were a key reason that county  offices had not completed FSA inspections. These officials said that  staffing had decreased for the past several years, but workload had  increased.
Third, some FSA state officials said that county office staff may hesitate  to spend time and effort on inspections when they do not believe the  inspections will have any impact. For example, they said that neither they  nor county officials are informed of any action taken on their inspection  results and that county officials are discouraged when their inspections do  not result in actions against the farmers who appear to be engaged in  negligent farming practices. However, at least one RMA compliance  office—RMA’s Northern Regional Compliance Office—does provide  feedback to FSA. This office is responsible for Iowa, Minnesota, Montana,  North Dakota, South Dakota, Wisconsin, and Wyoming. According to an  FSA official in North Dakota, RMA’s Northern Regional Compliance Office  sends FSA state officials letters describing the results of reviews RMA  requested the insurance companies to conduct based on FSA  inspections, and the state officials are to forward this information to the  counties.
In addition, in 2010, as provided for under the SRA, RMA regional  compliance offices directed insurance companies to review and report on  farmers’ policies to ascertain whether fraud, waste, or abuse had  occurred. These RMA offices have generally directed such reviews in two  situations. First, when FSA inspectors reported that farmers’ crops were  in worse condition than their peers, RMA regional compliance offices may  direct companies to analyze the claims, documenting their work with  appraisal sheets, special adjuster reports, pictures, and receipts for inputs  such as seeds and fertilizer. Second, when farmers have anomalous  claims data related to production history—a key factor in determining the  total claims farmers make—RMA offices may direct the insurance  companies to review these policies.
USDA’s Office of the Inspector General reported in 2009 that RMA lacks  documented procedures for following up on cases where farmers file  claims after FSA’s field inspections indicate that crops are in good  condition, and the farmer should not experience a loss.  Under the  Standards for Internal Control in the Federal Government, federal  agencies are to employ control activities, such as clearly documenting  internal control in management directives, administrative policies, or  operating manuals, and the documentation is to be readily available for  examination. Without documented agency policies and procedures for  reviewing farmers’ policies identified by data mining reports, RMA cannot  provide reasonable assurance that the farmers’ policies would be  reviewed consistently. The Inspector General added that, since RMA’s  resources are not unlimited, the agency should consider requiring that  insurance companies perform as much of this work as possible. In this  regard, as we noted above, about one-third of farmers listed as having  anomalous claim payments again claim losses after being placed on the  list. RMA has not maximized the use of the list of farmers with anomalous  claim payments by, for example, directing insurance companies to review  these farmers’ claims before paying them after FSA has reported the  crops to be in good condition. According to three current and former RMA  and Office of the Inspector General officials, because these farmers have  previously had anomalous claim payments, their claims warrant a review,  particularly when FSA’s inspection found their crops to be in good  condition within weeks of the time that the farmer made a claim.

		USDA May Use the List of Agents and Adjusters with Anomalous Losses to Corroborate Other Information, but RMA Does Not Conduct Required Reviews

Investigators from RMA and USDA’s Office of the Inspector General said  that they use the list of insurance agents and loss adjusters with  anomalous losses at times to corroborate information from other  sources—such as the Office of the Inspector General’s fraud hotline— rather than as a basis for initiating reviews. However, RMA has not fully  met a statutory ARPA requirement to conduct a review of agents and  adjusters with higher losses than their peers to determine whether the  losses associated with these individuals are the result of fraud, waste, or  abuse.
Officials from RMA and its data mining contractor told us of an instance in  which an investigator in USDA’s Office of the Inspector General used the  list of insurance agents and loss adjusters with anomalous losses as a  starting point. Based on information in the list, the investigator began  calling other USDA Inspector General investigative offices to determine  whether they were also familiar with an agent who frequently had large  anomalous losses. As a result of the list and telephone calls, the  investigator identified an Inspector General hotline informant who had  filed complaints about the same agent; the investigator initiated a review  that became the largest crop insurance fraud case in U.S. history; this  case involved tobacco farmers and insurance agents and adjusters  working together. According to the Office of the Inspector General, the  case may result in lower program costs of more than $80 million and  continues to expand to more related reviews.
We also found that RMA had not fully met a requirement to conduct a  review of agents and adjusters with higher losses than their peers to  determine whether the losses associated with these individuals are the  result of fraud, waste, or abuse. In 2009, the Inspector General found that  RMA was not reviewing these individuals and recommended that RMA  develop policies and procedures for reviewing disparately performing  agents and adjusters to assess whether the higher-than-average loss  ratios for the agents and adjusters identified are the result of potential  fraud, waste, or abuse. According to RMA officials we interviewed, RMA  had not fully met this requirement because of resource constraints,  among other things. These officials told us that investigating agents and  loss adjusters is more complex and time-consuming than investigating  individual farmers because one agent or adjuster may be identified with a  dozen or more policies. In addition, officials said, the insurance company  database used to develop the list includes agents who are not servicing  the policy they are identified with. RMA officials told us that they have  discussed the problem of inaccurate data with insurance companies and  that the companies have made improvements, but they could not specify  the extent of the problem or the improvements. Some RMA officials also  pointed out that investigators use many different data mining tools and  that it may be a better use of resources if the requirement for RMA to  review the list of agents and adjusters was changed to allow RMA to  review agents and adjusters and farmers using a variety of data mining  tools, such as a software program that helps investigators identify links  among producers, agents, or adjusters who are jointly engaged in  activities that are anomalous. In addition, in response to another 2000  ARPA requirement, RMA included in the 2011 SRA a provision directing  insurance companies to annually evaluate the performance of every  agent and loss adjuster, including their loss ratios and the number and  type of errors made by an agent or adjuster. The SRA does not, however,  require additional focus on agents and adjusters identified as having  anomalous losses through data mining.

		Competing RMA Priorities Result in Limited Time to Conduct Reviews of Farmers and Agents and Adjusters Identified by Data Mining Tools

According to RMA documents we examined and five of the six RMA  regional compliance officials we spoke with, RMA staff devote most of  their time to three priority compliance activities aimed at detecting fraud,  waste, and abuse in crop insurance. As a result, they have limited time to  review individuals identified by data mining tools, such as the list of  farmers with anomalous claim payments and the list of agents and  adjusters with anomalous losses. Specifically, regional compliance offices  are responsible for carrying out the following priority activities:
Reconciling conflicting RMA/FSA data associated with an FSA  disaster assistance program, the Supplemental Revenue Assistance  Payments Program. RMA headquarters directs staff to reconcile RMA  data, such as the number of acres for which a farmer is claiming a  loss, with FSA data on the number of acres planted. According to an  RMA document, as of August 5, 2011, FSA had identified more than  5,000 discrepancies for 2008 and 2009 and sent these to RMA, and  RMA regional compliance offices had resolved over half of them. RMA  officials said that they do not use data mining to determine priorities  for reconciliations because they are required to reconcile every  discrepancy referred by FSA, even if it is a $10 discrepancy. In  addition, the RMA Administrator told us that insurance companies that  are asked to help RMA resolve discrepancies have discussed the  substantial costs they incur to correct small errors.
Reviewing crop insurance policies to comply with the Improper  Payments Information Act of 2002. RMA staff review 250 randomly  selected policies each year, as agreed with the Office of Management  and Budget, to estimate a payment error rate. Some RMA officials  said that they would prefer to focus more attention on using data  mining to review high-risk policies to detect and prevent fraud, waste,  and abuse and focus less attention on conducting reviews to estimate  an error rate.
Reviewing potential cases of fraud, waste, or abuse in the crop  insurance program that were identified through hotline calls and  referred by USDA’s Inspector General. According to RMA data, each  year the agency opens and closes several hundred cases of potential  fraud, waste, and abuse involving thousands of crop insurance  policies; some field offices reported having large backlogs of cases to  address. Several RMA officials said they would like to use data mining  to determine which referrals they should review, but Office of the  Inspector General policy requires them to review all of these referrals  within 90 days. They noted that some referrals provide little  information or relate to small-value policies, but RMA may give priority  to these referrals over reviews with a potentially greater cost-benefit  result because of the Office of the Inspector General policy.

		RMA and FSA Have Not Taken Full Advantage of Data Management Techniques to Facilitate Data Mining

We identified three areas in which RMA and FSA have not taken full  advantage of data management techniques to increase the effectiveness  of data mining: inaccurate and incomplete FSA field inspection data for  listed farmers, the insufficiency of the data collected from insurance  companies on the results of their reviews, and RMA’s not providing  insurance companies with results for most FSA inspections.
Certain FSA field inspection data for listed farmers may be inaccurate and  incomplete because the results of the inspections may be reported late or  not at all. This problem arises because RMA and FSA have a complicated  process for transmitting the data, creating opportunities for errors and  omissions. Specifically:
Staff in about 1,000 FSA county offices transmit their field inspection  data to nearly 50 state offices by e-mailing data, mailing CDs or paper  documents, or inputting the data in their FSA computer systems.
The FSA state offices e-mail or mail the data, in its different formats,  to six RMA regional compliance offices.
Two of the six RMA regional compliance offices retype the data into  an RMA system, and the other four offices retype a small portion of  the data—the field inspection date and crop conditions—into a  spreadsheet that already contains the original data mining  information, such as the policy number and participating farmer’s  name. The six offices then send the FSA data to RMA’s data mining  contractor for analysis.
Through interviews with FSA state officials and a review of the data on  FSA field inspection results, we identified several examples of errors and  omissions that had occurred in the process of recording and transmitting  the data from FSA to RMA and its data mining contractor for additional  analysis and followup on anomalous claims and to its data mining  contractor for further analysis. For example:
Officials in three FSA state offices said that additional field inspections  likely have been done even though the data for them are missing.  They said that some county staff had not been trained on how to enter  inspection results into the FSA computer system and therefore did not  always report information on completed inspections to state FSA  offices so that it could be provided to RMA.
FSA state offices, at times, did not forward field inspection data to  RMA for several months after the inspections were completed,  according to our analysis of FSA records and an RMA official. All of  the field inspection data for one state were missing from RMA’s data  mining contractor records because the FSA state office provided the  data to RMA after RMA had sent inspection data to the data mining  contractor for analysis. At least 10 percent of the data for another  state were missing for the same reason. One RMA official noted that  FSA occasionally provides late responses for fields with crops in  worse condition than others in the area. Such delays mean that RMA  cannot ask insurance companies to review the fields for these policies  before harvest or making a claim payment, when insurance adjusters  could determine whether the crop was being deliberately managed in  a way that reduces yield.
According to RMA officials and contractor staff, they have recognized  these problems and proposed using software that other USDA agencies  use in a new process to transmit the data from the FSA county offices  directly to a USDA system while providing access to RMA and FSA. They  told us that they are planning to implement the new system before 2012  field inspections have begun and believe the new system will eliminate  problems we identified.
RMA does not collect sufficient data from insurance company reviews in  an electronic format that facilitates its data mining, according to RMA  officials. RMA uses an electronic form to collect data from all types of  company reviews, including those that RMA requested as a result of data  mining and those that were requested because of Office of the Inspector  General hotline referrals. However, this form does not provide the data  mining contractor with sufficient information on which records the  insurance companies reviewed and why they reviewed these records in  order to determine if an adjustment needs to be made to improve data  mining, according to RMA officials and the data mining contractor. In  addition, RMA officials and the data mining contractor told us that the  electronic form does not provide an efficient way of sorting out the data  needed for data mining. RMA officials said that more complete data on  the insurance company reviews are important for improving data mining  because insurance companies often have information that RMA does not  have that can explain why an anomalous claim is being made. The data  mining contractor stated that it had developed proposals for revising the  electronic form to collect information that could help it improve data  mining lists, such as the list of farmers with anomalous claim payments  and agents and adjusters with anomalous losses. In 2009, the Inspector  General also concluded that the data mining contractor needed such  information to refine data mining reports. Without an electronic  mechanism to collect sufficient data from insurance companies on their  reviews, RMA is limited in the analyses it can conduct and in the  improvements it can make in data mining. As a result, RMA may be  missing opportunities for savings that result from better data mining. RMA  officials said that they are considering making changes so that the data  mining contractor receives additional information.
RMA generally does not provide insurance companies with field  inspection results for most FSA inspections—that is, those for fields in  good condition—but provides them with the field inspection results for a  small portion of the farmers—those with crops in worse condition than  their peers. However, inspection information on fields in good condition is  important—particularly for inspections that occurred shortly before a claim  was made. Past cases have revealed that some farmers may harvest a  high-yielding crop, hide the sale of that crop, and report a loss to receive  an insurance payment. USDA’s Inspector General has reported on the  need to use FSA field inspection information to identify potential fraud,  waste, and abuse.on two farmers on the list of farmers with anomalous claim payments  whose crops were in good condition, according to the FSA inspection;  however, these farmers filed nearly $300,000 in claims a short time after  the FSA inspection, and RMA did not notice the discrepancy. RMA’s data  mining contractor stated that it could, with a few days of effort, provide all  the FSA field inspection data to the insurance companies, including those  on crops in good condition, which represent the bulk of inspections.

	Conclusions

Federal crop insurance plays an important role in protecting farmers from  losses caused by natural disasters and price declines, and it has become  one of the most important programs in the safety net for farmers. As we  have discussed, unlike other farm programs, the crop insurance program  does not limit the subsidies that a farmer can receive. Without subsidy  limits, a small number of farmers receive relatively large premium  subsidies and a relatively large share of total premium subsidies. In  addition, premium subsidies for all farmers, which averaged 62 percent of  premiums in 2011, have increased substantially since 2000. With  increasing pressure to reduce the federal budget deficit and with record  farm income in recent years, it is critical that taxpayer-provided funds for  the farm safety net are spent as economically as possible. Limits on  premium subsidies to individual farmers or reductions in the amount of  premium subsidies for all farmers participating in the crop insurance  program, or both limits and reductions, present an opportunity to save  hundreds of millions of dollars per year for taxpayers without  compromising this safety net.
In addition, RMA has made substantial progress over the past decade in  developing data mining tools to detect and prevent fraud, waste, and  abuse from a list of farmers who have received payments for anomalous  claims, but RMA’s use of these tools lags behind their development,  largely because of competing priorities. By not maximizing the use of  these tools, RMA may be missing opportunities to identify and prevent  losses to the federal government that result from fraud, waste, or abuse.  Furthermore, because FSA does not require its state offices to monitor,  during the growing season, completion of its county office field  inspections for farmers with anomalous claim payments, and because  FSA does not always communicate its inspection results to RMA in a  timely manner, RMA and FSA may not know about farmers who  improperly manage their crops or falsely report losses. FSA state offices  that do such monitoring seem to encourage a higher completion rate of  county office field inspections. RMA has also not provided insurance  companies with most FSA inspection results, particularly findings that  crops were in good condition, or directed insurance companies to review  the results of all completed FSA field inspections before paying claims  that occur after inspections showed a crop was in good condition. As a  result, insurance companies may not have information that could help  them identify claims that should be denied.
RMA has also not realized the potential of data mining tools to enhance  its detection of fraud, waste, and abuse on the part of insurance agents  and adjusters, including addressing the ARPA requirement to review  agents and adjusters identified as having anomalous losses.  Furthermore, RMA has not taken steps requiring minimal resources, for  example, by directing insurance companies, during annual performance  evaluations of agents and adjusters, to focus more attention on the list of  agents and adjusters with such losses. In addition, RMA’s electronic form  does not collect sufficient data from insurance companies on their reviews  in order to facilitate the use of these reviews in data mining.

	Matter for Congressional Consideration

To reduce the cost of the crop insurance program, Congress should  consider limiting the subsidy for premiums that an individual farmer can  receive each year or reducing the subsidy for all farmers participating in  the program, or both limiting and reducing these subsidies.

	Recommendations for Executive Action

To help prevent and detect fraud, waste, and abuse in the federal crop  insurance program, we recommend that the Secretary of Agriculture  direct the Administrator of RMA and the Administrator of FSA, as  appropriate, to take the following four actions:
For the list of farmers with anomalous claim payments, encourage the  completion of FSA county office inspections during the growing  season by requiring FSA state offices to monitor the status of their  completion.
Maximize the use of the list of farmers with anomalous claim  payments by, for example, ensuring that insurance companies receive  the results of all FSA field inspections in a timely manner and directing  insurance companies to review the results of all completed FSA field  inspections before paying claims that occur after inspections showed  the crop was in good condition.
Increase the use of the list of agents and adjusters with anomalous  losses through actions, such as directing insurance companies, during  annual performance evaluations of insurance agents and adjusters, to  focus more of their attention on the list of agents and adjusters with  anomalous losses.
Develop a mechanism, such as a revised electronic form, to collect  additional data from insurance companies in order to facilitate the use  of the companies’ reviews in data mining.

	Agency Comments and Our Evaluation

We provided the Secretary of Agriculture with a draft of this report for  review and comment. We received written comments from the acting  USDA Under Secretary for Farm and Foreign Agricultural Services. In  these comments, the acting Under Secretary stated it was ill advised for  us to suggest that Congress consider limiting or reducing premium  subsides without further study. The acting Under Secretary stated that in  recommending a $40,000 limit on premium subsidies, the report does not  fully account for all potentially negative impacts and costs resulting from  such a change. However, as we state in the report, we do not recommend  a $40,000 limit in premium subsidies per crop insurance participant.  Instead, we used $40,000 as an example of a premium subsidy limit and  noted that setting a premium subsidy limit higher or lower would have  corresponding effects on cost savings. In addition, our report recognizes  that setting a subsidy limit may have impacts, and we discuss some of  these potential impacts. Moreover, at a time when the agriculture sector is  enjoying record farm income and higher farmland values and the nation is  facing severe deficit and long-term fiscal challenges, we believe that crop  insurance premium subsidies—the single largest component of farm  program costs—is a potential area for federal cost savings. Furthermore,  the Administration’s budget for fiscal year 2013 and the Congressional  Budget Office each proposed a reduction in premium subsidies. These  subsidies increased fourfold, from $1.7 billion in 2002 to $7.4 billion in  2011.
USDA agreed with one of our recommendations, and did not directly  respond to the other three. Regarding our first recommendation— encouraging the completion of FSA county office inspections for the list of  farmers with anomalous claim payments by requiring FSA state offices to  monitor the status of their completion—USDA stated that it will update its  written procedures to require FSA state offices to monitor county offices’  completion of these inspections.
Regarding our second recommendation—that USDA maximize its list of  farmers with anomalous claims by providing the results of completed FSA  inspections to the insurance companies—USDA stated it is unlikely that  FSA will be able to accomplish this recommendation, but that comment is  not responsive to our recommendation. We clarified the language to say  that insurance companies should receive the results of all inspections that  have been completed. This effort would not entail additional work on the  part of FSA. RMA’s data mining contractor told us that it could complete  this activity within a few days after an inspection was completed.
Regarding our third recommendation—to direct insurance companies,  during annual performance evaluations of insurance agents and  adjusters, to focus more of their attention on the list of agents and  adjusters with anomalous losses than on others—USDA reported that it  was issuing guidance directing companies to provide to USDA the results  of reviews conducted on each agent/loss adjuster identified on the  anomalous agent/loss adjuster list provided by RMA. We agree that  providing guidance to the companies is important and continue to believe  that directing insurance companies to focus more attention on these  agents and loss adjusters during annual performance reviews would  produce additional benefits.
Regarding the fourth recommendation—to develop a mechanism, such as  a revised electronic form, to collect additional data from insurance  companies in order to facilitate the use of the companies’ reviews in data  mining—USDA did not clearly state whether it agreed or disagreed.  USDA stated that as one of its information systems projects matures, it  will find better ways to record and gather data for data mining. However,  we continue to believe that the data mining contractor needs additional  data from insurance company reviews in order to improve data mining,  and that specific direction from USDA is needed to acquire it.
USDA comments and our response are in appendix V.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  appropriate congressional committees; the Secretary of Agriculture; the  Director, Office of Management and Budget; and other interested parties.  In addition, this report will be available at no charge on the GAO website  at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or shamesl@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. Key contributors to this report are listed in  appendix VI.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to determine (1) the effect on program costs of  applying limits on farmers’ federal crop insurance subsidies, as payment  limits are applied to other farm programs, and (2) the extent to which the  U.S. Department of Agriculture (USDA) has used data mining tools to  prevent and detect fraud, waste, and abuse in the crop insurance  program.
To address the first objective, we reviewed eligibility standards, such as  adjusted gross income limits and payment limits, in the provisions of the  Food, Conservation, and Energy Act of 2008 (2008 farm bill); other  statutes; and USDA regulations. We also interviewed officials from  USDA’s Farm Service Agency (FSA) and Risk Management Agency  (RMA) regarding eligibility standards and payment limits in the 2008 farm  bill for farm programs other than the crop insurance program. To  determine the distribution of crop insurance subsidies among farmers  who participate in the program, we analyzed RMA data for 2010 and 2011  on the number and percentage of farmers receiving various levels of  subsidies and the locations of farmers who received higher subsidies. We  selected $40,000 as an example of a potential subsidy limit because it is  the payment limit for direct payments. Many participants in the crop  insurance program also participate in other farm programs that are  administered by USDA’s Farm Service Agency (FSA). Many of these  other farm programs have payment limits based on benefits that are  attributed to each interest holder in a farming operation. Under a scenario  of a limit on premium subsidies, it is likely these same rules regarding the  attribution of benefits would also apply to premium subsidies for the crop  insurance program. Therefore, in our analysis, we attributed these  subsidies for each policy to the interest holders in the policy. We did so  based on the payment share of each interest holder as recorded in FSA’s  validated Permitted Entity database that is used to ensure compliance  with payment limit rules. For entities, we attributed benefits through four  levels, as appropriate. We summed premium subsidies across policies for  each crop insurance participant. For those that were not found in FSA’s  Permitted Entity database or if RMA’s database contradicted FSA’s  Permitted Entity database, we attributed premium subsidies by dividing it  equally among the policy holder and the interest holders as reported in  RMA’s database. These participants represented 18.5 percent of the  entities.
We also reviewed USDA and other studies that examined participation in  the crop insurance program and premium subsidies. In addition, we  reviewed USDA data on the financial condition of farms of various sizes.  Furthermore, we reviewed USDA reports on the availability of private risk  management tools against crop losses and the effects of farm program  subsidies on beginning and smaller farmers. Finally, we reviewed farm  and crop insurance industry organizations’ statements on the crop  insurance program.
To determine the extent to which USDA has used data mining tools to  prevent and detect fraud, waste, and abuse in the crop insurance  program, we analyzed how RMA uses two data mining lists—the list of  farmers with anomalous claim payments and the list of insurance agents  and adjusters with anomalous losses—and the methods it uses to  develop these lists. We reviewed requirements in the Agricultural Risk  Protection Act of 2000 and the current and former standard reinsurance  agreement related to data mining, FSA guidance for field inspections,  FSA letters to farmers with anomalous claim payments, data analyses  and summaries on data mining tools developed by RMA’s data mining  contractor, USDA’s Inspector General reports and testimonies, and  reports of RMA completion of disaster payment reconciliations. We also  interviewed RMA data mining contractor staff, and RMA officials at  headquarters and six regional compliance offices to identify RMA’s uses  of these data mining tools, weaknesses found in the tools, opportunities  for increased use of them, or competing RMA priorities. We also  interviewed officials with USDA’s Office of Inspector General on their  views and uses of these tools. In addition, we worked with RMA’s data  mining contractor to analyze 2009 and 2010 data on FSA’s completion of  field inspections for policies of those farmers listed as having anomalous  claim payments. We conducted tests of the reliability of the data, such as  checking formulas, and found the data to be sufficiently reliable for the  purposes of this report. We also interviewed officials with RMA and its  data mining contractor to determine the process used to acquire FSA’s  field inspection data. We interviewed officials with FSA’s headquarters  office and the five FSA state offices for California, Colorado, Florida,  North Dakota, and Texas to obtain information about these data,  obstacles to completing the inspections, and suggestions for increasing   We selected FSA’s North Dakota office  their completion and reporting.because of its high completion rate of field inspections (96 percent) for  2009 and 2010 and large number of requests for field inspections (378).  We selected the other four state offices because, over the 2-year period,  they had low completion rates of field inspections (less than 33 percent)  and at least 80 requests for field inspections.
We conducted this performance audit from January 2011 to March 2012  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: Income and Payment Limits for Selected Farm Programs

	Program/payment category Commodity programs

$500,000 (average adjusted gross nonfarm  income over the 3 preceding tax years).
Direct and Countercyclical Program direct  payments   $500,000 (average adjusted gross nonfarm  income over the 3 preceding tax years).  $750,000 (average adjusted gross farm income  over the 3 preceding tax years).   $500,000 (average adjusted gross nonfarm  income over the 3 preceding tax years).   $500,000 (average adjusted gross nonfarm  income over the 3 preceding tax years).   $500,000 (average adjusted gross nonfarm  income over the 3 preceding tax years). $50,000 (annual rental payment) $1,000,000 (average adjusted gross nonfarm  income over the 3 preceding tax years).$1,000,000 (average adjusted gross nonfarm  income over the 3 preceding tax years). $300,000 (total for all contracts for  fiscal years 2009 through 2012)
This limit does not apply if more than 66.66 percent of the adjusted gross income—total of nonfarm  adjusted gross income and farm adjusted gross income—was farm income.

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

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

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

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

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

	GAO Comments

1.  As we clearly state in the report, we do not recommend a $40,000  limit in premium subsidies per crop insurance participant. Instead, as  we stated, we used $40,000 as an example of a premium subsidy limit  and noted that setting a premium subsidy limit higher or lower would  have corresponding effects on cost savings. In this connection, we  provided information on the potential savings that would result if  premium subsidies were limited to $100,000. Furthermore, limits on  premium subsidies would not prevent potentially affected farmers from  enrolling all of their crop acres in the crop insurance program and  receiving claim payments when a loss occurs. The report also notes  that savings could result from reducing the subsidy amount for all  farmers participating in the program, or both limiting and reducing  these subsidies. In proposing these changes to the crop insurance  program, we also identified other considerations that would come into  play, including the potential effect on large farms’ financial condition  and on participation in the crop insurance program. 2.  We disagree. This report does show regions of the country that would  be more affected by a limit on premium subsidies. On page 19, we  state that many of the participating farmers who received more than  $40,000 in premium subsidies were in the northern and southern  plains. Additional information on the locations of participating farmers  who received more than $40,000 in premium subsidies for 2011 is  presented in appendix III. 3.  An assessment of the availability of credit to the agricultural sector  was not the focus of our work, but our review of data from USDA’s  Agricultural Resource Management Survey shows that larger farms,  which are more likely to be affected by a limit on premium subsidies,  generally have stronger financial ratios and credit worthiness than  other farms participating in the crop insurance program. (See pages  21 and 22 of this report.) Furthermore, since we sent our draft report  to USDA for comment, we identified two Federal Reserve Bank  reports—one from the Federal Reserve Bank of Chicago, and one  from the Federal Reserve Bank of Kansas City—that reported that  credit conditions for farmers are favorable. In addition, if premium  subsidies were limited, an affected farmer could still purchase crop  insurance, although the premiums might not be subsidized or  subsidized less than currently. Thus, an affected farmer would not  lose access to credit.  4.  USDA did not adjust its estimate of affected crop insurance  participants and savings in premium subsidies to reflect how a limit on  premium subsidies might actually be implemented. That is, we  assume that any subsidy limit would be administered as USDA’s Farm  Service Agency (FSA) administers payment limits for other farm  programs—allocating the benefits according to the interest holders in  the farming operation. Most participants in the crop insurance  program also participate in other farm programs that FSA administers,  and many of these other farm programs have payment limits based on  benefits that are attributed to each interest holder in a farming  operation. As explained in our methodology, in developing our  estimate for a potential $40,000 subsidy limit, we used the payment  share of each interest holder as recorded in FSA’s validated Permitted  Entity database, which FSA uses to ensure compliance with payment  limit rules for farm programs. Using FSA’s information on the payment  share of each interest holder, we attributed subsidies for each crop  insurance policy to the interest holders in the policy. Therefore, we  estimated that up to 33,690 participating farmers would have been  affected in 2011 by a reduced subsidy, for a savings of up to $1 billion  if a $40,000 subsidy limit were applied. We believe our analysis  provides a reasonable estimate of the number of participating farmers  who might be affected by a limit on premium subsidies and the dollars  that might be saved. (See app. I for more information on our  methodology.) 5.  As we note in this report, a limit on crop insurance premium subsidies  would affect more farmers in some areas of the country than in other  areas. We also note in the report that large farms are better  positioned than smaller farms to pay a higher share of their premiums.  Furthermore, a higher limit on premium subsidies would affect fewer  farmers. In addition, limits on farm program benefits already have  disproportionate impacts. For example, under the Supplemental  Revenue Assistance Payments program and Noninsured Crop  Disaster Assistance program, annual payments are limited to  $100,000, which disproportionately affects farmers in regions that are  more prone to natural disasters.
In addition to a limit on premium subsidies, this report also examines  reducing premium subsidy rates for all farmers, which would have a  more proportionate effect across states and regions. However, it  would also reduce subsidies for those who may be less able to afford  higher premiums, particularly beginning and limited resource farmers,  as well as socially disadvantaged farmers.  6.  We do not agree that it would be virtually impossible to  administratively track and control a limit on premium subsidies. Most  farmers participating in the crop insurance program also participate in  other farm programs that FSA administers. Many of the farm  programs FSA administers already limit the payments an individual  can receive. Therefore, we believe that FSA’s methods—which  account for complicating factors such as the organization of farm  businesses and multiple crops in multiple counties, and even multiple  programs—could be applied to a limit on premium subsidies for crop  insurance and that any addition to administrative burdens would not  be significant. Moreover, as we stated in our report, premium subsidy  rates vary by the level of insurance coverage that the farmer chooses  and the geographic diversity of the crops insured. If RMA is capable of  tracking these different subsidy rates, we believe USDA can also  administer a subsidy limit. 7.  We believe it would not be impractical to administer a limit on  premium subsidies because of differences in dates and insurance  periods. FSA attributes benefits to each individual or entity for each  program that it administers. For each participant in a given program,  payments are summed across all entities, crops, and counties for the  crop year. Regarding livestock insurance, the amount of insurance  purchased in comparison with crop insurance is very small. Moreover,  this report did not discuss combining limits on premium subsidies for  livestock insurance and crop insurance. 8.  We do not agree that a limit on premium subsidies would prevent  farmers from making sound and informed insurance choices. Under  the crop insurance program, the amounts of a farmer’s premium  subsidy and premium expense are estimated during the period before  planting, when the farmer is making insurance choices. However,  insurance companies determine the actual premium later in the  growing season and bill the farmer at the end of the growing season.  Therefore, to the extent that a limit on premium subsidies introduces  additional uncertainty, it would likely be marginal.  9.  We believe it is unlikely that a limit on premium subsidies would affect  agricultural lenders’ decisions in providing farm operating loans. It is  not clear how a limit on premium subsidies would introduce so much  uncertainty about the amount of a farmer’s premium expenses that a  lender could not decide whether to provide financing. Agricultural  lenders already deal with a level of uncertainty about farmers’  revenues and expenses. In addition, lenders could require borrowers  to purchase crop insurance.  10. As we stated in this report, the amount of savings from a limit on  premium subsidies may depend on whether, and to what extent,  farmers and legal entities reorganized their business to avoid or  lessen the effect of limits on premium subsidies. In addition, some  farmers would likely begin to report their spouse as a member of the  farming operation, which, under payment limit rules, enables an  operation to double the amount of benefits it can receive. Regarding  potential reorganizations, most of the farmers and legal entities who  participate in the crop insurance program also participate in FSA  programs, and many of them have already reorganized their business  because of these programs’ payment limits. These farmers and legal  entities would be unlikely to reorganize further in response to a limit  on premium subsidies. In addition, in some instances, the requirement  that an individual or entity be actively engaged in farming to receive  farm program benefits is likely to prevent the creation of entities in  order to avoid a limit on premium subsidies. Furthermore, the 2008  farm bill decreased the incentive to reorganize a farming operation in  order to avoid a limit on farm program payments by eliminating the  “three-entity rule” and requiring direct attribution of payments to  individuals. 11. This report includes information about how crop insurance  participation and coverage levels may relate to spending on ad hoc  disaster assistance. The report also notes that in view of the nation’s  budgetary pressures, Congress may be less willing to approve ad hoc  disaster assistance payments than it has in the past. In addition, the  Administration’s proposed fiscal year 2013 budget addresses  participation and ad hoc disaster assistance and states, “With current  participation rates, the deep premium subsidies are no longer  needed.”  12. In addition to federal cost savings, our report discussed several  considerations that would come into play with limits on premium  subsidies. Furthermore, we noted that FSA has extensive experience  in administering limits on farm program benefits, which USDA does  not recognize in its comments. We believe RMA could benefit from  FSA’s experience in administering payment limits.  13. We recognize that FSA, like most federal agencies, faces resource  constraints. However, as we have previously reported, effective  strategies help set priorities and allocate resources to inform decision  making and help ensure accountability. Such priority setting and  resource allocation is especially important in a fiscally constrained  environment.  14. We clarified the language to say that insurance companies should  receive the results of all inspections that have been completed. This  effort would not entail additional work on the part of FSA. RMA’s data  mining contractor told us that it could complete this activity within a  few days after an inspection was completed. 15. We are pleased that RMA is developing guidance and believe that this  guidance may be a good first step towards increasing insurance  companies’ focus on anomalous agents and loss adjusters, who  warrant greater attention. However, we continue to believe that  directing insurance companies to focus more attention on these  agents and loss adjusters during annual performance reviews would  produce additional benefits. 16. It is unclear from RMA’s response whether it agrees or disagrees with  our recommendation. However, we continue to believe that the data  mining contractor needs additional data from insurance company  reviews in order to improve data mining and specific direction from the  government to collect these data.

Appendix VI: GAO Contact and Staff Acknowledgments

	GAO Contact

	Staff Acknowledgments

In addition to the individual named above, Susan Offutt, Chief Economist;  Thomas M. Cook, Assistant Director; Kevin S. Bray; Gary T. Brown;  Barbara J. El-Osta; Beverly Peterson; Anne Rhodes-Kline; Jeremy  Sebest; and Carol Herrnstadt Shulman made key contributions to this  report.

Related GAO Products

Crop Insurance: Opportunities Exist to Reduce the Costs of Administering  the Program. GAO-09-445. Washington, D.C.: April 29, 2009.
Crop Insurance: Continuing Efforts Are Needed to Improve Program  Integrity and Ensure Program Costs Are Reasonable. GAO-07-944T.  Washington, D.C.: June 7, 2007.
Crop Insurance: Continuing Efforts Are Needed to Improve Program  Integrity and Ensure Program Costs Are Reasonable. GAO-07-819T.  Washington, D.C.: May 3, 2007.
Climate Change: Financial Risks to Federal and Private Insurers in  Coming Decades Are Potentially Significant. GAO-07-760T. Washington,  D.C.: April 19, 2007.
Climate Change: Financial Risks to Federal and Private Insurers in  Coming Decades Are Potentially Significant. GAO-07-285. Washington,  D.C.: March 16, 2007.
Suggested Areas for Oversight for the 110th Congress. GAO-07-235R.  Washington, D.C.: November 17, 2006.
Crop Insurance: More Needs to Be Done to Reduce Program’s  Vulnerability to Fraud, Waste, and Abuse. GAO-06-878T. Washington,  D.C.: June 15, 2006.
Crop Insurance: Actions Needed to Reduce Program’s Vulnerability to  Fraud, Waste, and Abuse. GAO-05-528. Washington, D.C.: September  30, 2005.
Crop Insurance: USDA Needs to Improve Oversight of Insurance  Companies and Develop a Policy to Address Any Future Insolvencies.  GAO-04-517. Washington, D.C.: June 1, 2004.
Department of Agriculture: Status of Efforts to Address Major Financial  Management Challenges. GAO-03-871T. Washington, D.C.: June 10,  2003.
Crop Insurance: USDA Needs a Better Estimate of Improper Payments to  Strengthen Controls Over Claims. GAO/RCED-99-266. Washington, D.C.:  September 22, 1999.
Crop Insurance: USDA’s Progress in Expanding Insurance for Specialty  Crops. GAO/RCED-99-67. Washington, D.C.: April 16, 1999.
Crop Insurance: Increases in Insured Crop Prices and Premium Rates  Raise the Administrative Expense Reimbursement Paid to Companies.  GAO/RCED-98-115R. Washington, D.C.: March 20, 1998.
Crop Insurance: Opportunities Exist to Reduce Government Costs for  Private-Sector Delivery. GAO/RCED-97-70. Washington, D.C.: April 17,  1997.
Crop Insurance: Federal Program Faces Insurability and Design  Programs. GAO/RCED-93-98. Washington, D.C.: May 24, 1993.
Crop Insurance: Program Has Not Fostered Significant Risk Sharing by  Insurance Companies. GAO/RCED-92-25. Washington, D.C.: January 13,  1992.

Summary:
Why GAO Did This Study

The U.S. Department of Agriculture (USDA) administers the federal crop insurance program with private insurance companies. In 2011, the program provided about $113 billion in insurance coverage for over 1 million policies. Program costs include subsidies to pay for part of farmers premiums. According to the Congressional Budget Office, for fiscal years 2013 through 2022, the program costsprimarily premium subsidieswill average $8.9 billion annually.
GAO determined the (1) effect on program costs of applying limits on farmers premium subsidies, as payment limits are set for other farm programs, and (2) extent to which USDA uses key data mining tools to prevent and detect fraud, waste, and abuse in the program. GAO analyzed USDA data, reviewed economic studies, and interviewed USDA officials.

What GAO Found

If a limit of $40,000 had been applied to individual farmers crop insurance premium subsidies, as it is for other farm programs, the federal government would have saved up to $1 billion in crop insurance program costs in 2011, according to GAOs analysis of U.S. Department of Agriculture (USDA) data. GAO selected $40,000 as an example of a potential subsidy limit because it is the limit for direct payments, which provide fixed annual payments to farmers based on a farms crop production history. Had such a limit been applied in 2011, it would have affected up to 3.9 percent of all participating farmers, who accounted for about one-third of all premium subsidies and were primarily associated with large farms. For example, one of these farmers insured crops in eight counties and received about $1.3 million in premium subsidies. Had premium subsidies been reduced by 10 percentage points for all farmers participating in the program, as recent studies have proposed, the federal government would have saved about $1.2 billion in 2011. A decision to limit or reduce premium subsidies raises other considerations, such as the potential effect on the financial condition of large farms and on program participation.
Since 2001, USDA has used data mining tools to prevent and detect fraud, waste, and abuse by either farmers or insurance agents and adjusters but has not maximized the use of these tools to realize potential additional savings. This is largely because of competing compliance review priorities, according to GAOs analysis. USDAs Risk Management Agency (RMA), which is responsible for overseeing the integrity of the crop insurance program, has used data mining to identify farmers who received claim payments that are higher or more frequent than others in the same area. USDA informs these farmers that at least one of their fields will be inspected during the coming growing season. RMA officials told GAO that this action has substantially reduced total claims. The value of identifying these farmers may be reduced, however, by the fact that USDAs Farm Service Agency (FSA)which conducts field inspections for RMAdoes not complete all such inspections, and neither FSA nor RMA has a process to ensure that the results of all inspections are accurately reported. For example, RMA did not obtain field inspection results for about 20 percent and 28 percent of these farmers, respectively, in 2009 and 2010. As a result, not all of the farmers RMA identified were subject to a review, increasing the likelihood that fraud, waste, or abuse occurred without detection. Field inspections were not completed, in part because FSA state offices are not required to monitor the completion of such inspections. In addition, RMA generally does not provide insurance companies with FSA inspection results when crops are found to be in good condition, although USDAs Inspector General has reported this information may be important for followup. Past cases have revealed that some farmers may harvest a high-yielding crop, hide its sale, and report a loss to receive an insurance payment. Furthermore, RMA has not directed insurance companies to review the results of all completed FSA field inspections before paying claims that are filed after inspections show a crop is in good condition. As a result, insurance companies may not have information that could help them identify claims that should be denied.

What GAO Recommends

To reduce crop insurance program costs, Congress should consider limiting premium subsidies for individual farmers, reducing subsidies for all farmers, or both. GAO also recommends, in part, that USDA encourage the completion of field inspections. In commenting on a report draft, USDA did not agree that Congress should consider limiting premium subsidies, but GAO believes that when farm income is at a record high and the nation faces severe fiscal problems, limiting premium subsidies is an appropriate area for consideration. USDA agreed with encouraging the completion of field inspections.