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SHOW ME THE TAX DOLLARS—HOW MUCH IS

LOST TO IMPROPER PAYMENTS EACH YEAR?

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY

AND FINANCIAL MANAGEMENT

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

MAY 13, 2003

Serial No. 108–39

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

JOHN SULLIVAN, Oklahoma

NATHAN DEAL, Georgia

CANDICE S. MILLER, Michigan

TIM MURPHY, Pennsylvania

MICHAEL R. TURNER, Ohio

JOHN R. CARTER, Texas

WILLIAM J. JANKLOW, South Dakota

MARSHA BLACKBURN, Tennessee

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. ‘‘DUTCH’’ RUPPERSBERGER, Maryland

ELEANOR HOLMES NORTON, District of

Columbia

JIM COOPER, Tennessee

CHRIS BELL, Texas

———

BERNARD SANDERS, Vermont

(Independent)

PETER SIRH, Staff Director

MELISSA WOJCIAK, Deputy Staff Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHILIP M. SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY AND FINANCIAL MANAGEMENT

TODD RUSSELL PLATTS, Pennsylvania, Chairman

MARSHA BLACKBURN, Tennessee

STEVEN C. LATOURETTE, Ohio

JOHN SULLIVAN, Oklahoma

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

MAJOR R. OWENS, New York

CAROLYN B. MALONEY, New York

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

MIKE HETTINGER, Staff Director

LARRY BRADY, Professional Staff Member

AMY LAUDEMAN, Clerk

MARK STEPHENSON, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on May 13, 2003 ............................................................................... 1

Statement of:

Springer, Linda M., Controller, Office of Federal Financial Management,

Office of Management and Budget .............................................................. 5

Weems, Kerry N., Acting Assistant Secretary for Budget, Technology

and Finance, Department of Health and Human Services ....................... 29

Williams, McCoy, Director, Financial Management and Assurance Team,

U.S. General Accounting Office ................................................................... 14

Letters, statements, etc., submitted for the record by:

Platts, Hon. Todd Russell, a Representative in Congress from the State

of Pennsylvania, prepared statement of ...................................................... 3

Springer, Linda M., Controller, Office of Federal Financial Management,

Office of Management and Budget, prepared statement of ....................... 8

Weems, Kerry N., Acting Assistant Secretary for Budget, Technology

and Finance, Department of Health and Human Services, prepared

statement of ................................................................................................... 31

Williams, McCoy, Director, Financial Management and Assurance Team,

U.S. General Accounting Office, prepared statement of ............................ 16

(1)

SHOW ME THE TAX DOLLARS—HOW MUCH IS

LOST TO IMPROPER PAYMENTS EACH YEAR?

TUESDAY, MAY 13, 2003

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY AND

FINANCIAL MANAGEMENT,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room

2247, Rayburn House Office Building, Hon. Todd R. Platts (chairman of the subcommittee) presiding.

Present: Representatives Platts and Blackburn.

Staff present: Mike Hettinger, staff director; Dan Daly, counsel;

Larry Brady, Kara Galles, and Tabetha Mueller, professional staff

members; Amy Laudeman, clerk; Mark Stephenson, minority professional staff member; and Cecelia Morton, minority office manager.

Mr. PLATTS. We are going to get under way. Our vice chair, Marsha Blackburn, apparently is en route in the building and we will

go ahead and get started, rather than waiting any further.

This hearing of the Subcommittee on Government Efficiency and

Financial Management will come to order. I believe all of us here

today can readily agree that taxpayers have a fundamental right

to know how their tax dollars are being spent. Improper payments

by Federal agencies are a serious and growing problem which costs

taxpayers billions of dollars each year. We have seen some estimates that put the improper payment figure as high as $35 billion.

As I said prior to the start of the hearing to a couple of you, coming

from a community in which we still have 99 cents breakfast specials, when we start to talk billions of dollars, we pay close attention.

I cannot help but comment that as I sat down here with my Diet Pepsi, and on the front is a campaign promotional piece about $1

billion live on TV that you could win, so we are talking about 35

live winnings every year of $1 billion when we are talking about

improper payments.

Commendably, President Bush has made the reduction of improper payments a significant part of his management agenda. A

lack of consistency in calculating, defining and accounting for erroneous payments further complicates agencies’ efforts to combat this

problem. The Improper Payments Information Act signed into law

just last November is designed to address these concerns and requires OMB to issue guidance by the end of this month which will

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establish governmentwide procedures for dealing with erroneous

payments.

An improper payment is any payment that should not have been

made. It can be an incorrect payment, an over-or under-payment,

and include among other things a payment to an ineligible recipient; a payment for an ineligible service; or a duplicate payment, as

well as a payment for service not received at all.

While we do not yet have our arms around the total extent of

this problem, what we do know is that these mistakes, which occur

throughout government, are made because agencies do not have

adequate internal financial controls and business process systems

in place to protect against these types of errors. As we have pointed

out time and time again during our last three hearings, agencies

can get clean audit opinions, unfortunately without having sound

internal financial controls that would prevent improper payments—what we described as heroic end of the year efforts to get

that clean opinion, even though throughout the year their financial

controls were not well planned or well implemented.

Over the years, various agencies have estimated the amount of

improper payments, but many believe that these estimates represent only the tip of the iceberg. Last year, my esteemed former

colleague, Congressman Steve Horn, who served as chairman of

this subcommittee, was successful in securing the enactment of the

Improper Payments Information Act of 2002. This law has helped

bring to the forefront the need to address this issue more aggressively. Now, agencies will be required to make estimates of erroneous payments, and if those estimates are more than $10 million,

to develop plans to reduce or eliminate these errors.

Today, we look forward to exploring the draft guidance from

OMB and learning from GAO about strategies to identify and reduce improper payments. We are also eager to hear from HHS on

the challenges they faced and the successes they have had in dealing with this problem.

[The prepared statement of Hon. Todd Russell Platts follows:]

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Mr. PLATTS. Today, we are pleased to have with us the Honorable Linda Springer, Controller of the Office of Federal Financial

Management in the Office of Management and Budget; Mr. McCoy

Williams, Director of the Financial Management and Assurance

Team in the General Accounting Office; and Mr. Kerry Weems,

Acting Assistant Secretary for Budget, Technology and Finance in

the Department of Health and Human Services. Thank you for

coming and we look forward to your testimonies here today.

We will give our vice chair a second to catch her breath. I understand you do not wish to make an opening statement?

Ms. BLACKBURN. No, Mr. Chairman.

Mr. PLATTS. OK. We will then proceed to our witnesses. I would

ask each witness if you would stand, and anyone who will be advising you during your testimony to also stand, and take the oath together.

[Witnesses sworn.]

Mr. PLATTS. Thank you. The clerk will note that all witnesses,

as well as others who will be advising them, have affirmed the

oath. We now would like to proceed directly to the testimonies. Ms.

Springer, we will begin with you, followed by Mr. Williams and Mr.

Weems. The subcommittee appreciates the substantive written testimonies that each of you have provided for the record. We would

ask that you keep your verbal testimonies here today to less than

5 minutes.

Ms. Springer, please proceed with your testimony.

STATEMENT OF LINDA M. SPRINGER, CONTROLLER, OFFICE

OF FEDERAL FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET

Ms. SPRINGER. Thank you, Mr. Chairman. I appreciate the opportunity to be before this subcommittee again. One of the reasons I

am glad to be here is to continue the partnership that exists between the administration and the subcommittee in advancing many

of the President’s initiatives to improve management in the executive branch. This partnership is critical to the success of our efforts, particularly in the area of erroneous payments. We will need

changes in law, some of which have already been proposed, to improve our payment processes. I ask for your help to get those tools

which I will address in more detail in a moment.

Today, we are discussing the President’s initiative to reduce erroneous payments made with Federal dollars. This committee is more

familiar than most with the status of efforts in the government to

address this critical problem. Not long ago, based on GAO compilations of erroneous payment estimates reported in agency financial

statements, the estimate of governmentwide erroneous payments

was said to be around $20 billion. GAO also said as significant as

this amount is, the actual extent of improper payments governmentwide is unknown, and is likely to be billions of dollars more

and will likely grow in the future without concerted and concentrated efforts by agencies, the administration and the Congress.

That statement is as true now as it was when GAO made it last

summer. What we can say is that we know a lot more and we are

doing a lot more than ever before about the extent and cause of erroneous payments made by the Federal Government.

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As you know, Mr. Chairman, the President announced as part of

his management agenda a renewed effort to reduce erroneous payments. Initially, the initiative focused on the government’s major

benefit programs. The administration identified programs that

make in excess of $2 billion in payments annually and require

those agencies to assess the risk, the extent, and to put in place

a strategy to reduce erroneous payments. Based on the estimates

of erroneous payments made in programs making almost $1 trillion

in payments annually, erroneous payments exceed $35 billion a

year. Error rates for those programs range from almost zero to

more than 30 percent. That is obviously an unacceptable situation.

We have an urgent duty to the American taxpayer to improve our

stewardship over their resources.

There are agencies that we should commend, like the Office of

Personnel Management, which manages the Federal Employees

Health Benefits Program, with an error rate of just over 1 percent;

Federal Retirement Benefit programs, less than 1 percent; and the

Department of Defense which manages military retirement, 0.05

percent error rate, for keeping those error rates low. We should

also commend Medicare and food stamps, which have shown remarkable progress in bringing their erroneous payment rates

down.

Other programs for which we have estimated the rate of erroneous payments have not yet shown progress. I want to emphasize

that the administration’s initiative to reduce EITC, that is Earned

Income Tax Credit payments, is one that we are also focused on.

It has an error rate of almost 30 percent. Our initiative is not happening at the expense of the IRS’s efforts to pursue other enforcement priorities, so there is a global effort with respect to tax issues.

I am assured that the IRS is increasing its efforts to pursue with

vigor those in upper-income brackets who would evade their taxpaying obligations.

Another area where the error rate is unacceptably high is in

housing subsidies. The Department of Housing and Urban Development overpays more than $2 billion annually in low-income rent

subsidies. The causes include incomplete reporting of tenant income and improper calculation of tenant rent contributions. HUD

has committed to a goal of 50 percent reduction in these erroneous

payments by 2005, but it needs a tool to achieve this goal. HUD

needs access to the national directory of new hires so it can verify

tenant income. Congressman Sessions has recently introduced legislation, H.R. 1030, to grant HUD this authority. If enacted, this

legislation is expected to potentially garner up to $5 billion in savings over 10 years.

It is remarkable that we now have error rates for programs that

make up almost $1 trillion in payments annually, but those programs targeted as part of the President’s Management Agenda

make an additional $300 billion in annual payments. With the passage of the Improper Payments Information Act, we are targeting

even more programs that make hundreds of billions of dollars in

payments annually for which we have no adequate measure of erroneous payments. As a result of legislation proposed by this committee, portions of recovered erroneous contract payments can now

be used for recovery audit activities. Agencies are using this tool

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to identify erroneous payments made, reveal why they were made,

and most importantly, prevent erroneous contract payments in the

future.

Of course, this subcommittee also authored the recently enacted

Improper Payments Information Act in 2002. That law will require

agencies to identify programs and activities in which there is a risk

of erroneous payments, estimate the extent of the erroneous payments, and report to Congress all such programs and activities that

make erroneous payments in excess of $10 million a year.

I am pleased to report that the administration’s guidance, required by law to be issued by the end of May, will be distributed

to agencies around the end of this week. We would like to hold that

up and get the benefit of any information that comes out of this

hearing as well, and reflect it. The result of the law and the guidance will be greater uniformity in the estimation and reporting of

erroneous payments. For example, agencies will be required to estimate the extent of erroneous payments based on a statistical sample, with a 90 percent confidence level and 5 percent precision.

That is 2.5 percent around either side, plus or minus, of the estimated rate. They will be required to report the extent of their payments in their annual performance and accountability reports.

Through all these activities, we are improving the payment accuracy of government programs and activities. The urgent duty I

spoke of earlier is to ensure that America’s taxpayer dollars are administered with the greatest integrity possible. Where we identify

problems in payment processes, we are working diligently to address them. Where we do not know the extent of the problem, we

will find it out. The end result will be better-administered programs and fewer wasted dollars. We are at the beginning of this

process to reduce erroneous payments, but we could win this race

with your continued support.

I would be glad to answer any questions. Thank you.

[The prepared statement of Ms. Springer follows:]

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Mr. PLATTS. Thank you, Ms. Springer.

Mr. Williams.

STATEMENT OF MCCOY WILLIAMS, DIRECTOR, FINANCIAL

MANAGEMENT AND ASSURANCE TEAM, U.S. GENERAL ACCOUNTING OFFICE

Mr. WILLIAMS. Thank you, Mr. Chairman and vice chairwoman.

Thanks for the opportunity to discuss the governmentwide improper payment problems.

In general, improper payments are payments the government

made in error or in the wrong amount and often result from weaknesses in systems of internal control. As we testified before this

subcommittee last month, improper payment estimates disclosed in

agency financial statements totaled approximately $20 billion each

year for both fiscal years 2002 and 2001. OMB recently estimated

the amount of improper payments at about $35 billion annually.

However, the scope of the problem is likely greater because most

agencies have not yet estimated or publicly reported the magnitude

of improper payments in their programs and activities. In October

2001, we issued an executive guide that provided information on

strategies used successfully by public and private sector organizations to address their improper payment problems. We found that

entities using these best practices shared a common focus of improving their systems of internal control.

Most recently, in a report issued last August, we pointed out that

existing guidance did not require all Federal agencies to estimate

the improper payments in their programs and activities, or offer

agencies a comprehensive approach to measuring improper payments, developing and implementing corrective actions, or reporting on the results of actions taken. Today, we are seeing important

leadership action, both from the Congress and from the administration, to address the improper payments problem.

I would like to highlight two areas and provide my perspective

as to their potential impact. First, on the legislative side, two recent pieces of legislation, the Improper Payments Information Act

of 2002 and Section 831 of the National Defense Authorization Act

for Fiscal Year 2002, provided an impetus for all agencies to systematically address improper payments activities annually, and to

identify and recover contract over-payments. To illustrate this, the

Improper Payments Information Act of 2002, that this subcommittee sponsored, requires agency heads to annually review all programs and activities that they administer, and identify those susceptible to improper payments. For those with estimates of significant improper payments, the legislation requires further analysis

and reporting. The law also requires OMB to prescribe agency

guidance to implement the requirements of the act.

The National Defense Authorization Act for Fiscal Year 2002

contains a provision that requires agencies entering into sizable

contracts to carry out a cost recovery program for improper payments made to contractors. With the passage of this law, the Congress removed multiple barriers and granted agencies a muchneeded incentive for identifying and reducing their improper payments.

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Second, on the administrative side, the President’s Management

Agenda has identified improper payments as a key element in the

administration’s initiative to improve financial performance

throughout the Federal Government. As described in the agenda,

OMB will work with agencies to establish goals to reduce improper

payments for each program over $2 billion. In addition, OMB recently issued draft guidance on the implementation of the Improper

Payments Information Act of 2002 for agency comment. The guidance should help ensure transparency in reporting for those agencies with programs and activities with significant risk for improper

payments. As I stated earlier, recent legislation and other actions

have brought the government’s improper payment problems to the

forefront. Implementing the legislative provisions and other actions

I have discussed today is a shared responsibility. It will require

continued strong support and active and cooperative involvement

from the Congress, the administration and agency management.

In closing, I want to emphasize our commitment to continuing

our work with the Congress, the administration and Federal agencies to ensure that improper payments are fully addressed governmentwide, and that actions are taken to reduce or eliminate the

government’s vulnerabilities to the significant problem of improper

payments.

Mr. Chairman, this concludes my prepared statement. I would be

happy to respond to any questions.

[The prepared statement of Mr. Williams follows:]

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Mr. PLATTS. Thank you, Mr. Williams.

Mr. Weems.

STATEMENT OF KERRY N. WEEMS, ACTING ASSISTANT SECRETARY FOR BUDGET, TECHNOLOGY AND FINANCE, DEPARTMENT OF HEALTH AND HUMAN SERVICES

Mr. WEEMS. Good afternoon, Mr. Chairman, Madam Vice Chairwoman. Thank you for inviting me before you today. It is a pleasure and an honor for me to have the opportunity to speak about

the Department of Health and Human Services’ efforts to reduce

improper payments in the programs it administers.

One of the Department’s foremost strategic goals is achieving excellence in its management practices. In meeting this objective, the

Department is committed to ensuring the highest measure of accountability to the American people. The Department was accountable for more than $493 billion in gross outlays in fiscal year 2002.

Reducing improper payments and improving the related methods

and systems is critical to achieving the excellence we seek.

The Department consists of 12 operating divisions that manage

more than 300 programs with diverse missions. However, seven of

those programs—Medicare, Medicaid, SCHIP, TANF, Child Care,

Foster Care and Head Start—account for close to 90 percent of the

total outlays of HHS. The Department expects to be reporting erroneous payment rates for these seven programs in the future, and

is presently evaluating whether other programs would be covered

under the Improper Payment Information Act of 2002.

The success of HHS’s improper payment efforts can be traced to

five fundamental efforts. First and foremost, our leadership is committed to this initiative. Publicly identifying and correcting errors

is not without political risk, but the public benefits are enormous.

Second, creating partnerships with all the parties with an interest

in the program is critical for developing successful corrective actions. For instance, HHS works with the States across a number

of programs, including Medicaid, SCHIP, and Child Care, just to

name a few. Third, the Department has benefited from having one

of the strongest Inspectors General in the Federal Government,

and maintains a close relationship between the Office of the Inspector General and my Office of the Chief Financial Officer. Our

two offices work closely together to monitor programs and reduce

errors.

Fourth, we actively work with all parties to educate them on

proper payment and program procedures, especially our clients and

our intermediaries such as States, as well as our contractors, who

in turn work with the ultimate client or beneficiary. Fifth, where

there is a history of noncompliance with statutory and regulatory

authority, we have sought civil and other legal remedies. Between

the effort to educate and legal remedies, there is a wide spectrum

of corrective actions the Department uses to identify and reduce

improper payments. Finally, in the case of fraud, as opposed to innocent error, parties are prosecuted.

The Department’s largest program, Medicare, accounts for close

to 50 percent of the Department’s outlays. For the Medicare program, HHS has been a leader in monitoring and mitigating improper payments. We began measuring errors in the Medicare proVerDate 11-MAY-2000 11:34 Sep 09, 2003 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 D:\DOCS\88736.TXT HGOVREF1 PsN: HGOVREF1
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gram in 1996 and have made progressive strides in reducing errors.

The fiscal year 2002 rate of 6.3 percent is less than half of the 13.8

percent reported in fiscal year 1996. However, we have determined

that substantially more detailed data are necessary to bring the

error rate down further. HHS will be deploying a Comprehensive

Error Rate Testing program to calculate improper Medicare payments. The CERT program, as it is called, will allow the Department to estimate specific error rates for individual contractors and

provider types, in addition to a national error rate. It is our intention to publish contractor-specific error rates, as well as rates by

provider type. We will keep this committee informed of our

progress in this area.

Building on Medicare’s success in measuring error, HHS is well

into the process of creating a payment accuracy measure in the

Medicaid program. Medicaid is a substantial program, accounting

for over 30 percent of departmental outlays, but unlike Medicare,

it is administered primarily by State governments. Each of the 56

State and territorial governments run their own unique program.

To account for program variation, we are taking an incremental approach in the development of a national Medicaid error rate. Nine

States entered the program in the first year; 12 states will participate this year; 25 States are targeted in 2004, and the program

will be implemented nationwide in 2005. This collaborative approach will create a measure that is accurate and useful to the

Federal Government, as well as State governments.

The Department administers a number of State-based programs

that promote the economic and social well-being of children, families and communities. Those programs account for about $48 billion

of outlays in the President’s fiscal year 2004 budget. The Department closely monitors improper payments in these programs

through the Single Audit Act, reviews of financial data, and program-specific mechanisms. Through the Single Audit Act, the vast

majority of programs are audited at least once every 3 years, if not

more frequently. In addition to the audit and the other mechanisms, HHS is taking steps to establish erroneous payments for the

several State-based programs and we expect to be reporting on

those soon.

Mr. Chairman, in conclusion, HHS has a robust program for

identifying improper payments, taking appropriate management

actions to reduce the incidence of improper payments, and exploring and developing innovative ways to increase compliance. We attribute our success to a strong commitment of our leadership, the

focus on building and maintaining close relationships with the Inspectors General of the States and our contractors.

I hope that the information that I have provided today will be

of value, and I am happy to answer any questions you might have.

[The prepared statement of Mr. Weems follows:]

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Mr. PLATTS. Thank you, Mr. Weems, and all of our panelists for

your testimonies, and again, the efforts of you and your staffs in

preparing your even more substantive written testimonies.

We will proceed to questions, with just two members. While we

will alternate, we will not worry about being that strict with the

5-minute rule as far as alternating back and forth as we proceed

through the questions.

Ms. Springer, one, I would like to commend OMB as you prepare

to issue the guidance as required under the Improper Payments Information Act in a timely fashion, and your sharing some of where

you stand with that. Could you give us a little more detail on what

the agencies and all of us can expect to see from the guidance you

are going to issue—for example, some of the things, how you are

going to define improper or erroneous payments, will fraud be included in the definition, what are some of the more detailed specifics of the guidance, what will it be?

Ms. SPRINGER. I would be glad to do that, Mr. Chairman.

First of all, the guidance is almost final. It has been vetted over

the past several months throughout the administration, partly

through the partnership with the CFO Council and its subcommittee on erroneous payments, which is jointly made up of the Inspectors General community, as well as the financial community in the

agencies. We have gotten very good feedback there, and have a

process that really includes four steps. The first step is the requirement for agencies to inventory their programs and their activities.

The second step, then, based on that inventory, is to assess the

risk of erroneous payments in those programs and activities. That

risk assessment is really the key first activity point. Based on that,

where the risk is high, we will ask the agencies to estimate based

on the formula—and I will go over that formula with you in a moment—to actually do a statistically valid estimate of the amount of

erroneous payments. That, as well as plans for remediation will be

reported each year in the performance and accountability reports

that are due back from the agencies. The first reporting period

where that will be included will be in the November 2004 performance and accountability report. That is the first one where it will

be required under the act.

We will continue to ask for information on erroneous payments,

consistent with the directive that went out under the President’s

budget, under the A–11 guidance. So in the interim until we get

to November 2004, we will continue to get that information and obviously I would be glad to share that with you and with the committee.

As far as the definition of erroneous and improper payments, to

answer the question about fraud, yes, fraud is included in that definition. You mentioned earlier in your opening statement, Mr.

Chairman, some of the types of erroneous payments. Certainly, it

includes the very obvious ones of incorrect amounts, both over-and

under-payments. We will be getting information very specifically

about over-and under-payments that will not be a net amount. It

will be the absolute value, if you will, or gross amounts, and we

will be able to have those separately identified.

Of the $35 billion figure that we currently have for the $900 billion amount of programs, the $35 billion is made up roughly of $30

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billion of over-payments and $5 billion of under-payments. So we

will be able to continue to identify those separately.

Other categories in that definition would include inappropriate

denials of payments for services. It would include payments made

to ineligible recipients or for ineligible services; duplicate payments; payments that do not include the proper accounting for discounts that may be applicable. ‘‘Payment’’ means any payment that

is derived from Federal funds or Federal sources, or down the line,

from a Federal entity. So for example, Federal funds that go to a

State and then from the State to an ultimate recipient, if that was

made improperly, that would count and should be in the universe

of what is reviewed under the guidance.

It also includes Federal awards that are subject to the Single

Audit Act, and the Single Audit Act, obviously, and recovery auditing all provide additional tools, in addition to the very explicit guidance that we will be issuing later this week.

I could go on for a while, but maybe you have some very specific

questions.

Mr. PLATTS. Actually, I have a couple of followups of things that

you did highlight. One is, you mentioned that the first reporting

under the act will actually be November 2004. It sounded like from

what you said that while that is the first time we will actually see

the reports pursuant to the new act, that there will be a constant

oversight between now and then. So in some of our previous hearings where we have talked about where we would get to the end

of the year, and where we have the financial accounting requirements, and we have these heroic efforts to get the books in order

at the last minute. It sounds like OMB is going to be day-in and

day-out, or month-in and month-out, between now and November

2004, working with the agencies, that they are moving forward

pursuant to the guidance being offered to ensure that they are putting in place those internal controls, that when we get to the November 2004, deadline, that we have accurate information readily

available.

Ms. SPRINGER. Yes, that is a good characterization. We certainly

are not in the business of just issuing guidance and then being inactive. We expect to meet as soon as the guidance itself is issued,

and hear about the plans; make sure there is a good understanding

of the guidance, first of all, at the agency level and hear some feedback from the standpoint of its first assessment. Do we need to provide outside authorities, make them available, because these do involve some statistical formulas that need to be met and statistical

standards. We believe that agencies will need to get some assistance from some outside parties that have been involved in this activity. So we will be involved in that respect.

We will want to get the plans. Similar to what we are doing on

the financial reporting side, we will actually get from each agency

the plan. The reporting in 2004 is just the culmination of the execution of that plan.

Additionally, we will continue to get information for a broad

number of agencies that cover roughly half of Federal payments

that were targeted under the President’s Management Agenda. So

that will not stop. That will be replaced by the act and the new

guidance requirements, but up until that 2004 first reporting, we

49

will continue to get the reporting that was required under the

President’s Management Agenda. So there will not be a lapse in information coming or a lapse in our involvement.

Mr. PLATTS. OK. You touched also on guidance related to our

Federal programs, but administered by the States. Mr. Weems also

referenced them, such as Medicaid. How detailed, how involved will

your guidance be in trying to get agencies to work with States who

are really on the front lines of improper payments relating to those

State-run, but federally funded programs?

Ms. SPRINGER. Right. The dollars associated there are not small,

either. We have done several things. The guidance will certainly

address that. We make reference to audits performed under the

Single Audit Act, and that is probably the key focal point of activity, that Single Audit Act, in dealing with integrity issues in programs that involve the States. My staff and I have attended and

worked with the State and local auditors, controllers and treasurers. We have been to their meetings. We have shared the guidance

with them. I was on the phone as recently as yesterday with one

of the State auditors general.

As a matter of fact, OMB just clarified where there was a point

of confusion in recovery auditing, where the States had actually instructed contractors to not audit programs that were funded with

Federal dollars because they felt—there was some misinterpretation out there—that the dollars that would be found could not be

available to help pay for the cost of the audit, which was totally

wrong. The Federal Government was not getting the attention it

deserved from these audits. We have issued late last week, I believe, clarification, so we are making calls. So we are actively engaged is the message I am trying to give to you, and we have

shared the guidance with them and gotten their input.

Mr. PLATTS. Let me yield to our vice chair, Ms. Blackburn. But

just to put it in perspective, when we talk about these numbers—

$35 billion—and we talk about Medicare and adding prescription

drug benefits, over 10 years of spending $400 billion for that new

plan. If even these conservative estimates of the erroneous payments are accurate, it would in essence be the cost of that new benefit being added, if we totaled it over 10 years. So we truly are

dealing with some significant sums of money that can be put to

much better use for our taxpayers.

Ms. SPRINGER. Right.

Mr. PLATTS. Ms. Blackburn.

Ms. BLACKBURN. Thank you, Mr. Chairman.

Mr. Williams, I want to just tag onto what he was saying, and

come back to you. The $35 billion estimate, from your testimony,

I was unclear as to whether you included what you thought may

be erroneous payments in Medicaid in that amount or not, from

your written testimony?

Mr. WILLIAMS. The $35 billion is the amount that OMB has estimated. What we are saying at GAO is that you have to put the procedures in place to have all agencies in the Federal Government go

through the process of identifying where they have weaknesses and

where they have improper payments, and, at that particular point

in time, have all of those agencies report that information. We have

recommended that reporting be transparent so that the Congress

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and the American people will have some idea as to what the improper payment number is governmentwide. Until you establish

that base, we are saying that you do not know what the total picture of this problem is.

Ms. BLACKBURN. OK. Thank you for that clarification. I appreciate that.

So basically what you are saying is that until we get to November 2004, with some procedures in place, you think we do not have

a solid estimate? Would that be correct?

Mr. WILLIAMS. Until we get to that point where we have the entire government, that will be the first step, because this process is

going to take some time for some agencies. Some agencies are already estimating their improper payments, and they have procedures in place where they can do a good job. For other agencies,

this will be the first time, so it will probably take them some time

to get up to speed with this particular process. So we will be getting closer to it at that particular point in time.

Ms. BLACKBURN. Thank you, sir.

Ms. Springer, we thank you for being back with us. Looking at

the private sector, I know that GAO had an executive guide in October 2001 that provided some information on strategies used by

private sector organizations. Now, how much of those private sector

solutions have you incorporated into the draft guidelines that you

had mentioned, for the Improper Payments Act?

Ms. SPRINGER. We have drawn from the GAO study. We have reviewed it, and we have looked at the techniques and the plans.

There are really four or five main principles that are in that document. We have incorporated those. We believe that what we have

in the guidance is very consistent with what GAO has put out in

that August 2002 report.

If I may, may I just add one other piece to round out the scope

of the problem that might be helpful to you as well. If you—and

I did not bring a pie chart; if I had a little more time, I should

have—but if you view the total government’s budget as the universe of expenditures—a little bit in excess of $2 trillion—there is

$900 billion of that that has been measured. Out of that, we had

the $20 billion that was originally estimated from GAO and another $15 billion or so that surfaced as a result of the President’s

Management Agenda. So that is $900 billion. Another close to $200

billion, rounding off numbers, would be related to Medicaid, which

has not yet been reviewed. Then there is another $100 billion or

so that would take us up to the total encompassed by the existing

original OMB guidance. That really leaves another roughly $1 trillion that would be picked up as a result of the act from last year.

Included in that other $1 trillion is about $250 billion that is already covered by recovery auditing, to some degree. So there is another $750 billion or so that really has not been looked at. That

makes up the full pie chart. So we have roughly covered half of

that, between recovery auditing in the $900 billion that we have

looked at so far.

Ms. BLACKBURN. OK. Thank you. That makes it come together

a little bit better. Sometimes as we read testimonies and review,

you guys know the total picture and we are trying to pull that together. It does get confusing with different testimonies and difVerDate 11-MAY-2000 11:34 Sep 09, 2003 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 D:\DOCS\88736.TXT HGOVREF1 PsN: HGOVREF1
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ferent numbers used as those benchmarks in those references, so

I appreciate that.

Ms. Springer, going back, you mentioned the guidance on improper payments, with the inventories and the risk assessments in

those four items. Now, other than that, or prior to issuing those

guidances, what have you all done with the agencies in helping

them address improper payments?

Ms. SPRINGER. I would say to a large degree we have worked

with the agencies and identified for them which programs we think

they should be looking at. We have talked with them about contractors that they can use that we understand from the private sector have done a good job. We have not put out any one single formula prior to this guidance. I think in anticipating that the act was

moving along at a good pace that we did not actually sit down and

put out a formula and then have to go back and modify to be consistent with the act. So we have worked with the agencies to just

understand their own formulas, but now with this guidance we will

actually be putting out something that is more directive, as opposed to just reacting to what they were doing.

Ms. BLACKBURN. Mr. Weems, looking at Medicaid specifically, is

there anything that you all are doing to reduce erroneous payments

with that program?

Mr. WEEMS. Yes. We began a pilot project last year with nine

States where we asked them to develop their own method for calculating error. We expect to expand that to 12 States this year; 25

States in 2004; and then by 2005 be able to produce a national

error rate.

Ms. BLACKBURN. To followup, OK, so you are letting the States

take the lead in designing their program for the tracking?

Mr. WEEMS. Not entirely.

Ms. BLACKBURN. Not entirely, OK.

Mr. WEEMS. With the nine that we have begun with, we gave

them, within a framework, the ability to do that. We are going to

take that now and analyze it; look at the methods they used and

make sure that what we do in the next round will have a higher

degree of consistency and a higher degree of rigor; then in the next

round, an even higher degree of consistency and a higher degree

of rigor so that we can come to a point where all of the States will

be using a method that will accurately give us a measure that is

valid for the State, and also a national Medicaid error rate. We are

proceeding in this fashion because States are an important partner

in the Medicaid program. Right now, the funds are not quite evenly

divided. I believe we spend about $160 billion and the States spend

about $122 billion of their own money in the program. So, it is important for us to proceed with them as a partner. Their interest in

this, given the state of State budgets right now, is obvious, but we

want to proceed in a way that it is not just the Federal Government telling the States how to do it, when in fact we have significant variation across the States in the way that they run their own

programs.

Ms. BLACKBURN. Mr. Chairman, may I continue on?

Mr. PLATTS. Yes.

Ms. BLACKBURN. OK. Thank you very much.

52

Do you have a budget? What is it costing you to run the pilot

programs—just the implementation and the oversight of those?

Mr. WEEMS. I believe we expect to spend $10 million this next

year to do that, and then we will have to look at it again when we

phase it up to the 25 States.

Ms. BLACKBURN. OK. So basically, you are going through it—the

nine States, you will develop a list of learned lessons and best practices, and use those with the 12, and then on with the 25.

Mr. WEEMS. Yes, that is correct. Yes, ma’am.

Ms. BLACKBURN. OK. Alright. Thank you very much.

Mr. Chairman.

Mr. PLATTS. I am going to continue, Mr. Weems, on the Medicaid

issue. The nine States came on board in 2002?

Mr. WEEMS. Yes.

Mr. PLATTS. Are there any initial results from those nine States,

or is it too early because of it being a new pilot program?

Mr. WEEMS. There are results, but I would be reluctant to characterize them right now because of the diversity of the way that

the States approached it, and also the amount of rigor with which

the States might have approached it. So it is possible that one

State could have ended up reporting a very low error rate, when

the degree of rigor they applied might not have been the same. So

I would be reluctant to characterize. I would say that there is some

variation. We are going to look at that, use the lessons learned

from those 9 States, then as we proceed with the 12, apply more

rigor.

Mr. PLATTS. But am I understanding correctly that as you go

from the 9 to the 12, and the 25 and then ultimately to all States,

that at some point you envision having a uniform system for every

State to take the same approach so that you are comparing apples

and apples, one State to the other?

Mr. WEEMS. Yes, for precisely the reason that you state, Mr.

Chairman—for the sake of consistency so that if we say there is a

national error rate and then one State has a certain error rate, it

should be comparable to another State.

Mr. PLATTS. Is that something that is going to take legislative

change to require States to implement this uniform plan? Or is it

something that you believe you have the authority to require already?

Mr. WEEMS. We believe that we have the authority to do it now.

If we discover that we need additional authority, we will be right

back with you. Also, as we have proceeded so far, it has been a 100

percent federally funded effort. Whether or not we will sustain that

through the future also remains a question.

Mr. PLATTS. Do you envision with recovery audits, where there

is an ability to use some of the funds recovered for costs under the

program, that you will have something similar for States, so there

is an incentive to be more diligent and more of their costs are offset?

Mr. WEEMS. Absolutely, Mr. Chairman. That is the incentive for

States to be our partner, as we have discussed.

Mr. PLATTS. OK. A question maybe for all three of you—the disparity between error rates is pretty significant from the 30 percent

in the EITC to some of the ones, Ms. Springer, in your written tesVerDate 11-MAY-2000 11:34 Sep 09, 2003 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 D:\DOCS\88736.TXT HGOVREF1 PsN: HGOVREF1
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timony you highlight the Federal Employees Health Benefits Program—1.4 percent; DOD when it comes to the military retirement,

0.05 percent error rate. Is it simple—I don’t know if ‘‘simple’’ is the

right word—but simply the internal controls in place that results

in a 30 percent, which is a huge error rate compared to 1 percent

or 0.05 percent rate. What would be your best estimates from the

three of you why the great disparity that one program is doing

such a great job and another program is doing such a horrific job?

Ms. SPRINGER. I will open with a couple of thoughts on that. I

think some of it is the nature of the program. I think there is a

certain amount that may be related to controls, and I will talk

about controls in a minute. But I think some of it is the nature of

the program. Ones like Federal employee benefits programs I think

are going to be less prone to the types of verification—it would be

easier to verify eligibility, to demonstrate that you are the right recipient; and the amount might be clearer to assess the right

amount to pay. I think there are certain programs that just by

their construct are more easily dealt with and it is easier to be accurate about the process of payment and to test it and to ascertain

in fact that things are being executed properly.

Mr. PLATTS. Excuse me for interrupting—so would that be an example like with HUD, where Congressman Sessions is proposing

legislation to give access to more information that would allow that

control to be more significant of the decision of whether this is a

valid payment or not?

Ms. SPRINGER. That is right. That would be a tool there. The information is available, in the case of the better players, the better

actors, to make the assessment, as well as the construct of the program. HUD, and in some other situations—the Department of Education is another one for verifying direct student loans, where the

administration would like to be able to provide the Education Department with access to information from the IRS, to be able to

validate income levels and eligibility there. They do not have that

tool yet. So where the tools exist, you will see lower rates; where

the tools are not there and the construct of the program is a little

bit more challenging, you will tend to see higher rates.

Mr. WILLIAMS. I would like to add to that. It is probably a combination of issues. As stated earlier, certain programs have inherent risks of improper payments. You might have one particular

program in which the improper payment rate is 10 percent, and

you would have another program in which the improper payment

rate might be 4 percent. It might turn out that, when you do a

total assessment that the 10 percent rate, people at that agency are

doing a better job than the one that has 4 percent. So you have to

look at the overall picture as far as what are the inherent risks in

the particular program. You have to look at the commitment from

management to address the program. Some programs might have

a higher number because the agency is doing a better job of identifying its improper payments. Other agencies might have low numbers because their methodology of identifying the improper payments could be improved. So it is a combination of factors that you

have to look at. That is why you want to get procedures in place

that you can look at across the government, and you can make

some comparisons and say that this particular program is doing a

54

great job and getting a handle on its improper payments and doing

a great job in trying to reduce that number, but you should not expect to see where every department or agency within the Federal

Government would have the same number or the same percentage,

just because of the variations in the programs.

Mr. PLATTS. That is a point well taken, that goes into the many

variables. It is something that I, until reading some of the testimony, assumed that access to information, like the student aid applications, access to the income data, was available. As one who is

about to pay my last student loan payment after many years, for

law school and undergrad, I want people who either have it to pay

it back, or not get it if they are not eligible. I assume that that information was part of the review, to verify. Obviously, I have

learned that it was not, and we need to correct some of those challenges that should not be challenges, but should be just readily

shared between agencies.

Mr. WILLIAMS. That is correct.

Mr. PLATTS. Would you like to add anything, Mr. Weems?

Mr. WEEMS. Mr. Chairman, our experience in the Medicare program—Medicare has both a risk and it is a complex program. In

a lot of ways, Medicare is an honor program in that we are billed

for services. We do not have Federal employees go and check with

beneficiaries and see if in fact those services are rendered. It is

only through the audits or looking back through claims that we are

able to actually discover some of those kinds of errors. We do have

pre-payment gates in effect where we can look at a claim and determine, is this person a Medicare beneficiary, and does the service

look valid. The classic one is, is this a male and is the procedure

a hysterectomy—we would not pay that claim, for instance.

In our first experience, we found that many of the claims that

we looked behind did not have proper documentation. That is,

when we asked for the medical record, the medical record was improperly documented or there was not any documentation at all. So

we called that a payment error. Now, it could quite possibly have

been a correct payment, we were just not in a position to determine

that. So given the complexity of the Medicare program, we have

spent an awful lot of time and money educating our providers

through the contractors on how to properly submit a Medicare

claim; how to code them correctly; and how to properly document

a procedure. As a result, our error rate has fallen and also the proportion of the error rate that is explained by improper documentation has fallen even more dramatically.

We understand those risks and I think from our experience we

would say working with our clients and providing good education

is a good way of mitigating both the inherent risk in the program

and the complexity.

Mr. PLATTS. Maybe I would describe it as a kinder and gentler

approach to not having wrongful payments in the first place, with

that cooperation. It kind of goes to the internal controls of the provider. We are talking here about the internal controls of the agencies, because that is something when one of my work days I spent

in an emergency room for about 12 hours with emergency department doctors and nurses, administrative staff. One of the things

that was a little overwhelming was the paper documentation that

55

went with treating any patient, including or maybe even especially,

a Medicare patient. What came through to me is that they understand that they need to be very thorough so that if after the fact

there is a review of what has been paid to determine whether it

was a proper or improper payment, that the documentation—the

ducks are all in a line as need be.

Mr. WEEMS. That is very important to us, because looking across

all of the programs in HHS, we administer very few directly. Most

we administer either through the States or through contractors. So

it is very important that the States and the contractors have in

place proper controls.

Mr. PLATTS. And that highlights a point that while the estimates

may be as high as—using Secretary Rumsfeld, I think he has been

on record that as much as 5 percent of the payments by the DOD

are improper in some fashion—correlating that to the whole budget

and appropriations, would be as much as $80 billion a year; that

some of that is intentional deception or fraud, but a lot of it is just

not properly documented. It might be a legitimate payment, but we

are not dotting the I’s and crossing the T’s, and we need to do a

better job internally with the government and with the providers

or contractors out there.

Mr. WEEMS. That is exactly right.

Mr. PLATTS. Ms. Blackburn, did you have further questions?

Ms. BLACKBURN. Yes. I think I want to go back to the point the

chairman had made about incentivizing some of the agencies and

the levels of government through the recovery audit. In doing that

for a job well done, what kind of penalties are we looking at for

the agencies who still have high rates of error payments, or is

there any thought to that?

Ms. SPRINGER. My recollection is in the act as they are set out

now, both the recovery audit guidance, and also the new guidance,

I do not know that there is specifically a penalty that is laid out.

It is an interesting thought. Certainly, one thing that does come

into play here is that we have the performance assessment rating

tool, the PART process that we have, that is meant to tie performance to the budget. In a certain sense, I would expect to see the

erroneous payment rate become a part of those assessments of programs.

To the extent that there is not progress in bringing that rate

down to a targeted rate, I would expect that to be a factor in the

appropriations and the budget submission process. That could work

in two ways. It could manifest itself in saying we could do more—

even somebody who is making progress, but slowly could say, well,

we would like to do more, but we would like to get some funding.

If you can demonstrate progress, then maybe that could work as

an additional amount. It could also work in the opposite direction

as more of a penalty. So I think there is an opportunity through

the PART process for that to have some consequence for agencies

that are not making progress.

Ms. BLACKBURN. Thank you.

Mr. Williams, you spoke just a moment ago about the different

rates, and where 10 percent can be a good rate at one, and 4 percent at another one.

Mr. WILLIAMS. Yes.

56

Ms. BLACKBURN. Now, when you know that there are these improper payments that are out there, and we know it is never going

to hit zero all across the board, what do you think is more or less

a benchmark of an acceptable rate, or do you have a set rate that

you are looking to get these down? And what is your timeline for

getting these down? Is it November 2004 or where are we on that?

Mr. WILLIAMS. There is no specific number right now that I could

give you for the various agencies in the Federal Government. The

first thing that you have to do is to get a handle on the process.

I think the legislation has gone a long way by requiring agencies

to go through the process of assessing their operations. What you

have to do at that particular point in time is make your assessment

and form a baseline. Then you are in a position to set targets and

goals, and look at your operations and say, this is where I would

like to get to. So at this particular point in time, it is very difficult

to say what a good number would be for the various agencies.

There are some that, as I said earlier, have been doing this process. They have a good feel for what is going on. But across the government, to get this issue addressed governmentwide, you need to

have all of the agencies go through this process. What might be a

good number for one agency would not be for another. So you have

to take it on an agency-by-agency basis and take it from there.

As far as the timeline, one of the things that you have to consider in this area is that some agencies are further along than others in this particular process. Just getting in the information in fiscal year 2004 might be good for some, but it could take some additional time before agencies get to the point where they really do

have a good handle on what those numbers should be.

Ms. BLACKBURN. I know. I think it is just troublesome to some

of us who watch this process to think of how many years this has

gone on, and how many billions of dollars have been improperly

tracked and unaccounted for. There has seemingly been no recourse or no change of activity. I think that does make it difficult.

Mr. WILLIAMS. Yes.

Ms. BLACKBURN. In that vein, what specific recommendations for

action do you all have on making the information on improper payments per agency more readily available and more transparent?

Mr. WILLIAMS. I think the Congress has taken the action that we

suggested in our August 2002 report, and, with the passage of the

legislation, to require the agencies to report this information, to go

through the process. That is the first step. I think if you look at

this from a root cause of these problems, most times it can be

traced back to the lack of good internal controls in place. As we

talk about our framework for establishing a good internal control

system, the first thing that we talk about is the control environment. We talk about setting the tone at the top. I think the President’s Management Agenda and the Congress passing legislation

requiring agencies to take these various steps to identify and to report improper payments all point to us heading in the right direction. So I think the Congress has taken the step that we need to

get this process under way to do more than just talk about it, but

to have some accountability here in which agency management is

responsible for identifying and addressing the improper payment

issue.

57

Ms. BLACKBURN. Yes, I think you are right. The public has a

tendency to get tired of talk, and they want to see some action.

One more question.

Mr. WILLIAMS. OK.

Ms. BLACKBURN. Mr. Weems, I am new to Congress this year. I

came from a State Senate. We were always tackling and working

through TANF and Child Care, and some of the problems that surrounded that. Now, you have spoken of Medicaid, the work there

with the audits and the improper payments. What are you doing

specifically looking at Child Care dollars and improper payments

there?

Mr. WEEMS. Child Care—we are at the point of evaluating that

program and doing our initial risk assessment on it. That is one

that I would say is farther back in the queue for us. It is on our

list of seven. We are just not as far along on it as we are for the

others. With respect to TANF, as you know, in the TANF legislation, the Federal Government does not have a substantial ability

to review data and information from that program. One of the tools

that we will need in the TANF program is legislation to open that

up a bit so that we can get that information. We are currently in

discussions to craft that legislation correctly and get it up to the

Congress.

Ms. BLACKBURN. Will you review that basically more than in a

macro sense, I would assume?

Mr. WEEMS. Because of the variation in the States, we will have

to look a little farther in. At initial blush, the thing that we are

going to concentrate on is the actual cash payments, rather than

some of the other things that are possible under the TANF program.

Ms. BLACKBURN. Thank you very much.

Thank you, Mr. Chairman.

Mr. PLATTS. Thank you.

The followup on that with specific suggestions—you had identified the administration of the foster care program I believe as well.

Is there specific legislation that you have in mind, or is that still

in the draft stage?

Mr. WEEMS. It is still in the draft stage. We are still discussing

our needs with our colleagues, but we expect to be able to provide

the Congress something soon.

Mr. PLATTS. Because as I stated earlier, one of the benefits of

these hearings is not just for the general public and for Members

to understand how agencies hands are tied in some ways, with

Congressman Sessions addressing the issue at HUD and access to

information there. We talked about student loans, foster care,

TANF—that we can all be on the same page and working diligently

if there are legislative changes needed, that we identify them and

try to move forward as quickly as possible to give the agencies that

information. Because we are putting the onus on developing the internal controls, but if there is information outside of their ability

to acquire that is still going to hinder their efforts, then it is something that we should not really be holding them responsible for—

our inability to get them that additional information.

The question—and Mr. Williams, you talked about a baseline

and the Improper Payments Information Act will help establish

58

that now by requiring all the agencies to identify their improper

payments—and that coming forth in the 2004 performance and accountability standards report. As a general taxpayer, sometimes

watching the various TV broadcasts or reading the paper about

this improper payment that comes to light, I will be watching a

show at night at home and my wife will say, ‘‘Is that really happening? Why don’t you stop it from happening?’’

Why so long? Even though the guidance is just coming out now,

the agencies have known since November when it was signed into

law that this was going to be a requirement, why the 2004? Although not required to be in the 2003 reports, what would hinder

us from getting it in the 2003 report, a year sooner, so we get on

track and get that baseline established a year earlier?

Mr. WILLIAMS. Yes. I would support any early reporting of this

information because the sooner that we start reporting this information and put as much transparency in the reporting process as

we can, the better, in my opinion. I would say also that there are

some things that you have to look at when you are talking about

an issue like this, and using this internal control framework. I will

repeat what I said earlier, and that is, in order to address these

issues, you have to have a control environment. I am not just talking about at the agencies, but I am talking about you need a control environment that collectively involves the Congress, the administration, agency management—the entire government. So it is

going to take a coordinated effort of everyone working toward addressing this issue. You are going to have to continue to hold hearings like this to hold people accountable for what they are doing.

I think it all gets back to accountability as to what needs to be the

focus in this particular process.

I have worked on other issues. I have seen longstanding problems. But one of the things that I have observed in a lot of the

issues that I have addressed over the years is that you have to

have things like this. You have to have these hearings to hold people accountable, to make sure that they are aware that the Congress is looking at this process. It should result in getting some action. You need to get progress reports. This is where we are at this

particular point in time. This is where we are trying to get to.

So that is what needs to be done—that tone at the top, which as

I stated in my opening statement—I am beginning to see that. I

think that is going to result in some positive events as we move

down the road in addressing this problem.

Mr. PLATTS. Maybe that leads into a followup question, Mr.

Weems. You mentioned about the tone at the top of HHS that has

really helped to put a focus within that agency. Can you share

some examples of the actions at the leadership of HHS that have

helped to set that tone on the right track, that this is a serious

issue and we are really going to dive into it in all ways possible?

Mr. WEEMS. Absolutely. In this case, certainly Secretary Thompson is an extremely energetic boss that demands an awful lot of accountability from his employees, as he should. He also is from

Elroy, WI, where I am sure one can still get a 99 cent breakfast.

[Laughter.]

These are large numbers to him. So he sets that tone, and we

do a number of things. First of all, the management agreement

59

that we have with our colleagues with OMB and with the President

is reflective of that commitment. We have been and our colleagues

have been very aggressive in coming to that commitment and to

that arrangement. Also, once a month we have management meetings with the senior management leadership in the Department

where we are expected to report on our results, where we are on

the management plan. This is part of it. And then quarterly, the

entire leadership of the Department meets to go over where we are

on our management objectives. It is something that is with us

night and day.

Mr. PLATTS. And with the Secretary being a big fan of HarleyDavidson, and his District is home to a large manufacturer of Harley-Davidson, a plant, we think well of the Secretary as well.

Ms. Springer, how about—and realizing that the agencies are

heading in the right direction and HHS is an example of that, trying to bring more scrutiny and more focus and energy to this issue,

is OMB considering—you mentioned how you are going to have this

information being shared in a more voluntary sense, or part of the

management plan between now and 2004. Would OMB consider

strongly encouraging it being in the 2003 reports as opposed to

waiting until 2004?

Ms. SPRINGER. Certainly for the programs that reflect that $900

billion—that roughly half—there is no question that we have requested that, and we could make that available, and we can ask

them to put that in their plans. That covers 15 agencies. So even

though it is only roughly half of the total Federal outlays, most

agencies will have some piece that they are already required to do,

and we can certainly make that a requirement for 2003 for those

plans.

Mr. PLATTS. OK. I am checking my notes here. As we share questions and in your opening statements, you covered a lot of the

issues I wanted to explore a little further, but I want to see if I

missed anything.

I want to come back to a final question. We kind of touched on

this earlier when we talked about the EITC program and trying to

get our arms around that 30 percent error rate. If I remember my

numbers correctly, the administration has asked for about $100

million of additional funds to get our arms around it, to try to reduce that; that if we spend that $100 million, we will save a lot

more than that if we can get a better plan. Can you give more detail what you envision that $100 million being used for, and what

the cost-benefit analysis is if we spend that $100 million, we estimate we will maybe save X dollars or reduce our error percentage

of X amount?

Ms. SPRINGER. Yes. Well, just to put the full perspective on it,

the EITC program has been under review by various consultants

that the IRS has brought in. They estimate the total erroneous

payments to be in excess of $9 billion. That is one of the largest

single program amounts in the $35 billion total—close to one-third

of it; I guess one-quarter. So in any event, out of $9 billion, I do

not know the exact percentage. I could find that out for you. They

actually came to OMB and asked last fall for even more money

than the $100 million. We thought $100 million was a good

amount—they could get a lot accomplished with $100 million and

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then based on the accomplishments associated with that, how

much they could bring back in the way of improvements, then they

could in effect re-up for additional funding.

There are three basic causes of erroneous payments in the EITC

area. There are income reporting errors; there are taxpayers that

claim that they have a qualifying child, and they do not always;

and then there are also taxpayers that will claim the wrong status.

They will claim that they are married when they are really single,

and that affects it as well. Sometimes you also get a child being

claimed more than once. So there are a variety of things there and

it can be done at the front end.

In most cases, it will not involve any additional paperwork or effort on the part of the applicant. It is just that we will be able to

verify that the information is correct, and then if there is a followup, we would need to get some additional information to support

what they have requested. Again, I do not know the exact percentage of the $9 billion, but it is not an insignificant number and I

could get back to you with that.

Mr. PLATTS. If you could followup on this in maybe a little more

detail on what that $100 million is proposed to actually do—how

you are going to go about trying to reform the program and what

that projected benefit is.

Ms. SPRINGER. Right. I would be glad to do that. I do know that again, there was a study done in advance. It was not, give us $100

million and we will try and figure something out. They actually

have had a consultant on board and are doing an assessment, so

we will be able to get that for you.

Mr. PLATTS. Mr. Williams, in one of GAO’s previous reports,

there was acknowledgement of departments or agencies changing

their goals and objectives, which perhaps has had an impact on

ability to really assess the level of improper payments.

Mr. WILLIAMS. Yes.

Mr. PLATTS. I assume that with the new law in place that we

will overcome that because of establishing more of a uniform approach to evaluating improper payments. Is it your sense, or was

it in that statement in the report, that there was an intentional effort to try to hide that level of error rate, or to reorganize and start

over because we will see if we can do better? What is your read

on that effort?

Mr. WILLIAMS. My sense is that this was agencies’ attempt to

better report their performance in the GPRA. I do not think it was

an attempt to hide what the amount of their improper payments

were, but we have been critical of agencies in their GPRA reporting

over the years. I think you see these changes as agencies attempt

to better report how well they performed over the years. So I think

that is what the focus would be more on.

Mr. PLATTS. Not just presenting their information in a more positive light under GPRA?

Mr. WILLIAMS. That is correct.

Mr. PLATTS. A question for all three of you, and I think maybe

my final question is on having more accountability and internal

controls. As part of the Sarbanes-Oxley financial reforms regarding

publicly traded companies, we required audit opinions on their internal controls. I would be interested in each of your opinions on

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whether we should require audit opinions on the internal controls

of each of our departments and agencies within the Federal Government, as we are now requiring these publicly held companies to

do.

Mr. WILLIAMS. We at GAO have always supported having an

opinion on the internal controls. We think that this would be, at

least we consider this to be a best practice. We think it would provide more information on the various control weaknesses in an organization. The current reporting basically is one in which the

auditor talks about those areas in which they look at and which

they consider material, but we think it would be much better to

have the auditor look at the entire control process. Without getting

too technical, there is a process that we as auditors go through in

identifying the controls. We use that information for various reasons. I am of the belief that in order to get to the point where you

would be in a position to issue an opinion, there would be additional testing that would be required to put you, as an auditor, in

the position to do that. We think that would be much better information under a control environment at an agency than the current

report model.

Mr. PLATTS. Ms. Springer.

Ms. SPRINGER. Yes, it is a good question. It is a timely question.

Let me just provide you with an understanding of what is done

today, versus what is not done today, that would be contemplated

under expressing an opinion. It is very consistent with what Mr.

Williams just mentioned.

Today, as far as the internal control environment goes, the independent auditor gets an understanding of the control environment.

They assess the risk of any kind of material weakness. They will

test the internal controls and report any findings. They stop short

of expressing an opinion. So there is a lot of work that is done, but

it is a testing type of review, as opposed to an opinion level review.

There is a difference. But the fact that they do not express an opinion does not mean that there is no testing or risk assessment or

review for material weaknesses.

It is my understanding that the IG community estimates that it

would cost an additional 20 to 30 percent of existing audit fees to

go from that testing review up to signing an opinion. What we

would need to do—and I am not prepared to say that it is worth

that or not; I have not seen a cost-benefit assessment—but that is

the assessment that would need to be made to determine whether

or not that additional rigor, and there would be some additional,

is warranted and what the benefit is. We believe that within the

context of this discussion of erroneous payments that there is a lot

of ground that we can get by just instituting these practices that

we talked about today, over and above just what we would get from

this extra 20 or 30 percent cost.

So it is not as if there is nothing, and that is the point that I

want to make.

Mr. PLATTS. Yes.

Ms. SPRINGER. The fair amount of review today just stops short

of rendering an actual opinion. It is not inappropriate to look at the

merits of that, but I am not sure where we come out.

Mr. Weems.

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Mr. WEEMS. I agree with Ms. Springer. Our audits do significant

testing on internal controls and doing risk assessments of those

controls. We are concerned about the cost. Without a cost-benefit

analysis, and this is certainly something that we need to pursue,

some of our instincts tell us that marginal dollar might be spent

on correcting identified weaknesses, rather than seeking an audit

opinion on the internal controls themselves.

Mr. PLATTS. Ms. Springer, I was not sure, is there a cost-benefit

being done to look at that? Or are you just saying that you would

want that to be done before moving to that level?

Ms. SPRINGER. The latter.

Mr. PLATTS. OK. Because I am not certain of that total cost of

that testing level of audit that is done today, and what 20 or 30

percent equates to, and then to make a comparison when we are

talking $35 billion or as much as $70 billion or $80 billion in erroneous payments, and whether there is an added benefit to the level

to make that worthwhile. But for those in scrutinizing from somebody from the outside, that audit opinion of the internal controls

would certainly help OMB in looking at all the departments and

agencies, or Congress in looking at just not it has been tested, but

here is our opinion of how it is working or not—that would give

some added information to assess who is being thorough and doing

a good job, and who is doing something, but not necessarily as good

a job as they could otherwise do.

Ms. SPRINGER. There is no question that being able to have an

opinion to point to is like having that Good Housekeeping seal of

approval, and that answers any questions.

Mr. PLATTS. You know that is going to be public, so there is

maybe more pressure to fine-tune your controls.

Ms. SPRINGER. Right. And it is indisputable. I agree with you 100

percent. The only question that I would still need to have answered

for me is the cost-benefit—proving that there really is an addedvalue to it; a cost-justified value. I will tell you that it is an issue

that has come up. You are familiar, I think, with the fact that the

principals—the Director of OMB, Comptroller General Walker and

Secretary Snow, and OPM Director James and I and some others

meet at least quarterly and review financial management issues

within the government. We met last week and this was an issue

that we discussed. We will not lose track of this.

Mr. PLATTS. I was wondering what you are doing with Medicaid

in 9 States and 12, to pick a small department, maybe a large

agency, to pilot it to see in actual implementation whether there

is a benefit worth the investment? Is that part of the discussion?

Ms. SPRINGER. It is possible. We have not specifically had that

teed up, but that is a possible way.

Mr. PLATTS. OK.

Mr. WILLIAMS. Could I add a point to that? One of the things

that you have to take into consideration in that process of looking

at it from a cost-benefit standpoint. If you never look at those areas

that you have not tested, it might be difficult in coming up with

the benefits you would gain because you do not know what the control weaknesses may be. You also do not know how much those

weaknesses could be costing you from the standpoint of not identifying what those weaknesses are and having agencies put proceVerDate 11-MAY-2000 11:34 Sep 09, 2003 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6633 D:\DOCS\88736.TXT HGOVREF1 PsN: HGOVREF1
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dures in place to plug those weaknesses. So it might be a difficult

challenge to look at what is the cost-benefit of having auditors

issue an opinion on internal controls.

One thing that you would know for sure by having that opinion

is that the auditors have looked at the whole operation and assessed the controls of the entire agency or component that you are

looking at. But how much do you save by not looking at an area?

If you have not looked at that area, you do not know what those

weaknesses are. It might be difficult to determine.

Ms. SPRINGER. And I guess it is the issue of beyond just looking

at it, to actually rendering the opinion.

Mr. PLATTS. Right.

I do have one final question, Ms. Springer. With your final guidance about to be issued, I assume that there will be for each of the

departments and agencies, I will call him an ombudsman or a point

person at OMB that will be responsible for working with each department or agency as you move forward and the guidance being

actually acted on and implemented?

Ms. SPRINGER. Yes, that is absolutely right, in several ways.

OMB, as you know, on the budget side is already constructed with

focal points for each agency, but within my office, the Federal Financial Management Office, there is a person that is dedicated for

each agency, so they will also be charged with the erroneous payments review. I expect personally, as well as with one of my associates who has been leading this effort, to meet with all of them as

well. So, yes.

Mr. WILLIAMS. Mr. Platts.

Mr. PLATTS. Sure.

Mr. WILLIAMS. We at GAO would strongly support that. We

think it would be a great idea for OMB to take a very active role

in that particular process. We have had an opportunity to look at

the guidance. One of the things that is mentioned in the guidance

is it recommends that agencies take a look at our best practices report that we issued a couple of years ago and use that as a tool.

One of the things that we would encourage OMB to do is to work

very closely with the agencies to develop additional tools—tools

that would be specific to the individual agency. Individuals that

will be working with the various agencies on this issue should consider what additional tools can we come up with to help address

this improper payment problem.

Mr. PLATTS. So the guidance being kind of a broad floor on which

you build, depending on the individual needs of that agency?

Mr. WILLIAMS. That is correct. In addition to that, we have

begun some work in which we are following up on the recommendations that we made in our August 2002 report. We will

continue to look at this process to see what agencies are doing, and,

as part of that process, what is OMB doing in working with the individual agencies, as well as the various councils in the Federal

Government in the overall coordinated effort that we have stated

is needed to address this improper payment issue.

Mr. PLATTS. OK.

I want to thank each of you for your testimony, and the partnership that is clear between the executive branch with OMB, congressional efforts with GAO, and then the agencies out on the front

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lines. I think that is an important message we want to come out

of this hearing is that there is a coordinated and very dedicated effort that we get to the bottom of these erroneous payments. I would

again highlight my predecessor, Chairman Horn, in his great work

in getting the legislation enacted into law that we are now talking

about and moving forward with. Cooperatively, we can do right by

the taxpayers.

Thanks for your efforts here today and in your respective agencies day in and day out.

In closing, I also want to thank our staff, both majority and minority staff, who do an exceptional job and once again have been

great in putting together this hearing. As this hearing has demonstrated, improper payments are unfortunately a widespread

problem across our Federal agencies. Although it may be unrealistic to expect a perfect system with no erroneous payments, the

American taxpayer deserves far better than the current situation.

We must have internal controls and financial management systems

that work to prevent this kind of unacceptable handling of the taxpayer’s hard-earned dollars. Since improper payments occur across

all agencies, establishing sound internal controls, providing guidance to agencies, and working together to learn from each other’s

successes and failures will ensure that taxpayer dollars are being

used in the most efficient way possible.

We will certainly welcome the additional information that will be

provided as we discussed in the hearing, and we will hold the

record open for 2 weeks from this date for those who may want to

forward submissions for possible inclusion.

This meeting is adjourned.

[Whereupon, at 3:35 p.m., the subcommittee was adjourned, to

reconvene at the call of the Chair.]

[Additional information submitted for the hearing record follows:]

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