GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

United States General Accounting Office

Washington, DC 20548

October 31, 2000

The Honorable Bill Archer

Chairman

Committee on Ways and Means

House of Representatives

Subject: Medicare Financial Management: Clerical Errors in the Medicare Hospital

Insurance and Supplementary Medical Insurance Trust Funds

Dear Mr. Chairman:

The Department of Health and Human Services (HHS) reported to Congress in its

Accountability Report for fiscal year 1999 that the Health Care Financing

Administration (HCFA) had made several clerical errors in accounting for the

Medicare trust funds that caused the Hospital Insurance (HI) Trust Fund to be

overinvested by approximately $14 billion and the Supplementary Medical Insurance

(SMI) Trust Fund to be underinvested by approximately $18 billion. You asked us to

determine (1) what errors were made and how they occurred, (2) what effect the

errors had on the financial status of the General Fund, the HI Trust Fund, and the SMI

Trust Fund, (3) whether similar errors have occurred in other trust funds, and

(4) whether the Departments of HHS and Treasury have acted to ensure that similar

errors will not occur in the future. This letter summarizes the results of our review to

address your questions and provides recommendations to HCFA and Treasury to

further ensure that similar errors do not occur in the future.

Results in Brief

During fiscal year 1999, an inexperienced HCFA staff person inadvertently submitted

incorrect documentation to the Bureau of the Public Debt (BPD) for adjusting the HI

and SMI Trust Funds and the noninterest-bearing accounts related to the HI and SMI

Trust Funds. The clerical errors in the HI and SMI Trust Funds resulted in the HI

Trust Fund being overinvested by approximately $14 billion and the SMI Trust Fund

being underinvested by approximately $18 billion. The HCFA Office of the Actuary

estimated that, as a result, the HI Trust Fund realized excess interest earnings of

about $112 million and the SMI Trust Fund suffered a loss of about $232 million in

interest earnings. The net interest lost by the Medicare trust funds was about

$120 million. During the fiscal year, the general fund of the Treasury benefited from

the error by not paying the $120 million of net lost interest earnings to the trust funds.
Page 2 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

Therefore, the aggregate net effect on the trust funds and the general fund after full

implementation of the corrective actions was zero.

These errors went undetected throughout the year due to weaknesses in the internal

control structure at HCFA. Specifically, inadequate training and supervision

compounded by inconsistent and ineffective reconciliations were the key factors that

allowed these clerical errors to occur without being detected in a timely manner.

However, once the errors were identified, HCFA took immediate action to correct the

errors and address the internal control weaknesses that contributed to the errors.

The corrective actions included restoring the Medicare trust funds to the financial

positions that would have existed had the errors not occurred, in accordance with

recent legislation, and developing and implementing actions to correct HCFA’s

internal control weaknesses. Our review of selected financial reporting

documentation related to nine other major trust funds administered by other

government agencies did not identify similar errors.

Although HCFA has taken steps to help prevent similar errors from occurring in the

future, we are recommending that HCFA further enhance monthly benefit adjustment

procedures, formally include these procedures in HCFA policy guidance, and develop

training for the adjustment process. In addition, Treasury has begun informally

performing procedures to review and analyze HCFA’s requests adjusting trust fund

balances. We are recommending that Treasury formalize its procedures for reviewing

and analyzing HCFA requests to adjust trust fund account balances. In written

comments on a draft of this letter, BPD and HCFA agreed with our findings and

recommendations and stated that they have begun taking steps to implement our

recommendations.

Background

HCFA, an HHS agency, is responsible for administering Medicare, Medicaid, and

other programs that address the nation’s health care needs. In this role, HCFA is

responsible for ensuring that Medicare program benefits are provided to eligible

beneficiaries,1 and safeguarding the fiscal integrity of the Medicare programs, which

reported over $200 billion in payments in fiscal year 1999. Funds for the two largest

Medicare programs administered by HCFA, the HI and SMI programs, are held in the

federal HI Trust Fund and SMI Trust Fund. The HI program is financed primarily by

payroll taxes paid by employees and employers. The SMI program is financed

primarily by transfers from the general fund and by monthly premiums paid by

beneficiaries. Payroll tax revenues held in the HI Trust Fund that are not currently

needed to pay HI benefits and expenses are invested in interest-bearing Treasury

securities. Similarly, premiums and matching contributions not needed to pay

current SMI benefits, held in the SMI Trust Fund are invested in interest-bearing

special Treasury securities.

HCFA, like other program agencies that direct BPD’s actions, is responsible for the

ultimate disposition of the trust fund assets. To transfer funds to and from the trust

1

At the end of fiscal year 1999, there were 39.5 million beneficiaries enrolled in Medicare.
Page 3 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

funds, BPD, acting upon directions from HCFA, submits to the Treasury’s Financial

Management Service (FMS) a nonexpenditure transfer authorization form requesting

the transfer of the funds. BPD, as trust funds manager, is responsible for processing

certain receipt, investment, redemption, and transfer transactions for 15 trust funds,

including the Medicare HI and SMI Trust Funds, and for reporting the results of these

transactions as processed to FMS and the program agencies.

Each month, HCFA and BPD execute the necessary transactions to (1) transfer assets

to and from the trust funds, maintaining minimum balances in the accounts,

(2) administer current HI and SMI benefits and expenses, and (3) record these

transactions in their respective financial systems. Each day, BPD redeems securities

from the trust funds based on the total amount of funds drawn by Medicare

contractors the day before to pay Medicare benefit payments. BPD then determines

how to allocate this amount between HI and SMI using allocation percentages

provided monthly from HCFA.2

BPD then transfers these amounts into noninterestbearing accounts administered by HCFA, referred to as the HI and SMI transfer

accounts, from which payments are made to health care providers and suppliers.

BPD then reports the transfer amounts to Treasury’s FMS and to HCFA.

As illustrated in figure 1, throughout each month, as Medicare contractors make

payments to providers for beneficiary services and supplies, the outlays reduce the

amounts in the transfer accounts. In managing the transfer accounts, HCFA attempts

to maintain a daily balance close to but not less than zero in these accounts, as they

do not earn interest. At the beginning of every month, HCFA staff determine whether

an adjustment is needed in the transfer accounts. This process is known as the

monthly benefit adjustment. HCFA staff compare the actual Medicare benefit outlays

for the prior month to the amounts that BPD transferred into the noninterest-bearing

transfer accounts in the prior month3and calculates the differences for each transfer

account. HCFA then prepares the necessary documentation directing BPD to either

return excess amounts to the trust funds or transfer additional amounts into the

transfer accounts. When amounts deposited in a transfer account exceed the actual

Medicare benefit outlays in a month, HCFA instructs BPD to return the surplus

amounts to the trust funds to be reinvested in interest-bearing Treasury securities.

Conversely, when amounts in a transfer account are insufficient to cover actual

outlays, HCFA requests that BPD transfer additional amounts to the trust fund

transfer account. In this case, BPD redeems interest-bearing securities from the

Medicare trust funds, transfers the amounts, and reports the amount transferred to

HCFA and FMS.

2

HCFA’s allocation percentages fluctuate from month to month and are based on HCFA’s budget

estimates of monthly Medicare outlays. For example, the July 1999 outlay percentages were 53.3

percent for HI outlays and 46.7 percent for SMI. In the previous month, the percentages were 58.4

percent and 41.6 percent for HI and SMI, respectively.

3

These amounts will normally differ each month because the amounts deposited by BPD are estimated

payments, not actual payments. Medicare contractors report actual payment amounts each month for

the previous month.
Page 4 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

Figure 1: Overview of HCFA’s Monthly Benefit Adjustment Process

Medicare contractors

draw funds from

transfer account to

make payments to

providers

BPD invests appropriated

amounts, taxes, premiums

and excess funds in

Treasury securities

HCFA compares

funds deposited to

payments

Request additional

funds

BPD redeems securities

and deposits funds in

transfer account

Payments

higher/lower than

deposits?

Higher Lower

Request excess

funds be returned

and invested

Medicare Transfer Accounts

+ Deposits $$$

- Payments $$$

Difference $$$

Healthcare

Providers

Submit claims

Pay claims

Appropriated

amounts

Employment taxes Premiums

HCFA is responsible for ensuring that its staff properly execute the monthly benefit

adjustment procedure and that the balances in the Medicare transfer accounts are

reconciled each month. HCFA is expected to use the Undisbursed Appropriation

Account Ledger (FMS-6653) that FMS supplies each month for both the HI and SMI

transfer accounts in its reconciliation process. The FMS 6653 provides the opening

fund balance for the month, amounts transferred into and out of the transfer

accounts during the month by BPD, the actual amount of Medicare benefit outlays

that were reported, and the closing balance at the end of the month. HCFA is
Page 5 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

responsible for reconciling the ending fund balances on the FMS-6653s with its

official records.

Scope and Methodology

To identify the errors that were made and how they occurred, their effects on the HI

and SMI Trust Funds and the General Fund, and the corrective actions taken by HHS

and Treasury, we interviewed BPD and HCFA officials and staff and reviewed

Treasury and HCFA documents. In addition, we reviewed the legislation for

correcting the clerical errors. We also included the final estimates of the interest

effects on the HI and SMI Trust Funds as determined by HCFA’s Office of the

Actuary, but we did not test, or recalculate the interest estimates.

To identify whether similar significant errors have been made in other trust funds, we

interviewed BPD officials and GAO staff responsible for reviewing financial data for

those agencies. We also reviewed the fiscal year 1999 financial reports and/or fiscal

year 1999 accountability reports for those agencies responsible for administering nine

of the largest federal trust funds to determine whether similar errors had been

reported for those trust funds. The trust funds reviewed were the Federal Old Age

and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds, the

Unemployment Trust Fund, the Hazardous Substance Superfund, the Highway Trust

Fund, the Airport and Airway Trust Fund, the Civil Service Retirement and Disability

Fund, the Military Retirement Fund, and the Railroad Retirement Trust Fund.4 We

conducted our review from May 2000 through August 2000 in accordance with

generally accepted government auditing standards. We requested comments on a

draft of this report from the HCFA Administrator and the Commissioner of the Public

Debt. Their comments along with technical suggestions have been incorporated as

appropriate and reprinted in enclosures I and II.

HCFA Made Errors in the HI and SMI Trust Fund Adjustment Process

During fiscal year 1999, HCFA made systematic errors in its monthly benefit

adjustment process. The monthly benefit adjustment amounts were calculated

correctly. However, the memorandums prepared by HCFA staff detailing the

adjustments to be made between the trust funds and the transfer accounts were

prepared incorrectly. The transfers called for in the memorandums were the reverse

of what was actually required. For example, during July 1999, SMI benefit payments

equaled $7,078,151,311. The total funds deposited in the SMI transfer account

equaled $7,739,943,000. As a result, a surplus of $661,791,688 remained in the SMI

transfer account at month-end and should have been returned to the SMI Trust Fund.

However, the memorandum prepared and submitted by HCFA staff requested that an

4

The Federal Old-Age and Survivors Insurance and Disability Insurance trust funds are administered by

the Social Security Administration; the Unemployment Trust Fund, by the Department of Labor; the

Hazardous Substance Superfund, by the Environmental Protection Agency; the Highway Trust Fund

and Airport and Airway Trust Fund, by Department of Transportation; the Civil Service Retirement and

Disability Fund, by the Office of Personnel Management; the Military Retirement Fund, by the

Department of Defense; and the Railroad Retirement Trust Fund, by the Railroad Retirement Board.
Page 6 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

additional $661,791,688 be transferred from the SMI Trust Fund to the SMI transfer

account.

Beginning with the April 1999 adjustments and continuing through the September

1999 adjustments, HCFA incorrectly requested that Treasury transfer funds into the

SMI transfer account that actually should have been returned to the SMI Trust Fund

for investment. These transfers resulted in a large surplus in the SMI transfer

account at year-end. During the same period, HCFA incorrectly requested that

Treasury transfer funds from the HI transfer account to the HI Trust Fund that

actually should have remained in the transfer account. These transfers resulted in a

large deficit in the HI transfer account at year-end. An additional result of HCFA’s

errors was that the amounts available for investment in interest-bearing securities

were less for SMI (underinvested) and more for HI (overinvested) than should have

been had the errors not occurred.

The errors were detected by HCFA’s Office of the Actuary, which is responsible for

monitoring the trends and activities of the Medicare trust funds through a periodic

analysis of the HI and SMI Trust Fund transactions, and brought to the attention of

HCFA officials. Upon discovery of the errors, as discussed in detail later in this

letter, the trust fund balances were corrected.

Internal Control Weaknesses Contributed to the Errors

The Comptroller General's Standards for Internal Control in the Federal Government

states that an agency's control environment is significantly affected by the

competence of its personnel and the agency's ability to (1) identify appropriate

knowledge and skills needed for various jobs and (2) provide needed training to

maintain skill levels for particular jobs. In addition, the standards state that all

transactions and other significant events need to be clearly documented and that the

documentation should be properly managed and maintained.

Several internal control weaknesses in HCFA’s Medicare trust fund adjustment

process contributed to the errors that affected the trust funds. After an employee

who previously prepared the adjustments left the agency, HCFA assigned an

inexperienced employee responsibility for calculating adjustments to the trust funds

and the related transfer accounts. HCFA officials did not sufficiently train the new

employee, and there were no documented procedures of the adjustment process to

assist the new employee in performing the monthly adjustment. As a result, there

was a lack of understanding of how to properly adjust the transfer account balances.

In addition, the employee did not understand that the growing month-end balances

for the transfer accounts (positive and negative) were indicative of problems in the

adjustment process.

Further, HCFA staff did not reconcile account balances affected by the adjustment

process as required by Treasury regulations. This resulted in the error going

unnoticed for several months. Lastly, HCFA officials did not provide adequate

supervisory review and approval of the monthly adjustment procedures, although

such procedures are a critical internal control.
Page 7 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

The Comptroller General's Standards for Internal Control in the Federal Government

states that ongoing monitoring activities should include comparisons and

reconciliations to identify inaccuracies or exceptions that alert management to any

internal control problems. In addition, other important control activities included in

the standards are (1) assigning authority and responsibility in a manner that ensures

each individual knows how his or her actions interrelate and contribute to meeting

the agency objectives and (2) requiring supervisors to continually review and approve

the assigned work of their staff.

Errors Affected the Medicare Trust Funds and the General Fund

As a result of HCFA’s internal control weaknesses and resulting adjustment errors,

the holdings and interest income for both Medicare trust funds were affected.

Approximately $18 billion of the SMI Trust Fund’s interest-bearing securities was

unnecessarily redeemed and the amounts transferred to HCFA’s noninterest-bearing

SMI transfer account. Consequently, the SMI Trust Fund lost interest earnings on the

securities redeemed of approximately $232 million as of August 1, 2000.5

Approximately $14 billion in additional interest-bearing securities were purchased for

the HI Trust Fund due to the error. The HI Trust Fund earned approximately

$112 million in excess interest on these additional securities as of August 1, 2000.

The difference between the amount of interest lost by the SMI Trust Fund and the

excess interest earned by the HI Trust Fund is approximately $120 million. This

difference is primarily due to the difference between the interest rates of the

securities incorrectly redeemed and those purchased to initially correct the error.

After the error was discovered, HCFA’s first corrective action was to instruct BPD to

redeem the $14 billion in excess HI securities purchased and to acquire $18 billion in

SMI securities to replace the securities redeemed in error. HCFA acquired and sold

the respective securities in October 1999. The interest rate on the newly acquired

SMI securities was 6.50 percent, while the securities that they replaced had been

earning interest at rates ranging from 5.875 percent to 8.75 percent. This meant that

the SMI Trust Fund was in effect earning up to 2.25 percent less interest on a portion

of the $18 billion of newly acquired securities than if the error had not occurred. As

illustrated in figure 2, the HCFA actuary determined that the total loss of interest to

the SMI Trust Fund from October 1998 through July 2000 was $232 million, and the

total excess interest earned by the HI Trust Fund was approximately $112 million.

5

HCFA’s Office of the Actuary calculated the interest effects of the clerical errors through July 31,

2000. In August of this year, BPD made the appropriate adjustments to the HI and SMI Trust Funds,

effective August 1, 2000.
Page 8 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

Figure 2: Interest Earned on HI and SMI Investments























Total actual (est.) $19.745 billion

Total w/o error (est.) $19.633 billion

____________

Difference $112 million

Total actual (est.) $5.821 billion

Total w/o error (est.) $6.053 billion

____________

Difference $232 million

a

a

a

a

a

The estimated interest amounts in figure 2 were calculated by HCFA’s Office of the Actuary using a model based on

Treasury’s investment and redemption policies, and actual HI and SMI Trust Fund data for the period from October 1, 1998,

through July 31, 2000.

Source: HCFA’s summary chart and statistics for final HI/SMI interest and asset adjustments

The clerical errors had a direct effect on the HI and SMI Trust Funds as discussed

above. During the period October 1998 through July 2000, the General Fund

benefited by not paying the net amount of approximately $120 million in interest on

the trust fund securities. After the full implementation of the corrective actions, the

aggregate net effect on the trust funds and the general fund and thus for the federal

government as a whole was zero.

HHS and Treasury Have Taken Corrective Actions

HCFA, in coordination with Treasury, determined that specific corrective actions

were needed both to restore the assets of the HI and SMI Trust Funds and to correct

the internal control weaknesses at HCFA. As described in tables 1 and 2, HCFA

developed and executed a corrective action plan approach to correct the monetary

effect of the errors on the trust funds and address the underlying internal control

weaknesses that prompted the errors. HCFA’s corrective actions for the Medicare

trust fund investment adjustment process are documented in HCFA’s fiscal year 1999

Medicare Trust Fund Investment Adjustment Process Corrective Action Plan.
Page 9 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

Table 1: HCFA Corrective Action Plan to Correct the Trust Fund Errors

Weakness Corrective actiona

Analyze the condition of the trust funds as of October

1999 and determine the corrective action necessary to

eliminate the cause and internal control weaknesses of

the inappropriate account balances.

Determine the impact on the interest earnings of the

trust funds account.

The HI Trust Fund has earned excess interest and

the SMI Trust Fund has not earned interest due in

fiscal year 1999 as a result of clerical errors.

Adjust the trust funds to correct the miscalculations

and make the trust funds whole.

a

Detailed steps for implementing the corrective actions were included in the Corrective Action Plan.

Source: HCFA’s fiscal year 1999 - Medicare Trust Fund Investment Adjustment Process Corrective Action Plan

In consultation with Treasury, HCFA developed more precise corrective action plan

steps that addressed making the trust funds whole. Specifically, to correct the most

significant effect of the errors on the HI and SMI Trust Funds holdings, BPD was

instructed to purchase Treasury securities for the SMI Trust Fund using the

underinvested amount ($18 billion) and redeem Treasury securities held by the HI

Trust Fund in the amount of the deficit in the HI transfer account ($14 billion).

Further, to completely restore the trust funds to where they would have been in the

absence of the errors required transferring the amount of excess interest income

earned by the HI Trust Fund to the SMI Trust Fund and reestablishing for both trust

funds the security holdings that would have been held by the trust funds if the clerical

errors had never happened. Lastly, the difference in interest lost to the SMI Trust

Fund and the excess interest earned by the HI Trust Fund needed to be transferred

from the General Fund of the Treasury.

In October 1999, BPD purchased approximately $18 billion in securities for the SMI

Trust Fund and redeemed approximately $14 billion of HI securities to correct the

most significant effect of the errors. The remaining corrective actions required

congressional approval.

Legislation to correct the interest earnings and restore the status of the trust fund

holdings was signed into law by the President on July 13, 2000. Specifically, section

2703 of Public Law 106-246 required that within 120 days after the effective date of

the act, the following actions would be taken:

(1) Correct the holdings of the trust funds by replicating, to the extent practicable,

the holdings of the trust funds that would have been held by the trust funds if the

clerical errors had not occurred.

(2) Correct the trust fund interest income, by transferring the amount of excess

interest income from the HI Trust Fund to the SMI Trust Fund that would not

have been earned if the errors had not occurred.

(3) Appropriate to the SMI Trust Fund the difference between the interest income

lost by the SMI Trust Fund and the amount transferred from the HI Trust Fund.

The actions required by the legislation were completed by BPD in August 2000, with

an effective date of August 1, 2000. Specifically, BPD adjusted the HI and SMI Trust
Page 10 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

Fund holdings as of July 31, 2000, through redemptions and acquisitions resulting in

a net reduction in the holdings of the HI Trust Fund of approximately $112 million

and an increase in the holdings of the SMI Trust Fund of approximately $232 million

on August 1, 2000. Further, effective August 1, the trust funds’ portfolios of

securities were restored, as to principal and interest rate, to the state that they would

have been had the clerical errors never occurred.

HCFA’s corrective action plan also included actions to strengthen the internal

controls to prevent further errors. HCFA’s approach to correcting the internal

control weaknesses, as shown in table 2, included identifying the key weaknesses

contributing to the clerical errors at HCFA and the corresponding corrective action

step.

Table 2: HCFA Corrective Action Plan to Address Internal Control Weaknesses

Internal control weaknesses Corrective actiona

The Medicare trust fund adjustment process had

the following internal control weaknesses that

caused the clerical errors:

(1) Inadequate verification and reconciliation of

transactions to ensure accuracy.

Implement the monthly use of the benefit adjustment

spreadsheet for use in the calculation and verification of

the monthly adjustment.

(2) Inadequate analysis of monthly financial

account balances.

The Treasury income statement is received monthly in

the Accounting Systems Management Branch (ASMB)

and is distributed to the Financial Reporting & Oversight

Branch (FROB). An accountant in FROB will analyze for

reasonableness the Treasury income statement amounts

for fund balance and investments, including comparing

the current month with the prior month and years. ASMB

will also distribute the Treasury income statement to the

Office of the Actuary (OACT). OACT will also review the

amounts for reasonableness.

(3) Inadequately trained staff. Staff responsible for the preparation of certain Treasury

forms used to transfer funds and report fund transactions

will receive detailed training on the preparation of these

forms and the use of the benefit adjustment spreadsheet.

(4) Lack of detailed written procedures for the

monthly adjustment process.

Develop written detailed procedures on use of the

Benefit Adjustment Spreadsheet and the preparation of

certain Treasury forms used to transfer funds and report

fund transactions.

(5) Inadequate supervision, review, and approval of

work.

All supporting documentation will be reviewed and

approved at least monthly by an accountant, the

ASMB Chief, Division of Accounting Director, and

the Deputy Director of the Financial Services group.

(6) The allocation percentages for HI and SMI were

not updated on a regular basis.

The Division of Budget will supply the Division of

Accounting with the updated Budget Outlay Plan each

quarter.

a

Detailed steps for implementing the corrective actions were included in the Corrective Action Plan.

Source: HCFA’s Fiscal Year 1999 - Medicare Trust Fund Investment Adjustment Process Corrective Action Plan.

Although progress has been made, HCFA has not implemented all corrective actions

outlined above. HCFA has developed and implemented a benefit adjustment

spreadsheet to use in performing analyses, calculations, and verification of the

monthly trust fund account adjustment. Further, HCFA has provided detailed
Page 11 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

training to staff on preparing the accounting adjustment and documentation and

using the benefit adjustment spreadsheet. In addition, HCFA developed procedures

specifying the supervisory review steps for all supporting documentation related to

the monthly adjustment to the trust funds transfer accounts. However, HCFA has

only developed a draft of written detailed procedures for completing the benefit

adjustment spreadsheet and preparing the required Treasury accounting

documentation.

Treasury officials at BPD, who act as managers of the Medicare trust funds, stated

that they were not aware of the errors because they are not responsible for reviewing

the balances of the Medicare noninterest-bearing transfer accounts. HCFA has

responsibility for monitoring the transfer accounts. Although not required to do so

under Treasury regulations, Treasury officials at BPD have begun reviewing certain

reports and related documentation for the Medicare transfer accounts to ensure that

requests from HCFA to adjust the balances of the transfer accounts and trust funds

are reasonable.

Similar Errors Were Not Reported by Other Trust Funds

Our review of fiscal year 1999 financial reporting documentation for nine other major

trust funds did not identify any reported errors similar in nature to the errors

reported for the HI and SMI Trust Funds. The errors affecting the HI and SMI Trust

Funds and related transfer accounts were the result of internal operational mistakes

made by HCFA and appear to be unique to HCFA. In our review of other major trust

funds, such as the OASI and the DI Trust Funds, we did not look at the extent to

which errors may have resulted from activities such as the allocation of gross tax

receipts6since it was outside of the scope of this review.

During our review, we did not identify evidence that the other trust funds use transfer

accounts similar to HCFA to pay program expenditures or require monthly trust fund

adjustments similar to HCFA’s. For example, monthly program expenditures are paid

from the OASI and DI Trust Funds administered by the Social Security

Administration. However, SSA does not perform a month-end adjustment process

similar to the one performed by HCFA. This is due to the fact that expenditure

amounts for the programs funded by the OASI and DI Trust Funds are normally fixed

and known amounts, and therefore the amount transferred to cover the expenditures

is the same as the expenditure level. Conversely, Medicare benefit payments

fluctuate from month to month, and the deposits made for these payments are, of

necessity estimates.

Conclusions

As more and more beneficiaries rely on Medicare to provide health coverage and

health care security, it is imperative that the finances of the program are properly

accounted for. HCFA, responsible for the fiscal integrity of the Medicare programs,

6

Excise Taxes: Internal Control Weaknesses Affect Accuracy of Distributions to the Trust Funds

(GAO/AIMD-99-17, November 1998).
Page 12 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

and Treasury, trust fund manager, must ensure that adequate controls are in place to

safeguard Medicare assets. The errors that occurred in accounting for the trust funds

during fiscal year 1999 demonstrate how weak internal controls and limited oversight

can affect Medicare program assets. It will be important that HCFA and Treasury

develop and implement formal procedures to ensure that the activities related to

accounting for the Medicare trust funds are properly managed.

Recommendations for Executive Action

To ensure that adequate controls are in place to safeguard Medicare assets, we

recommend that the HCFA Chief Financial Officer take the following actions:

• Further enhance the monthly Medicare benefit adjustments procedures to include

monthly analysis of the transfer account ending balances to detect anomalies.

• Formalize the written procedures for preparing the monthly Medicare benefit

adjustment spreadsheet and incorporate them in official HCFA policy guidance.

• Conduct training for those staff responsible for preparing, processing, and

reviewing the monthly benefit adjustment and any staff whose job performance is

directly related to the daily transfer account transactions.

In addition, to further strengthen the controls in place to safeguard Medicare assets,

we recommend that the Commissioner of the Public Debt formalize BPD’s informal

procedures for reviewing certain reports and related documents for the Medicare

transfer accounts to ensure that HCFA’s requests to adjust the balances of the

transfer accounts and trust funds are reasonable.

Agency Comments and Our Evaluation

BPD and HCFA agreed with our findings, conclusions, and recommendations. BPD

stated that it has already implemented a reasonableness review of HCFA requests and

that it will formally document this procedure by December 31, 2000. In its comments,

HCFA discussed the steps it has taken to improve the benefit adjustment process and

strengthen internal controls. The Acting Administrator described some of these

steps, such as developing and implementing procedures for preparation of the

monthly benefit adjustments and providing training to staff on these procedures. In

addition, HCFA stated that one of its key initiatives will be the development and

implementation of a HCFA accounting manual that will detail the procedures for

significant activities, including the benefit adjustment process. The steps that HCFA

and BPD have outlined in their comments appear reasonable. Formalizing and

institutionalizing these procedures should improve financial accountability over the

Medicare trust funds.

-----

We are sending copies of this report to Representative Charles Rangel, Ranking

Minority Member, Committee on Ways and Means, and appropriate congressional

committees. We are also sending copies to Michael M. Hash, Acting Administrator of
Page 13 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

the Health Care Financing Administration, and the Honorable Van Zeck,

Commissioner of the Bureau of the Public Debt. Copies will be available to others

on request. This report was prepared under the direction of Gloria Jarmon, Director,

who may be reached at (202) 512-4476 or by email at jarmon.aimd@gao.gov if you or

your staff have any questions. Kim Brooks, Ed Brown, Kay Daly and Meg Mills were

key contributors to this letter.

Sincerely yours,

Jeffrey C. Steinhoff

Managing Director

Financial Management and Assurance

Enclosures
Enclosure I

Page 14 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

Comments From the Health Care Financing Administration

Note: GAO comment

supplementing those

in the report text

appears at the end of

this enclosure.
Enclosure I

Page 15 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

See comment 1.
Enclosure I

Page 16 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds
Enclosure I

Page 17 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds
Enclosure I

Page 18 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds
Enclosure I

Page 19 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

The following is GAO’s comment on HCFA’s letter dated October 25, 2000.

GAO’s Comment

1. Our review focused on fiscal year 1999 activity in other trust funds. Although

errors in other trust funds may have occurred, as discussed in the report, errors

similar to those reported for the HI and SMI Trust Funds were not reported in the

agencies’ financial reports.
Enclosure II

Page 20 GAO-01-39R Clerical Errors in the Medicare HI and SMI Trust Funds

Comments From the Bureau of the Public Debt

(916376)