U.S. GOVERNMENT PRINTING OFFICE

63–548 CC WASHINGTON : 2000

H.R. 1827, THE GOVERNMENT WASTE

CORRECTIONS ACT OF 1999

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

ON

H.R. 1827

TO IMPROVE THE ECONOMY AND EFFICIENCY OF GOVERNMENT OPERATIONS BY REQUIRING THE USE OF RECOVERY AUDITS BY FEDERAL

AGENCIES

JUNE 29, 1999

Serial No. 106–104

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

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

HELEN CHENOWETH, Idaho

DAVID VITTER, Louisiana

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

DAVID A. KASS, Deputy Counsel and Parliamentarian

CARLA J. MARTIN, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY

STEPHEN HORN, California, Chairman

JUDY BIGGERT, Illinois

THOMAS M. DAVIS, Virginia

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JIM TURNER, Texas

PAUL E. KANJORSKI, Pennsylvania

MAJOR R. OWENS, New York

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

J. RUSSELL GEORGE, Staff Director and Chief Counsel

BONNIE HEALD, Director of Communications

GRANT NEWMAN, Clerk

MARK STEPHENSON, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on June 29, 1999 ............................................................................... 1

Text of H.R. 1827 .............................................................................................. 3

Statement of:

Dinkins, Paul, executive vice president, Profit Recovery Group International, accompanied by Jack Kenny, the director for government,

Profit Recovery Group International, Inc.; Douglas R. Wilwerding, chief

executive officer and president, Omnium Worldwide Inc.; Terrence

Lyons, director of accounting, Walgreen Co.; Stephen R. Booma, health

care consultant; and Robert Koehler, attorney-at-law, Patton Boggs,

on behalf of the American Logistics Association ........................................ 210

Lee, Deidre, Acting Deputy Director for Management, Office of Management and Budget; George H. Allen, Deputy Commander, Defense Supply Center of Philadelphia; Gerald R. Peterson, Chief, Accounts Payable

Division, Army-Air Force Exchange Service; and Michelle Snyder, Director, Financial Management Office, Chief Financial Officer of the

Health Care Financing Administration ...................................................... 50

Walker, David D., Comptroller General, General Accounting Office ........... 19

Letters, statements, et cetera, submitted for the record by:

Allen, George H., Deputy Commander, Defense Supply Center of Philadelphia, prepared statement of .................................................................... 58

Booma, Stephen R., health care consultant, prepared statement of ............ 237

Burton, Hon. Dan, a Representative in Congress from the State of Indiana:

Prepared statement of ............................................................................... 17

Regulatory News article ............................................................................ 15

Dinkins, Paul, executive vice president, Profit Recovery Group International, prepared statement of .................................................................. 213

Horn, Hon. Stephen, a Representative in Congress from the State of

California, prepared statement of ................................................................ 8

Koehler, Robert, attorney-at-law, Patton Boggs, on behalf of the American

Logistics Association, prepared statement of ............................................. 244

Lee, Deidre, Acting Deputy Director for Management, Office of Management and Budget:

BEA scoring obstacle to implementing gainsharing ............................... 102

Information concerning a pilot study ....................................................... 82

Prepared statement of ............................................................................... 52

Lyons, Terrence, director of accounting, Walgreen Co., prepared statement of ........................................................................................................... 231

Peterson, Gerald R., Chief, Accounts Payable Division, Army-Air Force

Exchange Service, prepared statement of ................................................... 67

Snyder, Michelle, Director, Financial Management Office, Chief Financial

Officer of the Health Care Financing Administration:

DOJ’s guidelines ........................................................................................ 89

HHS Y2K quarterly reports ..................................................................... 106

Information concerning dollar amounts .................................................. 86

June 1999 program memorandum ........................................................... 205

Prepared statement of ............................................................................... 77

Turner, Hon. Jim, a Representative in Congress from the State of Texas,

prepared statement of ................................................................................... 10

Walker, David D., Comptroller General, General Accounting Office:

Information concerning overpayments..................................................... 39, 45

Prepared statement of ............................................................................... 23

Wilwerding, Douglas R., chief executive officer and president, Omnium

Worldwide Inc., prepared statement of ....................................................... 221

(1)

H.R. 1827, THE GOVERNMENT WASTE

CORRECTIONS ACT OF 1999

TUESDAY, JUNE 29, 1999

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 2:01 p.m., in room 2247, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding. Present: Representatives Horn, Walden, Ose, Burton, and Turner.

Staff present: J. Russell George, staff director; Randy Kaplan, counsel; Bonnie Heald, communications director; Matthew Ebert,

policy advisor; Jane Cobb, professional staff member, Committee on

Government Reform; Grant Newman, clerk; Justin Schleuter, Paul

Wicker, Lauren Lefton, and John Phillips, interns; Michelle Ash

and Faith Weiss, minority counsels; Mark Stephenson, minority

professional staff member; and Earley Green, minority staff assistant.

Mr. HORN. The Subcommittee on Government Management, Information, and Technology will come to order.

Fraud, waste, and error in Federal programs and activities are

costing taxpayers billions of dollars each year. Earlier this session,

the Subcommittee on Government Management, Information, and

Technology held its annual series of hearings on the Federal Government’s financial management practices. On March 31, 1999,

this subcommittee held a hearing examining the Governmentwide

Consolidated Financial Statement. The audit of this governmentwide financial statement, performed by the General Accounting Office, illustrated the broad array of financial management problems

faced by the Federal Government.

The report confirmed that tens of billions of taxpayer dollars are

being lost each year to waste, abuse, and mismanagement in hundreds of programs within the executive branch of the Federal Government. Improper payments made to vendors and others supplying goods and services to Federal departments and agencies is one

of the most serious areas of waste and error. According to the General Accounting Office, Federal departments and agencies were unable to determine the full extent of improper payments in major

programs, estimated to involve billions of dollars each year.

At the Department of Defense, the General Accounting Office reported that among the most serious financial management weakVerDate 11-SEP-98 10:41 May 25, 2000 Jkt 000000 PO 00000 Frm 00004 Fmt 6633 Sfmt 6633 C:\DOCS\63548.TXT HGOVREF1 PsN: HGOVREF1
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nesses was the Department’s inability to determine the full extent

of improper payments. The Health Care Financing Administration’s Medicare Program was cited by the General Accounting Office as a high-risk area for fraud, waste, and abuse. In 1998, there

was an estimated $12.6 billion in Medicare overpayments.

Today we will examine H.R. 1827, the Government Waste Corrections Act of 1999, introduced by my colleague and the chairman

of this full committee, the Committee on Government Reform, Representative Dan Burton of Indiana. This legislation offers a potential solution to address the billions of dollars of erroneous overpayments made each year. This bill would require executive branch departments and agencies to use a process called, ‘‘recovery auditing,’’

to review Federal payment transactions to identify and recover erroneous overpayments.

Recovery auditing is a process of reviewing payment transactions

to identify and recover incorrect payments. Payments for goods and

services can be processed incorrectly for a variety of reasons. Vendors can make pricing errors on their invoices. They may forget to

award discounts. Or they can neglect to offer allowances and rebates. Recovery auditors review payment transactions to identify

three types of errors.

For decades, private sector companies have successfully used recovery auditing to identify and collect erroneous overpayments. Recovery auditing is currently used to a limited extent in the Federal

Government. H.R. 1827 would expand the use of recovery auditing

to all executive branch departments and agencies for payment activities of at least $10 million annually.

Recovery audits could be conducted in house or contracted out to

a private recovery audit firm. The bill would require recovery auditors to report on the factors causing overpayments and steps that

can be taken to reduce such overpayment. To encourage agencies

to participate in recovery auditing, the bill would allow agencies to

be reimbursed for costs they incur for their recovery audit efforts.

Additional amounts collected could be used by the agency to carry

out management improvement programs.

The subcommittee will hear from a variety of public and private

sector witnesses who will discuss the provisions of H.R. 1827, including the application of recovery auditing to the Federal Government. I welcome our witnesses. We look forward to their testimony.

And I am delighted now to yield for an opening statement to Mr.

Turner of Texas, the ranking member on this committee. And we

are delighted to have you here, Jim. It is all yours.

[The text of H.R. 1827 and the prepared statement of Hon. Stephen Horn follow:]

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106TH CONGRESS

1ST SESSION

H. R. 1827

To improve the economy and efficiency of Government operations by requiring the

use of recovery audits by Federal agencies.

IN THE HOUSE OF REPRESENTATIVES

MAY 17, 1999

MR. BURTON of Indiana (for himself, Mr. ARMEY, and Mr. OSE) introduced the

following bill; which was referred to the Committee on Government Reform

A BILL

To improve the economy and efficiency of Government operations by requiring the

use of recovery audits by Federal agencies.

Be it enacted by the Senate and House of Representatives of the United States

of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the ‘‘Government Waste Corrections Act of 1999’’.

SEC. 2. FINDINGS AND PURPOSES.

(a) FINDINGS.—The Congress finds the following:

(1) In private industry, overpayments to providers of goods and services

occur for a variety of reasons, including duplicate payments, pricing errors, and

missed cash discounts, rebates, or other allowances. The identification and recovery of such overpayments, commonly referred to as ‘‘recovery auditing’’, is an

established private sector business practice with demonstrated large financial

returns. On average, recovery audits in the private sector identify payment

error rates of 0.1 percent of purchases audited and result in the recovery of

$1,000,000 for each $1,000,000,000 of purchases.

(2) Overpayments are a serious problem for Federal agencies, given the

magnitude and complexity of Federal operations and documented and widespread financial management weaknesses. Federal agency overpayments waste

tax dollars and detract from the efficiency and effectiveness of Federal operations by diverting resources from their intended uses.

(3) Recovery auditing already has been employed successfully in limited

areas of Federal activity. It has great potential for expansion to many other

Federal agencies and activities, thereby resulting in the recovery of substantial

amounts of overpayments annually. Limited recovery audits conducted to date

have identified errors averaging 0.4 percent of Federal payments audited, or

$4,000,000 for every $1,000,000,000 of payments. If fully implemented within

the Federal Government, recovery auditing has the potential to recover billions

of dollars in Federal overpayments annually.

(b) PURPOSES.—The purposes of this Act are the following:

(1) To require the use of recovery audits by Federal agencies.

(2) To provide incentives and resources to improve Federal management

practices with the goal of significantly reducing Federal overpayment rates and

other waste and error in Federal programs.

SEC. 3. ESTABLISHMENT OF RECOVERY AUDITS REQUIREMENT.

(a) ESTABLISHMENT OF REQUIREMENT.—Chapter 35 of title 31, United States

Code, is amended by adding at the end the following:

‘‘SUBCHAPTER VI—RECOVERY AUDITS

‘‘§ 3561. Definitions

‘‘In this subchapter, the following definitions apply:

‘‘(1) DIRECTOR.—The term ‘Director’ means the Director of the Office of

Management and Budget.

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‘‘(2) PAYMENT ACTIVITY.—The term ‘payment activity’ means an executive

agency activity that entails making payments to—

‘‘(A) vendors or other entities that provide property or services for the

direct benefit or use of an executive agency; or

‘‘(B) entities that provide services or make payments on behalf of the

Federal Government pursuant to contractual arrangements with an executive agency.

‘‘(3) RECOVERY AUDIT.—The term ‘recovery audit’ means an auditing process

to identify overpayments made by executive agencies to vendors and other commercial entities in connection with a payment activity, including overpayments

that result from duplicate payments, pricing errors, failure to provide applicable

discounts, rebates, or other applicable allowances, or charges or payments that

are not authorized by law, regulation, or other applicable requirements.

‘‘§ 3562. Recovery audit requirement

‘‘(a) IN GENERAL.—Except as provided in subsection (d), the head of each executive agency—

‘‘(1) shall conduct recovery audits with respect to each payment activity of

the executive agency that expends $10,000,000 or more annually; and

‘‘(2) may conduct recovery audits for any other payment activity of the executive agency.

‘‘(b) PROCEDURES.—In conducting recovery audits under this section, the head

of an executive agency—

‘‘(1) shall give priority to the most recent payments;

‘‘(2) shall implement this section in a manner designed to ensure the greatest financial benefit to the Government; and

‘‘(3) may conduct recovery audits directly, by procuring performance of recovery audits by contract (subject to the availability of appropriations), or by

any combination thereof.

‘‘(c) RECOVERY AUDIT CONTRACTS.—

‘‘(1) EXECUTIVE AGENCY AUTHORITIES.—With respect to recovery audits procured by an executive agency by contract—

‘‘(A) notwithstanding section 3302(b) of this title, the executive agency

head may pay the contractor an amount not to exceed 25 percent of the

total amount recovered by the executive agency, through setoff and otherwise, solely on the basis of information obtained as a result of audits performed by the contractor under the contract;

‘‘(B) the executive agency head may authorize the contractor (subject to

subparagraph (C)) to notify entities of potential overpayments, to respond

to questions concerning potential overpayments, and to take other administrative actions with respect to overpayment claims; and

‘‘(C) subject to section 3711 of this title, the executive agency head shall

have final authority to resolve disputes, to compromise or terminate overpayment claims, to collect by setoff, and to initiate litigation or referrals for

litigation.

‘‘(2) CONTRACT TERMS AND CONDITIONS.—The head of an executive agency

shall include in each contract for procurement of performance of a recovery

audit a requirement that the contractor shall—

‘‘(A) provide to the executive agency periodic reports on conditions giving rise to overpayments identified by the contractor and any recommendations on how to mitigate such conditions; and

‘‘(B) notify the executive agency of any overpayments identified by the

contractor pertaining to the executive agency or to another executive agency

that are beyond the scope of the contract.

‘‘(3) EXECUTIVE AGENCY ACTION FOLLOWING NOTIFICATION.—The head of an

executive agency shall take prompt and appropriate action in response to a notification by a contractor under subparagraph (A) or (B) of paragraph (2), including forwarding to other executive agencies any information that applies to them.

‘‘(d) EXEMPTIONS.—The Director may exempt any executive agency payment activity from the requirement of subsection (a)(1) if the Director determines that conducting recovery audits for that payment activity would not be practical or cost-effective.

‘‘§ 3563. Recovery audit model programs

‘‘(a) IN GENERAL.—The Director, after consulting with executive agency heads,

shall designate not less than five recovery audit model programs. The designated

model programs shall—

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‘‘(1) reflect a representative range of executive agencies, program activities,

and payment practices; and

‘‘(2) continue for a period of at least one year.

‘‘(b) PURPOSE.—The purpose of the model programs designated under this section is to stimulate and enhance recovery audits in the Federal Government by developing best practices and otherwise identifying ways to make recovery audits more

effective. In designating the model programs, the Director shall ensure that the designated programs complement, and in no way preempt or delay, other Federal recovery audit activities.

‘‘§ 3564. Disposition of amounts collected

‘‘(a) IN GENERAL.—Notwithstanding section 3302(b) of this title, amounts an executive agency collects, by setoff and otherwise, each fiscal year through recovery

audits conducted under this subchapter shall be treated in accordance with this section.

‘‘(b) USE FOR RECOVERY AUDIT COSTS.—Not more than one quarter of the

amounts collected by an executive agency through recovery audits shall be available

to meet obligations to recovery audit contractors and to reimburse applicable appropriations for other recovery audit costs incurred by the executive agency.

‘‘(c) USE FOR MANAGEMENT IMPROVEMENT PROGRAM.—Not more than one half

of the amounts collected by an executive agency through recovery audits—

‘‘(1) shall be available to the head of the executive agency to carry out the

management improvement program of the agency under section 3565 of this

title;

‘‘(2) may be credited for that purpose by the agency head to any agency appropriations and funds that are available for obligation at the time of collection;

and

‘‘(3) shall remain available for the same period as the appropriation or fund

to which credited.

‘‘(d) USE FOR ORIGINAL PURPOSE.—Not more than one quarter of the amounts

collected—

‘‘(1) shall be credited to the appropriation or fund, if any, available for obligation at the time of collection for the same general purposes as the appropriation or fund from which the overpayment was made; and

‘‘(2) shall remain available for the same period and purposes as the appropriation or fund to which credited.

‘‘(e) REMAINDER.—Amounts collected that are not applied in accordance with

subsection (b), (c), or (d) shall be deposited in the Treasury as miscellaneous receipts.

‘‘(f) LIMITATION OF AMOUNTS.—In accordance with section 1512(d) of this title,

the Director may reserve amounts made available to an executive agency under subsections (b) through (d) to the extent the Director determines that the full amounts

otherwise available cannot be used productively for the purposes for which they are

made available.

‘‘§ 3565. Management improvement program

‘‘(a) IN GENERAL.—

‘‘(1) REQUIREMENT.—The head of each executive agency shall conduct a

management improvement program, consistent with rules prescribed by the Director.

‘‘(2) PROGRAM FEATURES.—In conducting the program, the head of the executive agency—

‘‘(A) shall, as the first priority of the program, address problems that

contribute directly to agency overpayments; and

‘‘(B) may seek to reduce errors and waste in other executive agency programs and operations by improving the executive agency’s staff capacity, information technology, and financial management.

‘‘(3) INTEGRATION WITH OTHER ACTIVITIES.—The head of an executive agency—

‘‘(A) subject to subparagraph (B), may integrate the program under this

section, in whole or in part, with other executive agency management improvement programs and activities; and

‘‘(B) must retain the ability to account specifically for the use of

amounts made available under section 3465(b) of this title.

‘‘(b) AWARDS.—

‘‘(1) IN GENERAL.—The head of an executive agency may, under the program

under this section and subject to the availability of appropriations, pay cash

awards to career employees of the executive agency who have made extraorVerDate 11-SEP-98 10:41 May 25, 2000 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6621 C:\DOCS\63548.TXT HGOVREF1 PsN: HGOVREF1
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dinary contributions to improving the executive agency’s operations in a way

that demonstrably and substantially reduces waste and error by the executive

agency.

‘‘(2) TERMS AND CONDITIONS.—An award under this subsection shall be subject to the following terms and conditions:

‘‘(A) An award may be granted to an individual employee or to a group

of employees, in any amount not exceeding $150,000 for any individual.

‘‘(B) The award must be based on a written determination by the executive agency head that the awardee (or the group of awardees, collectively)

was directly and primarily responsible for actions that result in tangible

cost savings to the executive agency of at least double the amount of the

award.

‘‘(C) The Director must concur in any award that exceeds $50,000 to

any individual.

‘‘(D) The awards shall be in addition to any pay and allowances to

which an employee is otherwise entitled, and shall not affect an employee’s

eligibility for other bonuses and awards.

‘‘(E) The award shall be subject to such additional terms and conditions

as may be prescribed by the Director.

‘‘(3) CAREER EMPLOYEE DEFINED.—In this subsection the term ‘career employee’ means any employee of an executive agency, other than—

‘‘(A) a noncareer appointee, limited term appointee, or limited emergency appointee (as such terms are defined in section 3132(a) of title 5) in

the Senior Executive Service; and

‘‘(B) an employee in a position that has been excepted from the competitive service by reason of its confidential, policy-determining, policy-making,

or policy-advocating character.

‘‘§ 3566. Responsibilities of the Office of Management and Budget

‘‘(a) IN GENERAL.—The Director shall be responsible for coordinating and overseeing the implementation of this subchapter.

‘‘(b) GUIDANCE.—In addition to the Director’s specific responsibilities under this

subchapter, the Director shall issue rules and provide support to agencies in implementing the subchapter. The Director shall issue initial rules not later than 90 days

after the date of enactment of this subchapter.

‘‘(c) REPORTS.—

‘‘(1) IN GENERAL.—Not later than one year after the date of the enactment

of this subchapter, and annually for each of the two years thereafter, the Director shall submit a report on implementation of the subchapter to the President,

the Committee on Government Reform of the House of Representatives, the

Committee on Governmental Affairs of the Senate, and the Committee on Appropriations of the House of Representatives and of the Senate.

‘‘(2) CONTENTS.—Each report shall include—

‘‘(A) a general description and evaluation of the steps taken by executive agencies to conduct recovery audits, including an inventory of the programs and activities of each executive agency that are subject to recovery

audits;

‘‘(B) a description of any exemptions from recovery audits made under

section 3562(d) of this title;

‘‘(C) a description and evaluation of the recovery audit model programs

conducted under section 3563 of this title, that shall include—

‘‘(i) an assessment of the benefits of the programs;

‘‘(ii) an identification of best practices from the programs that could

be applied to other recovery audit activities; and

‘‘(iii) an identification of any significant problems or barriers to

more effective recovery audits that were experienced in the model programs;

‘‘(D) a description of executive agency management improvement programs under section 3565 of this title, including a description of any awards

under section 3565(b) of this title; and

‘‘(E) any recommendations for changes in executive agency practices or

law or other improvements that the Director believes would enhance the effectiveness of executive agency recovery auditing.

‘‘§ 3567. General Accounting Office reports

‘‘Not later than 60 days after issuance of each report under section 3566(c) of

this title, the Comptroller General of the United States shall submit a report on the

implementation of this subchapter to the Committee on Government Reform of the

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House of Representatives, the Committee on Governmental Affairs of the Senate,

the Committee on Appropriations of the House of Representatives and of the Senate,

and the Director.’’.

(b) APPLICATION TO ALL EXECUTIVE AGENCIES.—Section 3501 of title 31, United

States Code, is amended by inserting ‘‘and subchapter VI of this chapter’’ after ‘‘section 3513’’.

(c) DEADLINE FOR INITIATION OF RECOVERY AUDITS.—The head of each executive

agency shall begin the first recovery auditing under section 3562 of title 31, United

States Code, as amended by this section, by not later than 6 months after the date

of the enactment of this Act.

(d) CLERICAL AMENDMENT.—The analysis at the beginning of chapter 35 of title

31, United States Code, is amended by adding at the end the following:

‘‘SUBCHAPTER VI—RECOVERY AUDITS

‘‘3561. Definitions.

‘‘3562. Recovery audit requirement.

‘‘3563. Recovery audit model programs.

‘‘3564. Disposition of amounts collected.

‘‘3565. Management improvement program.

‘‘3566. Responsibilities of the Office of Management and Budget.

‘‘3567. General Accounting Office reports.

Æ

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Mr. TURNER. Thank you, Mr. Chairman. This hearing, of course,

is focused on a piece of legislation that the chairman of this committee, Mr. Burton, introduced last year which seeks to make recovery auditing mandatory for Federal agencies. I appreciate

Chairman Horn’s interest in this issue and his willingness to focus

on it by holding this hearing.

As we know, the Federal Government erroneously pays vendors

and contractors billions of dollars each year and, through a series

of financial management hearings held by this subcommittee, we

have learned, for example, that the Medicare system made approximately $12 billion in erroneous payments in fiscal year 1998 revealing an error rate of 7 percent. Obviously, these kinds of errors

and mistakes do not need to exist in our Federal agencies and I

commend Chairman Burton as well as Chairman Horn for focusing

on this problem, continuing to search for solutions such as recovery

auditing.

Mr. Chairman, thank you again for the opportunity to be a part

of this very important hearing.

[The prepared statement of Hon. Jim Turner follows:]

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Mr. HORN. I thank the gentleman. And we are waiting for Chairman Burton. He should be here in a minute or so. So we will be

in recess for a minute or so. When Mr. Burton arrives, we will have

the statement read into the record.

In the meantime, let me note, this is for some of you that have

been here before, before this subcommittee or any subcommittee of

the Government Reform Committee, we swear in all witnesses. And

when we have you at the table, such as panel two where there are

four witnesses, when we call on you in that sequence, the document

you have given us in writing, we have read. And that automatically

goes into the record without any additional motions. And we would

like you to summarize those statements so there is more dialog

with the committee members on both sides of the aisle to ask questions and get to the core of the matter.

And we are now delighted to introduce the gentleman from Indiana, the chairman of the Committee on Government Reform, for an

opening statement.

Mr. BURTON. I want to thank you, Mr. Chairman. And you will

see, first of all, I am out of breath because I am out of shape. And,

second, I am wearing sunglasses because I forgot to change these.

So I don’t want you to think I am a movie star or think I am.

Thank you, Chairman Horn, for holding this hearing on H.R.

1827, the Government Waste Corrections Act.

One of my highest priorities as chairman of the Committee on

Government Reform is to attack the widespread fraud, waste, and

error in Federal programs and activities that cost taxpayers billions of dollars every year. One area where we bleed millions of dollars every day is in overpayments for contractors that often go undetected and almost never get repaid. Many agencies could benefit

from the use of recovery auditing. Several of these could see substantial gains.

The Department of Defense, the Environmental Protection Agency, NASA, and the Department of Energy have all been on GAO’s

high-risk list for almost 10 years for contract management problems. These agencies represent about $140 billion worth of contracts yearly. DOD alone represents about $100 billion of this

spending. How much of this is wasted in overpayments has not

been calculated, but with the problems associated with these contracting operations, I would bet that the figures are pretty high.

Another high-dollar, high-risk area is Medicare. Of about $200

billion it pays out annually, overpayments in Medicare’s fee for

service claims last year were estimated at $12.6 billion. That is

$12.6 billion in just 1 year. Over the past 3 years, this figure is estimated at over $56 billion. This needless waste of money year

after year significantly distorts the true costs of Medicare. Mr.

Chairman, if nothing else, recovery auditing should be mandated

to recoup Medicare overpayments.

I just hope that when the bill passes and these overpayments

start coming back, the checks won’t be returned as is the current

practice. And I would like to say that, Mr. Chairman, that I read

an article that was in the Regulatory News and it indicated that

some of these checks are being returned because they don’t know

what to do with them. And we certainly want to make sure that

14

that is corrected, because if people are sending overpayments back

to the Treasury and to the government——

Mr. HORN. Without objection, that article will be put in the

record at this point.

[The information referred to follows:]

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Mr. BURTON. Thank you, Mr. Chairman. And this is even when

providers voluntarily return the money, their checks are still returned. Mr. Chairman, I hope your subcommittee will try to get

some answers from the representatives from HCFA today on that

very problem.

Let me briefly describe what my bill does. The bill requires agencies to conduct recovery auditing to identify and collect overpayments for programs that spend $10 million or more annually. Up

to 25 percent of the money collected back can be used to pay the

recovery audit firm, so there is no payment to the contractor unless

the overpayments are returned. The bill also allows agencies to put

25 percent of collections back into the programs and activities from

which the overpayments originated. Mr. Chairman, this is to provide agencies that need an incentive to commit to this activity.

Requiring agencies to identify and recover overpayments is only

one of the bill’s key objectives. The other is to remedy the root

causes that gave rise to the overpayments in the first place. To this

end, the bill also allows for some of the money recovered to be

available to the agency to make improvements to their financial

and other internal systems in order to prevent overpayments and

reduce other problems of waste and error in the future. Recovered

moneys not used for these purposes will get returned to the Treasury.

Mr. Chairman, this bill holds great promise. In places where recovery auditing has been tested in government, it has proven effective. For instance, the Army-Air Force exchange program [AAFES]

has 16 years of experience with recovery auditing, having begun

the practice in 1983. With purchases of approximately $6.5 billion

annually, over $100 million has been recovered over the past 5

years.

In another example, the Defense Department has been conducting a recovery auditing demonstration program at its supply center

in Philadelphia. Looking at purchase transactions from fiscal years

1993 to 1995, over $27 million in overpayments have been identified. Given the billions of dollars we spend to procure goods and

services annually and the magnitude of the overpayment problem

in our current programs, this bill has enormous potential to

achieve substantial cost savings and benefits for the government

and the American taxpayer.

Mr. Chairman, I stand ready to work with you, our Democratic

colleagues, and this administration to make whatever improvements that are necessary to get the best bill possible. I want to

thank you again for moving forward with the subcommittee consideration of this very important bill. And I apologize, once again, for

my tardiness.

[The prepared statement of Hon. Dan Burton follows:]

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Mr. HORN. We thank you for putting in this bill. We think it has

a lot of merit.

Now if the Comptroller General will stand and raise his right

hand?

[Witness sworn.]

Mr. HORN. The clerk will note that the witness affirmed the oath.

And we are delighted to have you with us. It is an honor. And

we hope you have enjoyed your first few months on the job, which

is one of the most important in the United States. So welcome.

STATEMENT OF DAVID D. WALKER, COMPTROLLER GENERAL,

GENERAL ACCOUNTING OFFICE

Mr. WALKER. Thank you. Chairman Horn, Chairman Burton,

Ranking Member Turner, I appreciate the opportunity to discuss

H.R. 1827, the Government Waste Corrections Act of 1999 and its

relationship to the longstanding issues of government accountability for use of public moneys, overpayments, and the role of recovery

auditing in identifying and recovering overpayments.

One of the most important issues facing the government today is

the need for greater accountability in managing the finances of our

national government. It is a significant problem at many agencies

and one that has been the subject of frequent reports by us and

others. One key aspect of the problem is the difficulty the government has in assuring proper payment of all of its bills while avoiding overpayments. My testimony today will discuss the dimensions

of the overpayment problem, our past work on the DOD recovery

auditing demonstration program, and the Government Waste Corrections Act of 1999.

My comments on the bill reflect my belief that there are three

principles that should guide any recovery auditing program. First,

there should be meaningful incentives for agencies to want to participate in the program and to make it work. Second, there should

be adequate safeguards to ensure that the program is implemented

in a manner intended by Congress and that it preserves the integrity of the congressional appropriations process. And, third, there

should be transparency in the conduct of the program. That is,

there should be evaluation reporting on program implementation,

to include the amounts recovered under the program and how they

are used. In the context of these three principles, I will suggest opportunities to strengthen the bill.

Significant financial systems’ weaknesses, problems with fundamental recordkeeping and financial reporting, incomplete documentation, and weak internal controls continue to prevent the government from effectively managing its operations. Significant

among these problems is the inability of Federal agencies to determine the full extent of improper payments that occur in major programs estimated to involve billions of dollars annually.

Within the estimated billions of dollars of improper payments,

the amount of exact overpayments that are involved is unknown.

Given the poor state of the financial accounting record at many

agencies, neither the Federal agencies nor we have a very good estimate of the extent of overpayments that occur each year, yet we

expect that they are significant. We know, for example, that beVerDate 11-SEP-98 10:41 May 25, 2000 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6602 C:\DOCS\63548.TXT HGOVREF1 PsN: HGOVREF1
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tween the years 1994 and 1998, contractors returned about $4.6

billion in overpayments to the Department of Defense alone.

Across government, improper payments, which includes overpayments, occur in a variety of programs and activities, including

those related to contract management, Federal financial assistance,

and tax refunds. Reported estimates of improper payments total

billions of dollars annually. Such payments can result from incomplete or inaccurate data used to make payment decisions, insufficient monitoring or oversight, and other deficiencies in agency information systems and controls.

The risk of improper payments is increased in programs involving one of three criteria: first, complex criteria for computing payments; second, a significant volume of transactions; and, third, an

emphasis on expediting payments. The reasons for improper payments range from inadvertent errors to fraud and abuse.

Recovery auditing offers the potential to identify and recover

some of these overpayments. Recovery auditing started about 30

years ago and it is used in several industries including the automotive, retail, and food service industries. The DOD, the Army and

Air Force Exchange Service, and the Navy exchange service, use

recovery auditing. An external audit recovery group may be the

only group used by an organization or it may be used in combination with internal resources that examine invoices for overpayments prior to an external group’s review.

Recognizing its potential to the government, in fiscal year 1996,

the National Defense Authorization Act required the Secretary of

Defense to conduct a demonstration project to evaluate the feasibility of using recovery auditing and to identify overpayments made

to vendors by DOD. Authority to expand the program was provided

in fiscal year 1998 under the National Defense Authorization Act.

The DOD demonstration project began in September 1996 when

the Defense supply center in Philadelphia competitively contracted

with Profit Recovery Group International [PRGI]. The contract covers purchases made during fiscal years 1993 to 1995 and requires

PRGI to identify and document overpayments and to make recommendations to reduce future overpayments. PRGI receives a fee

of 20 percent of net collected funds. The focus of the demonstration

program is on purchases of subsistence, medical, and clothing

items, items that are typically found in retail merchandising establishments.

We have reviewed the demonstration program and concluded

that recovery auditing offers the potential to identify overpayments, but implementation problems hindered DOD from fully realizing the benefits of the program. As of June 1999, according to

PRGI, it had completed 90 percent of its work and identified $29.3

million in overpayments made to suppliers on purchases of roughly

$6 billion. However, collections by DOD, as of June 1999, only

amounted to approximately $2.6 million.

DOD has been slow to embrace recovery auditing. For example,

in House Report 105–532, which related to a bill providing for fiscal year 1999 DOD authorizations, DOD was directed to expand

the use of recovery auditing. We found, however, that DOD had not

done so. While DOD issued an August 1998 memorandum encouraging the use of recovery auditing and some activities within DOD

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have expressed interest in this concept, no contracts had been

awarded at the time we completed our work in March 1999. We

subsequently ascertained, however, that in June 1999, earlier this

month, one of the recipients of the 1998 memorandum, the U.S.

Transportation Command, had entered into such a contract and

that it should be awarded in the near future.

The Government Waste Corrections Act of 1999 would require

the use of recovery auditing by Federal agencies and provide incentives to improve Federal management practices with the goal of reducing overpayments. We believe the bill is a positive step in the

government’s effort to reduce overpayments and to obtain timely

identification and recovery of overpayments when they occur. The

act addresses recommendations we made in our recent report on

DOD’s demonstration program. This includes giving the head of the

executive agency the option to perform recovery auditing with internal staff, by contract, or through a combination of internal staff

and contract resources.

We believe it is very important that heads of agencies perform

a sound evaluation of the applicability of recovery auditing to their

operations and the related cost and benefits of undertaking internal recovery auditing before asking an external audit group to do

such auditing. Simply stated, we believe that it is important to pick

the low-hanging fruit before turning to contingency fee arrangements on the outside. Where recovery auditing can be cost-effectively used across government and whether that is the case remains somewhat of an open question that needs to be carefully

thought through.

We also support the bill’s requirement that recovery auditing

contractors provide periodic reports with recommendations on how

to mitigate overpayment problems and that, as part of the agency’s

management improvement program, the agency is to give first priority to addressing problems that contribute to overpayments.

Finally, the bill allows applicable appropriations to be reimbursed for costs incurred by government activities in supporting recovery audit efforts and to provide other incentives to support the

use of recovery auditing. These features should eliminate some of

the implementation problems we saw in the demonstration program at DOD.

While we are positive toward the concept of recovery auditing

and its potential for application to the Federal Government, the

government’s experience with recovery auditing has been limited.

Thus, we think it is a good idea to further mandate additional

model programs in Federal agencies to determine the applicability

of recovery auditing and to develop best practices for their use governmentwide. In conducting the mandated model programs—at

least five are currently provided for in the bill—there should be

sufficient diversity in where recovery auditing is modeled to adequately test the concept among the different types of payment activities. Beyond the mandate of the model programs, we believe

that the use of recovery auditing should be, at least for the time

being, available but not mandated for other Federal agencies.

The committee may also want to reexamine the bill’s provisions

relating to the use of recoveries made under the program. While financial incentives are critical to the program’s success, incentives

22

that are too great are unnecessary and may undermine the program by creating inappropriate disincentives to making accurate

and timely payments in the first instance. The committee may

want to provide for a more substantial portion of the recoveries to

be returned to the Treasury, therefore creating a win-win situation

whereby the agency benefits and the taxpayers benefit as a result

of this effort, more than just the recoveries.

We will be happy to discuss further technical comments with the

committee staff.

In summary, Mr. Chairman, Federal agency managers have a fiduciary responsibility relating to and are accountable for the proper use of Federal funds. Our work has shown that in certain cases,

these responsibilities are not being exercised adequately and the

result is billions of dollars a year in improper payments, a substantial portion of which represent overpayments that may never be recovered.

Federal agencies need to achieve more effective control over their

payment processes. The causes of the payment problems are varied

and many are longstanding. The solutions can be found in the effective use of technology, the establishment of sound internal control and payment processes, and the wise use of human capital.

If Federal agencies do not effectively tackle these challenges,

they will continue to risk erroneously paying contractors billions of

dollars and perpetuating other financial management problems. Effectively addressing these challenges, however, will require investment and sustained commitment by top-level management. Recovery auditing, which has a longstanding track record in the private

sector, offers a low-risk opportunity to identify and recover some of

these overpayments.

We strongly support the provisions of H.R. 1827 providing for

model recovery auditing programs. In this way, the government

can assess the applicability of recovery auditing to different types

of payments and develop the best practices for its use on a wider

scale. In our view, with the use of model programs plus strong

monetary incentives, it would be unnecessary to mandate recovery

auditing across the government. There may also be opportunities

to employ novel servicing arrangements, such as creating a center

of excellence in a Federal agency to provide leadership to other

agencies in implementing recovery auditing.

The keys to the successful execution of governmentwide recovery

auditing programs are: one, meaningful incentives for agencies to

want to participate in the program and to make it work; two, adequate safeguards to ensure that achieving congressional intent is

attained and that the proper use of appropriations is maintained;

and, three, assuring transparency in the conduct of the program.

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

to answer any questions that you or Chairman Burton may have

at the present time.

[The prepared statement of Mr. Walker follows:]

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Mr. HORN. Well, I thank the gentleman for that very thoughtful

statement and now yield for questioning to the chairman of the full

committee, Mr. Burton of Indiana.

Mr. BURTON. The first thing that comes to my mind, which I alluded to in my statement, is that you said that—and I think about

the DOD—that there was $29 million, in overpayments and only

$2.6 million of that has been recovered? Is that correct?

Mr. WALKER. That is correct, sir.

Mr. BURTON. Well, why is that?

Mr. WALKER. There are a number of reasons, Mr. Chairman. I

would be happy to provide more for the record, but first the contractor identifies the alleged overpayment and then there has to be

actions taken on behalf of DOD in order to actually recover those

moneys.

Mr. BURTON. What kinds of actions?

Mr. WALKER. Well——

Mr. BURTON. They have to send a bill out or a letter out saying

there was an overpayment made and we want you to respond?

Mr. WALKER. Well, they would have to have some type of correspondence interaction. But, they typically would want to satisfy

themselves that they agree that, in fact, there is an overpayment.

I would be more than happy, Mr. Chairman, for the record, to provide some specific details if you would like.

[The information referred to follows:]

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Mr. BURTON. Well, you know, for instance, with the Department

of Defense, if a contractor wants to do business with the Department of Defense in the future on future contracts, if he has been

overpaid to the tune of $29 million, it would appear to me that he

would check that out pretty quickly and make restitution. Otherwise, he might not be able to be a primary bidder on a contract in

the future. I don’t know why in the world it should take a long period of time once you find out there are $29 million in overpayments to get it back and $2.6 million is not even a tenth of that.

It just doesn’t make any sense.

Mr. WALKER. Mr. Chairman, clearly it should have been handled

more expeditiously than it has. The only thing that we note in my

full statement that I would like to add now is that—it is interesting—there are actually some provisions in the law right now I

think that also need to be looked at, beyond what we are addressing here.

For example, right now the government can be required to pay

interest if it does not make its payments on a timely basis. However, if contractors knowingly received overpayments, they are not

required to pay any interest on those overpayments, even if they

knowingly hold onto those payments for an extended period of

time—potentially years—waiting for the Department of Defense to

ask them.

Mr. BURTON. Well, that might be something we could even incorporate into this bill. If there is an overpayment made with the

knowledge of the contractor and the contractor doesn’t return that

in a timely fashion, he pays an interest penalty. That is something

I think our staff ought to write down and look at to the feasibility

of putting in this bill.

The other thing I wanted to ask you about is you said that you

want to have these audits done internally rather than externally.

Why? It seems to me that if it had been handled—if the auditing

process had been handled properly in the first place within the

agency, the overpayment would have been caught initially. And if

the overpayment wasn’t caught, what is the incentive for the interior auditor to correct the mistake that was made?

Mr. WALKER. Mr. Chairman, actually I believe what is important

is that efforts be taken to try to capture the low-hanging fruit.

Mr. BURTON. Well——

Mr. WALKER. Either through internal resources or external contractors. Either one or a combination thereof, before entering into

contingent fee arrangements. My point is if we don’t do that, then

we can end up paying fairly significant contingent fees to recover

overpayments that could more cost-effectively be obtained even potentially through contractor resources, but not under a contingent

fee arrangement.

Mr. BURTON. Well, that might drag out for a long period of time.

I mean, the overpayments have been known for a long time. The

agencies involved have not been collecting those overpayments. The

reauditing after the payments have been made hasn’t been done

very effectively. And the incentive for an outside auditing firm to

do it will stimulate them to get the job done. And I am not sure

that stimulation would be there on the inside of the agency.

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Mr. WALKER. I think it is facts and circumstances. Let me give

you an example——

Mr. BURTON. And, besides, wouldn’t you have to have more funds

expended in that agency to be able to provide for this reauditing?

Mr. WALKER. Not necessarily. I think there could be an impact

on the appropriations process that would have to be examined. Let

me give you one example, Mr. Chairman. HCFA had about $24 billion in overpayments. They have gotten it down to about $12 billion. Still too high. No question about it.

One of the things that we have been encouraging HCFA to do for

some time, and they have adopted our recommendation, is to make

use of commercially available software to help identify some of

these overpayments. Such software is used widely in the private

sector. That is something that HCFA has done, which is one of the

reasons they found a lot of these recoveries. In that case, the government gets 100 cents on the dollar for all of the savings.

Mr. BURTON. Well, hasn’t GAO reported regarding this reduction

you are talking about that this decrease was attributable to better

documentation provided to the auditors, rather than to a substantive reduction in improper payments?

Mr. WALKER. Much of it has been attributable to documentation,

that is true. There has been some reduction in improper payments.

But a lot of it was the documentation issue.

Mr. BURTON. Yes. Does this mean that the earlier figures were

not accurate? I mean the higher figures there? You know, you said

it was reduced from——

Mr. WALKER. I would say that we had better clarity as to the nature of what that number was. It wasn’t exactly what was thought

initially.

Mr. BURTON. But they may have been inaccurate.

Mr. WALKER. That is true. They could have been, Mr. Chairman.

Mr. BURTON. Have there been specific actions taken by HCFA

over the last years or so that can be attributed to the decline in

the overpayment estimates?

Mr. WALKER. They are taking actions now. For example, they

have adopted our recommendation to use commercially available

software in order to try to identify possible improper payments. It

was a while in coming, but they have done it now.

Mr. BURTON. What is HCFA doing right now, specifically, to try

to recover these overpayments?

Mr. WALKER. Well, they are taking a number of steps with both

internal and external resources, including their normal contractual

relationships to try to identify double payments; to try to identify

payments for services that were not rendered; to try to identify

payments where there may have been some upcoding with regard

to the nature of the services that were rendered. Mr. Chairman, it

is my understanding they are actually going to appear here after

me and they would probably be in a better position to tell you exactly what they are doing.

Mr. BURTON. Well, I don’t want to belabor my questioning because I know the chairman has questions, but I still can’t see

where these overpayments being handled within an agency with a

reaudit would be that beneficial. I mean, if the problem hasn’t been

corrected by now, it seems like to me an exterior auditing firm with

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an incentive to really get at it would be more accurate and more

effective. Then, of course, the problem, once it is identified, is getting the money in. And I still can’t understand why, with $29 million-plus in overpayments to DOD, only $2.6 million has been recovered and that is something else we need to look into.

Mr. Chairman, I thank you very much for yielding to me.

Mr. HORN. Well, you are certainly welcome to continue your line

of questioning. Because you and I have it here, we can take all

afternoon. [Laughter.]

Mr. BURTON. Well——

Mr. HORN. Go ahead.

Mr. BURTON. OK, sure. I mean, if you don’t mind. You say that

between fiscal years 1994 and 1998, contractors returned about

$4.6 billion in overpayments to DOD. Were these overpayments

voluntarily identified and returned by the vendors?

Mr. WALKER. It is my understanding that most of them were

identified by the contractors.

Mr. BURTON. Was DOD even aware of the overpayments, in

many cases?

Mr. WALKER. Not all of them, no. Their financial records——

Mr. BURTON. Well, that brings up this question again about interior auditing. I mean, if you have got auditors—don’t they have

auditors at DOD?

Mr. WALKER. They do, Mr. Burton.

Mr. BURTON. And payments are made and $4.6 billion is returned in overpayments and much of that was returned without

the knowledge of the people in DOD that they were overpayments?

And you want to have these reaudits done internally?

Mr. WALKER. Not necessarily by the same people, Mr. Chairman.

Let me clarify. We don’t oppose the use of external contractors. Let

me make it clear. We are not saying that at all. We are saying that

an agency may decide on day one that it wants to use external contractors as a means to deal with this issue. We don’t have a problem with that.

Mr. Burton, my only point is that one should consider, based

upon individual facts and circumstances, if agencies haven’t done

anything to try to get the low-hanging fruit, whether you should

go to a contingent fee arrangement on day one or whether you

ought to try to consider another fee arrangement with external contractors and then go to contingent fees. It is just facts and circumstances.

Mr. BURTON. It seems to me that right now the auditing departments of all these agencies ought to be going through the billing

records on a regular basis and finding out if overpayments were

made. That is their job. And if they are not doing it now, I can’t

for the life of me figure out why they would do it if we hired some

more people and put them in there.

Mr. WALKER. As you know, Mr. Chairman, we are, on record, for

several years, as saying that many aspects of DOD’s financial management system are a high-risk to the government. They don’t have

adequate internal controls. They don’t have adequate accountability mechanisms. And we are trying to shine the light on that to try

to get them to improve it.

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Mr. BURTON. Well, in the short run, an exterior audit firm might

light a fire under them. Congress can always restructure the auditing process. But, as far as I am concerned, there needs to be a

strong incentive for there to be corrections in the auditing process.

And that incentive, I think, is not going to come from an interior

restructuring.

Mr. HORN. Would the gentleman yield on this topic?

Mr. BURTON. Be happy to yield.

Mr. HORN. A few years ago, I held a hearing entitled, ‘‘The Defense Department: What did you do with the $25 billion we can’t

find?’’ And what it seemed to get down to was what we are noting

in some of our questions here. The Defense Finance and Accounting

Service in Columbus, OH. Did the General Accounting Office go out

and look at that operation or did they leave it to Defense? Do you

know, offhand whether they took a careful look at it?

Mr. WALKER. Yes, we have been out there. The primary responsibility is with the IG but we do work at DFAS in various locations.

Mr. HORN. Well, we let 2 years go by to see if they could clean

it up. And then, presumably, they have got it down to $10 billion

we can’t find. So $15 billion was accounted for.

Now how come we got to the $25 billion? It seemed to be the following: No. 1, they were having GS–1s—and I hadn’t heard of

those since the first world war. I wasn’t around then, but I read

it. And apparently GS–1s were staffing some of that. And contractors were getting checks from the government out of that center

and they would phone up and say, I don’t have a contract with the

government. And the Defense group there would say, ‘‘oh, yes, you

do. Our records show you do.’’

One guy, I am told—and I don’t think it is just apocryphal—put

the check in interest earning. And he knew they would get around

to it some day. And they did. And he paid them back the amount

of overpayment, but he kept the interest. And apparently he was

pretty well paid by that little thing.

So one of the problems is the man power at what level of brains

and knowledge. And, No. 2, the type of training that goes on in a

center like that. It seems to me you have got to build in the blocks

before those checks go out. And that is where an internal auditor

ought to be working and picking randomly some of these checks to

see if the paper matches.

Well, what the problem was on the $25 billion is they had ordered $25 billion. The acquisition documents never quite related to

the inventory documents. So you would find it if you could. And I

just wondered the degree to which GAO is looking at some of it or

are you taking the Inspector General’s word for it?

Mr. WALKER. No, we are.

Mr. HORN. Because we have great faith in the Inspector General

over there.

Mr. WALKER. Several things, Mr. Chairman. Three things are

really key in this area. First, people; second, process; third, technology. On the people front, you have mentioned two of the key ingredients. You have got to have people with the right kind of skills

doing this work. They may or may not exist within the current organization. You may have to go out to the outside. And you need

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training for the people that are doing this work, if they are internal.

Second, concerning the process, among other things, you need internal controls. You need solid internal controls.

Third, concerning technology, we have to automate much of this

and we have to integrate systems. There are so many different systems at DOD.

But, you know, those are three key elements. And, in many

cases, you are going to have to turn to contractors because you

don’t have the resources internally in order to get it done.

Mr. HORN. OK. Go ahead. I yield back.

Mr. BURTON. Yes. My very able staff assistant just mentioned

that, I guess in the correspondence we have had on this issue, the

various agencies including DOD say that the reauditing is not a

core function of the Department. And, with the lack of adequately

trained personnel, it seems that the prudent thing would be to use

exterior auditors until you were able to bring your staff up to snuff.

Now when these overpayments voluntarily came back to the

DOD, was that money credited back to the government or did it go

back to the programs? Where did it go?

Mr. WALKER. I am not sure, Mr. Chairman. I can try to provide

some more information for the record.

Mr. HORN. Without objection, the answer of GAO will be put in

the record at this point.

[The information referred to follows:]

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Mr. WALKER. Thank you.

Mr. BURTON. OK. And my understanding is that in the case of

Medicare overpayments voluntarily returned to HCFA, checks were

returned because there was no systematic way to deal with this

money coming back to the government. You know, that just boggles

my mind. Somebody sends a check back to HCFA saying, ‘‘Hey, listen, this is an overpayment that we didn’t deserve,’’ and they sent

it back him, saying, ‘‘We are sorry. You are going to have to just

keep the money because we don’t know what to do with it.’’ That

boggles my mind—how can that happen?

Mr. WALKER. It is mind-boggling, Mr. Chairman. You are right

there. It does happen.

Mr. BURTON. I mean, people want to do the right thing and send

money back to the government for an overpayment and you say,

gosh, you are just going to have to keep it because we don’t know

what to do with it?

Mr. WALKER. Well, it is mind-boggling that it would happen. But,

there are many circumstances I mentioned earlier where, actually,

people know it is an overpayment. They don’t send it back because,

under current law, they take the position that they don’t have to

until they are notified. And, in fact, there is no economic incentive

for them to send it back.

Mr. BURTON. Yes, I understand. But I don’t want to change the

subject.

Mr. WALKER. Sure.

Mr. BURTON. We are talking about payments that are voluntarily

sent back and it boggles the mind to send a check back to somebody just because you don’t know how to enter it. And you are worried about reauditing? I mean, if they don’t know how to—I mean,

I took bookkeeping in college, you know. And it is not that hard

to put it in the bank and mark it down, you know? I don’t understand that.

Mr. WALKER. The people that actually process the payments that

are supposed to put those in the bank aren’t the ones that would

be doing the auditing. But I hear you, Mr. Chairman.

Mr. BURTON. I understand that the places in government now

using recovery auditing are not funded on annual appropriations

but are set up on revolving funds or no-year accounts. In other

words, they are attuned to a monetary bottom line like businesses

in the private sector. In order to create this kind of incentive for

regularly appropriated agencies, my bill would allow 25 percent of

the moneys or up to 25 percent of the moneys to go back to the program that it originated from. Do you see any problem with that

kind of an incentive?

Mr. WALKER. Mr. Chairman, we think it is essential that you

have an incentive for the agencies to want to play and to participate in this program. And, in fact, what we had suggested was

something along the lines of 50 percent of the money being able to

go back to the agency and 50 percent going for the taxpayer. So I

think it is crucial that you have an incentive for the agencies.

Mr. BURTON. OK. Finally, you said that if we required the use

of model programs and provide the right incentives, it would not

be necessarily to mandate the use of recovery auditing across the

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government. I think you have elaborated on that, but is there anything further you would like to add to that?

Mr. WALKER. I think it is critical that we have some additional

model programs that look at different aspects of where recovery auditing might be applied. And, at least five of those should be required. I think, beyond that, if you provide the kind of incentives

that we are talking about, that should go a long way to encouraging people to do this. And if they don’t, you can always go to a

mandate system.

Mr. BURTON. OK. Let me ask just one more question.

Mr. WALKER. Sure.

Mr. BURTON. To put a recovery auditing system in these agencies

where it does not now exist would take time, right?

Mr. WALKER. That is correct.

Mr. BURTON. Do you have any idea what kind of time?

Mr. WALKER. Well, it depends on the program, Mr. Chairman.

Mr. BURTON. Well, it would take some time. The outside recovery

auditing companies are ready to go right now. They have got the

auditors there. They have done it. They have got the experience.

Why should we wait when we know that these overpayments are

made? We know that the waste is there. We know that they should

be recovered. Why should we wait for a model program when it is

going to take time to put it in place when we already have an outside entity that can do it?

Mr. WALKER. I guess my only point, Mr. Chairman, would be if

you take a number like $10 million—which is what the bill currently proposes—if you look at the number of Federal entities and

agencies that would be affected by that, it would be a significant

number. The types of purchases they end up making are fundamentally different and I think that there would be a lot of time

and energy spent on the contracting aspect of it. So it is really just

a cost-benefit question, frankly, from a different perspective, Mr.

Chairman.

Mr. BURTON. What if the threshold were raised to $50 million or

$100 million or $500 million?

Mr. WALKER. Obviously, we would have to take a look at how

that would affect the number of entities that would potentially be

impacted by it.

Mr. BURTON. OK. OK. Thank you, Mr. Chairman.

Mr. HORN. Thank you. Some of this has been covered, but let me

just ask it for the record’s sake. According to your testimony, the

General Accounting Office supports the provisions of the bill with

Mr. Burton providing for model programs for recovery auditing.

What are the Federal programs you suggest using for these model

programs? Which ones would you say we ought to apply that to?

Mr. WALKER. Well, we don’t speak to specific programs. I would

be happy to provide something for the record if you would like. I

do think that what we need to do is we need to analyze what are

the different types of purchasing activities that the Federal Government engages in. Also, we ought to make sure that we have at

least one program for each major type of purchasing activity.

One area that is more problematic, but I think we ought to explore is how recovery auditing can be applied. But, there are some

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tors give a lot of money in overpayments, but there are also some

peculiarities in dealing in the health area, because many of these

overpayments have to do with medical decisions, medical necessity,

and the nature of the services that are being provided. I think that

might be an example where you might need to take a look at it because there are specific things that have to be looked at that would

be different than, for example, how it has been applied at DOD

where they are purchasing, clothing and supplies. Recovery auditing has been used for decades in the private sector for those types

of activities.

I might add, recovery auditing has been used in health care as

well in certain circumstances in the private sector.

Mr. HORN. Well, would GAO say, let us start on the ones with

the largest amount of money that are overpayments and deal with

that?

Mr. WALKER. There is clearly a logic to that, Mr. Chairman.

Mr. HORN. OK. Now you mentioned the purchasing models. Give

me an idea. What are the purchasing models that you are thinking

of?

Mr. WALKER. When you are contracting for things that are readily commercially available on the outside. Obviously, in this instance, there is clearly an application. When you are contracting

for major weapons systems or other things that are customized, obviously, there is potential application there too, but one would have

to approach it a different way.

When you are dealing in the health care area, there is potential

application, but there are a number of special considerations, given

the nature of how overpayments might occur. Obviously, if it is a

double payment or if it is for service that wasn’t rendered, that is

easier than if a judgment call has to be made as to whether the

service that was provided was appropriate under the circumstances, based upon the nature of the illness?

So those would be three examples, Mr. Chairman.

Mr. HORN. OK. Another question for the record. The Government

Waste Corrections Act of 1999 currently provides that of the

amounts collected through recovery auditing, up to 50 percent can

be applied for management improvement programs. Up to 25 percent can be applied for the payment of the contractor and to reimburse the fund from which overpayments were made. You testified

that you would reexamine the allocation of overpayment recoveries

and provide for a substantial portion to be returned to the Department of the Treasury. Why do you suggest these changes and how

would you restructure the allocations?

Mr. WALKER. Our view is that if you say that 50 percent of the

recoveries would go to the agency either to pay for the contractor

and/or to reinvest in their systems and programs to prevent this

from happening in the future or to minimize it, that that should

be enough of an incentive and should provide enough funding for

the agencies to engage in this activity, especially if it is on a contingent basis where they only have to pay if the amounts are actually recovered.

Mr. HORN. Well, if that is at the 50 percent mark, does that

mean we simply apply that money to better cost recovery? Or do

we let the agency do anything with it?

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Mr. WALKER. No. I think you want to target it, as has been contemplated in this bill, to the types of initiatives that are designed

to improve the systems, the controls, and the recovery mechanisms

that the bill is intended to address.

Mr. HORN. OK. In other words, this would relate to getting new

human resources in auditing.

Mr. WALKER. Either systems or human capital or enhanced processes.

Mr. HORN. Right. Or investment in computing.

Mr. WALKER. Correct. Technology, for example. I agree, Mr.

Chairman.

Mr. HORN. OK.

Mr. WALKER. One of the three: People, process, technology focused in this area.

Mr. HORN. Do you feel the current ratios may create inappropriate incentives, which is from the bill?

Mr. WALKER. We think there clearly ought to be something directly in this for taxpayers. The taxpayers ought to get part of this

recovery. And we are a little concerned, Mr. Chairman, that the

agencies not be in a circumstance where they get 100 cents directly

or indirectly of every dollar that is recovered because that might

create a perverse incentive for them to overpay in the first instance.

Mr. HORN. Right.

Mr. WALKER. We don’t want to do that.

Mr. HORN. OK. Does the gentleman from Indiana have any

other——

Mr. BURTON. Mr. Chairman, unfortunately I have to depart for

another meeting. But I want to thank Mr. Walker for his candor

and you for holding this hearing. And I hope we can work out any

differences we might have so we can get this bill moving as rapidly

as possible. I think we have got a little difference on the exterior

rather than interior auditing, but maybe we can work that out and

get a bill that we can all live with and save the taxpayers a lot of

money.

Mr. WALKER. Thank you, Mr. Burton.

Mr. BURTON. Thank you. Thank you, Mr. Chairman.

Mr. HORN. Thank you. And thank you, Mr. Comptroller General.

We will now go to panel two.

Mr. WALKER. Thank you, Mr. Chairman.

Mr. HORN. Thanks for coming.

Panel two has the Honorable Deidre Lee, Acting Deputy Director

for Management, Office of Management and Budget; Mr. George H.

Allen, Deputy Commander, Defense Supply Center of Philadelphia;

Mr. Gerald R. Peterson, Chief, Accounts Payable Division, ArmyAir Force Exchange Service; and Ms. Michelle Snyder, Director, Financial Management Office, Chief Financial Officer of the Health

Care Financing Administration.

If you would stand and raise your right hands. And are there any

assistants in back of you that might be talking? If they are, get

them to stand, too. I only like these baptisms once. All right. Fine.

We have one. Anybody else? Two. So we have got six witnesses to

be sworn. Do you affirm—there are a few back there somewhere?

OK. So we have got seven, then. Is that it? All right.

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[Witnesses sworn.]

Mr. HORN. OK. It seems the lips were moving. Yes, it is eight.

It was eight. OK.

So that is taken care of and we now start with Ms. Lee. And we

are glad to see you here. And, as you know, your statement is in

the record. We would like you to summarize it and then we will

have more time for questions.

STATEMENTS OF DEIDRE LEE, ACTING DEPUTY DIRECTOR

FOR MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET;

GEORGE H. ALLEN, DEPUTY COMMANDER, DEFENSE SUPPLY

CENTER OF PHILADELPHIA; GERALD R. PETERSON, CHIEF,

ACCOUNTS PAYABLE DIVISION, ARMY-AIR FORCE EXCHANGE SERVICE; AND MICHELLE SNYDER, DIRECTOR, FINANCIAL MANAGEMENT OFFICE, CHIEF FINANCIAL OFFICER OF THE HEALTH CARE FINANCING ADMINISTRATION

Ms. LEE. Thank you very much. Good afternoon, Chairman Horn,

Mr. Ose. I am here today to discuss the administration’s view on

H.R. 1827, the Government Waste Corrections Act of 1999. This

bill would mandate that agencies use the technique of recovery auditing to identify and collect overpayment to vendors and contractors.

At the outset, let me clearly state that we share the committee’s

desire to eliminate overpayments. Our goal is to make all payments

correctly and on time. When we pay correctly the first time and on

time, we prevent errors and eliminate the need and expense of correction and collection. Making the right payment at the right time

is the most cost-effective approach for reducing erroneous payments

whether the payment is made to a contractor, a food stamp recipient, or a Medicare provider.

In conjunction with the Congress, the administration has made

progress in improving overall financial management, yet there is

more to be done. We will continue to make improving financial

management systems and modernizing payments a high priority.

This priority is reflected in this year’s financial management status

report and 5-year plan, which will be transmitted to the Congress

soon.

Progress has been made and significant initiatives are underway.

For example, use of technology. Agencies are updating their financial systems, including electronic payment systems. These systems

automate document matching, reduce errors associated with paper

payment systems, and provide automated checks and edits to prevent the occurrence of duplicate payments, pricing errors, and

missed cash discounts, rebates, or other allowances.

We are also simplifying small transactions paying processes. The

80–20 rule applies here; 80 percent of the transactions equate to

20 percent of the dollars. Use of purchase cards also simplifies the

buying process. And, as you know, Chairman Horn, that is near

and dear to my heart as we talk about acquisition reform.

By using purchase cards, we streamline the payment process and

save the cost, both in terms of dollars and labor resources, for most

small purchases, or the 80 percent. We are also revising circular

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ing on ways to facilitate electronic payments and improve implementation of the Debt Collection Act.

Specifically, in recovery auditing, we are working with the DOD

to evaluate the results of their demonstration project in recovery

auditing. In recognition of recovery auditing as a tool for other

agencies, GSA established a multiple award schedule to provide

Federal agencies with easy access to private sector experts in recovery auditing who can tailor techniques to meet specific agency

requirements.

We are working with the users of this schedule to gain additional

insight into the uses and benefits of recovery audits. As you can

see, we are focusing on paying correctly. H.R. 1827 includes some

promising provisions: Paying for audit recovery services out of proceeds; gainsharing for our financial management improvement;

identifying management improvement opportunities; and rewarding employee performance.

We also have some issues with H.R. 1827, which I would like to

highlight today. Specifically, thresholds: Requiring recovery audits

for payment activities that expend $10 million or more annually.

Using the industry recovery standard of $1 million recovered for

every $1 billion audited, a threshold of $10 million would result in

gross collections of $10,000. While this is not insignificant, based

upon work that is already done to certify accurate payments, as

well as the cost of setting up the program, requiring or mandating

recovery audits may not be cost effective at this threshold.

Payment activity. This term may be read to include benefit and

entitlement payments. Most major benefit and entitlement programs have statutory provisions for identifying and recovering

overpayments. HCFA will address this today in their testimony.

We need to clarify the proposed applicability and retain appropriate tailoring of recovery audits to specific programs.

And, last, but not least, congressional appropriations. I think it

was discussed at length with Mr. Walker, but this bill allows agencies to return up to 25 percent of collections to programs. We need

to ensure that this return process is consistent with congressional

intent and the appropriations process. And, also, be sure we emphasize the correct incentives for reaction to recovery audits.

Mr. Chairman and members of the subcommittee, the administration is committed to good financial management and making the

right payment on time. We will continue our efforts, working with

the CFOs, to identify and address ways to improve accountability,

specifically, payment accuracy, including exploring the use of recovery audits. We welcome the opportunity to work with you in exploring the most effective means of using recovery audits. And I will

be pleased to answer any questions you may have.

[The prepared statement of Ms. Lee follows:]

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Mr. HORN. Thank you. We will have the questions deferred until

after the four witnesses have testified.

Mr. George H. Allen is the Deputy Commander, Defense Supply

Center of Philadelphia. Welcome.

Mr. ALLEN. Good afternoon, Mr. Chairman, distinguished members.

I will just summarize my remarks. On behalf of the Department

of Defense, I want to thank you for the opportunity to appear here

before the subcommittee to describe our experience with recovery

auditing. The 1996 Defense Authorization Act directed the Defense

Personnel Support Center, which has since been renamed the Defense Supply Center of Philadelphia or later referred to as DSCP,

to be the test site for demonstration of private-sector recovery auditing.

In September 1996, DSCP competitively contracted with Profit

Recovery Group International [PRGI] as I will refer to them. Although the pilot program is not complete, I can say with certainty,

the commercial recovery auditing has proven to be a cost-effective

practice for our center.

Let me describe briefly how we demonstrated this commercial

practice. As law directed, we required PRGI to audit available accounting and procurement records from fiscal years 1993 through

1995. The audit base was $7.2 billion in payments to vendors over

that 3 year period. Thus far, PRGI has identified potential overpayments of about $27.3 million. The overpayment arose from a variety of reasons, including duplicate payments, interest paid in error,

discounts offered but not taken, overcharges, and breeches of the

price warranty provisions in our contracts.

Of the amount identified, we have collected $2.6 million, leaving

a potential uncollected balance of $24.7 million. We have moved

forward to issue claims to collect about $10.4 million in those overpayments and another $2 million in dispersing errors. We have not

yet approved $12.3 million of potential overpayments.

In addition to the numerical data just reviewed, I believe the

demonstration project has benefited our operation in three other

ways. First, recovery auditing has allowed us to continuously encourage vendors to comply with contract terms and conditions. The

additional scrutiny of recovery auditing has provided and will continue to provide more assurance that overpayments will be identified and collected promptly.

Second, the auditing process has uncovered systemic problems,

including the need to fine tune our automated payments systems

to assure that we comply with all statutory requirements.

And, third, dispersing errors uncovered by the auditing program

have highlighted the need for closer oversight of the payment function itself and should result in the reduction of these types of errors in the future.

Mr. Chairman, I would like to now briefly discuss our expansion

plans with NDLA. The 1998 Defense Authorization Act directed the

recovery auditing be expanded to all Defense Working Capital

Fund activities. However, under this legislation, the program will

be self-funding. That is, the audit contractor’s fee will be paid from

the amounts recovered. As with the original demonstration program, fees may not exceed 25 percent of the total recovered. DSCP

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is serving as the lead center for expansion to other DLA agency activities. A competitive solicitation has been issued and we anticipate an award by the end of next month.

In closing, Mr. Chairman, let me say the recovery audit programs have been successful at DSCP and they have become an integral part of our business practices in Philadelphia. And I am prepared to answer any questions at the appropriate time.

[The prepared statement of Mr. Allen follows:]

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Mr. HORN. Thank you very much, Mr. Allen.

Our next presenter is Gerald R. Peterson, Chief, Accounts Payable Division of the Army and Air Force Exchange Service. Mr. Peterson.

Mr. PETERSON. Mr. Chairman and honorable members of the

subcommittee, on behalf of the Army and Air Force Exchange Service [AAFES], thank you for the opportunity to appear before your

committee to relate our experience with recovery audits.

Although AAFES has over 25 businesses, our principal business

is retail sales. We follow commercial retail best practices to the extent possible. Employing professional audit recovery firms is a best

practice we adopted many years ago.

AAFES signed its first contract with a commercial audit recovery

firm in 1983. We currently have audit recovery contracts with two

firms, a primary and a secondary. Firm A has the primary contract

at a rate of 21.75 percent. It recovered $24.4 million last year. Firm

B has the secondary contract with a rate of 35 percent. It recover

$1.1 million last year. In September 1994, AAFES instituted its

first in-house recovery effort to detect duplicate payments. The inhouse group now recovers missed discounts and outstanding credits

on supplier statements in addition to duplicate payments.

We have learned that a successful audit program involves the following. First, partner with both suppliers and audit recovery firms.

The relationship with a recovery firm is a partnership in which

each provides a benefit to the other. Similarly, suppliers must be

viewed with respect to maintain a long-term relationship built

upon trust.

Second, develop an in-house recovery program to augment the

commercial recovery. During the last 5 years, AAFES’ in-house

team recovered $33.3 million at a total cost of approximately

$465,000.

Third, compress the audit cycle. Suppliers know most retailers

employ audit recovery firms and getting claims after the fact is a

part of doing business. To avoid straining a supplier relationship,

it is important to find payment errors in a timely manner. No supplier appreciates having to go back into records that are 4 or 5

years old.

And, fourth, learn from the recovery firm. Review what the commercial recovery firm is finding and determine if it is the result of

a systemic flaw in the accounts payable process. It is much cheaper

to fix the source of the program or to recover the funds through an

in-house group than to pay a commercial firm.

AAFES has greatly benefited from audit recovery services during

the last 16 years. And many government agencies could benefit

from their services as well. As presently written, however, there

are several aspects of H.R. 1827 which will have a negative impact

on AAFES.

The first one is the recovery audit requirements. This section

states, ‘‘The executive agency head may pay the contractor an

amount not to exceed 25 percent of the total amount recovered by

the executive agency.’’ Twenty-five percent may be acceptable for

primary audits, but the fee paid for secondary audits will exceed

this amount. If the bill isn’t amended to provide higher fees for secondary audits, AAFES will have to cancel its contract with Firm

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B and lose the $700,000 in net earnings that contributed to our

bottom last year. So, ideally, AAFES would like to be exempted

from this provision.

The second area is disposition of amounts collected. This section

states how funds recovered may be used. If amounts recovered

aren’t applied in accordance with this section, the funds revert to

the Treasury. Non-appropriated funds, instrumentalities, NAFEs,

should be totally excluded from this section as we generate our own

operating funds. The bill should be amended to allow recovered

funds to remain within the NAFE, in accordance with its operating

rules.

And, third, responsibilities of the Office of Management and

Budget. This section sets forth the reporting requirements from the

individual agencies. NAFEs should be totally excluded from this reporting requirement, especially entities such as ours. We work continually with our commercial recovery firms to maximize the recovery potential.

For the reasons just mentioned, AAFES requests favorable consideration for the requested changes to the bill.

Mr. Chairman, the Army and Air Force Exchange Service appreciates the opportunity to testify before this subcommittee. The use

of audit recovery firms has been a success story for us. The millions

of dollars recouped through audit recovery efforts have helped improve the quality of life of our stakeholders; the soldiers and airmen serving around the world. We support your initiative to bring

best practices to government agencies. At the appropriate time, I

will be happy to answer any questions you might have.

[The prepared statement of Mr. Peterson follows:]

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Mr. HORN. Thank you very much.

The next presenter has one of the toughest jobs in the U.S. Government, and that is Ms. Snyder, being the Chief Financial Officer

for the Health Care Financing Administration. Welcome.

Ms. SNYDER. Thank you, Mr. Horn. I have been CFO now for 4

months and I am beginning to appreciate just how difficult this job

is.

Chairman Horn and distinguished subcommittee members,

thank you for inviting us to testify about the Government Waste

Corrections Act and our extensive efforts to prevent and recoup improper payment. As you know, we reduced Medicare’s payment

error rate from 14 percent to 7 percent in just 2 years. We are

working diligently to build on this success and we are very grateful

for this subcommittee’s support in these efforts.

We have had good success with the kind of recovery audit efforts

described in the proposed legislation. And we believe that they may

well have value for other government agencies as well.

We, of course, have pursued a different kind of strategy in addition to recovery audit efforts. And that is to prevent improper payments from occurring in the first place. We are making solid

progress on that front, in large part due to increased efforts by providers to document and file claims correctly. We also use nearly

100,000 computerized edits that detect and automatically deny payment for improper claims as well as manual medical record reviews

and cost report audits. We are making solid progress in identifying

and collecting overpayments as well.

As you know, the HHS Inspector General audits have found that

most Medicare claims are correct on their face. Finding most of our

remaining payment errors requires going beyond what is on the

claim to look at documentation and medical necessity. These activities are now primarily performed by our claims processing contractors. We recently held an open competition to establish a pool of

new program safeguard contractors to augment these efforts. And

the President is proposing legislation to further increase competition for Medicare work among qualified entities.

However, the act’s authorization to compensate recovery auditors

on a contingency basis may have only limited value for Medicare.

We recoup most overpayments by making deductions from future

payments to providers who have been overpaid. And paying on a

contingency basis for error identification could be perceived as a

bounty system by health care providers. The vast majority of Medicare providers, we have found, make only honest errors and their

good will and cooperation are key to much of our success in preventing improper payment in the first place.

Furthermore, a financial incentive to identify errors could well

lead to inappropriate denials and thus create errors instead. Our

obligation is to pay correctly. And we do not want to deny proper

payment any more than we want to make improper payment. Inappropriate denials resulting from contingency payment also could

backfire on the bottom line due to increased costs for appeals filed

by beneficiaries and providers denied proper payment. So while we

would be willing to consider use of the contingency fee option, we

would need to take extreme caution in ensuring that any use of it

would, indeed, be constructive.

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We also generally endorse the idea of increasing funding for program management improvement activities that could reduce overpayment. We have greatly benefited from the stable source of program for program integrity activities provided to us under the

Health Insurance Portability and Accountability Act, which totaled

$560 million in fiscal year 1999 and $630 million in fiscal year

2000. However, we generally believe that recouped overpayments

should be returned to the trust fund or general revenue fund as is

now the case.

I would also just like to take a few seconds to address the remarks made by Mr. Burton earlier. I have not seen the article to

which he refers about the returned checks, but I would like to assure this subcommittee that we have instructed our fiscal intermediaries and carriers to cash checks that are returned and to

properly credit them to the Medicare account.

We have had some experiences in the past where people returning checks wanted us to say that, in cashing the check, that satisfied their full liability, which we have not, of course, been willing

to do. And our instruction has been we will cash the check and

make it clear that this does not necessarily release them of their

liability until further investigation might be completed. But we

would be very happy to work with Mr. Burton’s staff to make sure

that we are responsive, indeed, to the article that he mentioned.

We also look forward to continuing to work with the subcommittee on efforts to improve Medicare program integrity. I thank you

for holding the hearing. And would be happy to answer any questions you might have.

[The prepared statement of Ms. Snyder follows:]

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Mr. HORN. We thank you.

And I am now going to yield to the time for questioning to Mr.

Ose, the gentleman from California.

Mr. OSE. Thank you, Mr. Chairman. I am going to work as procedurally as I can here. Ms. Lee, on your statement here the 5-year

plan will be transmitted to Congress soon?

Ms. LEE. Yes, sir. It is in final sign-off.

Mr. OSE. When can we expect it? I mean, is soon next week, next

month, what is it?

Ms. LEE. I was hoping next week, but let us say when you get

back from recess.

Mr. OSE. August? Or Fourth of July?

Ms. LEE. In July.

Mr. OSE. OK. Now, secondarily, you talked about, under the National Defense Authorization Act. In a pilot study four-tenths of 1

percent of the payments sampled were incorrect. The pilot study

must have used a sample. Again, Ms. Lee, there must have been

a sample size or something that you looked at. It is on page 2 of

your testimony at the bottom. I am wondering about the sample

size.

Ms. LEE. Can I get that for you, for the record?

Mr. OSE. Certainly. That would be fine.

Mr. HORN. Without objection, the response of the Deputy Director for Management will be put in the record at this point.

[The information referred to follows:]

I have confirmed with the Department of Defense and the contractor that the pilot

covered $7.2 billion in payments from 1993, 1994 and 1995 made by the Defense

Supply Center in Philadelphia.

Mr. OSE. Thank you, Mr. Chairman. And then on page 3, I am

a little bit confused about something. On page 2, when we talk

about the sample or my question about the sample sizes there is

a statement about four-tenths of 1 percent of the payments sampled were incorrect, which is remarkable. And then when the discussion gets to the issue of the threshold, the $10 million threshold,

there is a comment about the threshold of $10 million would result

in a gross collection of $10,000 under this bill if a overpayment was

found. That is one-tenth of 1 percent, if I understand.

Ms. LEE. That is the industry standard, as we understand it.

Mr. OSE. In private industry.

Ms. LEE. In private industry.

Mr. OSE. OK. That is not bad either.

And then, finally, in the last page of your testimony, when you

talked about the provisions in the middle of your—right above conclusion—‘‘The bill would allow agencies to return up to 25 percent

of collections to programs and activities from which the overpayment arose. These provisions could be used to bypass the normal

Congressional Appropriations process.’’ I am not quite sure I understood your explanation.

Ms. LEE. We would propose that we structure the bill to make

sure that when we returned those moneys to a program, it was, in

fact, Congress’ intent to spend the funds. For example, sometimes

we recover after a period of time and if the program has been

eliminated or is completed or finished, we want to make sure the

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moneys go back where you originally intended the moneys to be

spent.

Mr. OSE. The flaw being that if a program is terminated, there

is no point in returning the money back to it.

Ms. LEE. To that program, right.

Mr. OSE. If the program is continuing, you would not have an objection to returning the money to that program.

Ms. LEE. Correct.

Mr. OSE. OK. Thank you.

I have got more questions.

Mr. HORN. Yes. Go ahead.

Mr. OSE. OK. Let us see. Mr. Allen, on page 3 of your testimony,

the fourth paragraph, you talked about DSCP’s recoveries to date

being $2 million. That is for audit work begun in June 1997. And

what I am curious about is I don’t see much point in spending $5

million if you only recover $2 million. My question would be the

cost of recovering the $2 million is roughly——

Mr. ALLEN. By the contract we have with PRGI, we pay them I

believe it is 20 percent of whatever we collect.

Mr. OSE. OK.

Mr. ALLEN. We have up to $5 million under that initial legislative proposal to pay them, at a rate of 20 percent of whatever we

collect.

Mr. OSE. So, potentially, in anticipation of finding $25 million in

overpayment, you are authorized to spend up to $5 million?

Mr. ALLEN. That is correct.

Mr. OSE. These aren’t my words, as a bounty?

Mr. ALLEN. That is correct.

Mr. OSE. OK. Thank you.

Mr. ALLEN. The subsequent legislation authorizes us to pay from

the proceeds, that is, from the amounts collected.

Mr. OSE. At the outset, there was an appropriation to pay the reward?

Mr. ALLEN. That is correct.

Mr. OSE. OK.

Now, Mr. Peterson, I got the first two points on AAFES’s request

for exemption. Those being the threshold on the secondary audits

and the reversion to Treasury of the recovered funds. But you lost

me on the third one. You had three points there that you were

seeking an exemption under this legislation for.

Mr. PETERSON. Yes. Since our program has been undergoing for

16 years, we feel that we have already demonstrated that we are

following industry best practices in that we are working continually

with our recovery firms to bring best practices to bear. And so for

that reason, we don’t feel that we should be reporting back to the

OMB.

Mr. OSE. Is it your rationale that as this is essentially self-funded——

Mr. PETERSON. Yes.

Mr. OSE [continuing]. That these funds should stay in AAFES’s

jurisdiction?

Mr. PETERSON. That is correct. We are a non-appropriated fund

instrumentality. We generate our own revenues through our sales.

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Mr. OSE. All right. On the methodology that you used for contractor A in your example and contractor B, I would presume—and

maybe that is not safe to presume and you can correct me if it is

appropriate, certainly—the methodologies at the outset that contractor A used generated X amount of recoveries. And the secondary audit firm, contractor B, used a slightly different methodology,

I presume, that generated around, your example, $1.1 million.

Mr. PETERSON. Yes. We have only had the secondary audit for a

little over 1 year.

Mr. OSE. Well, my question really is when you have contractor

B who uses a slightly different methodology than contractor A, over

time do those two methodologies get merged so that we are continually improving the larger portion, if you will, of the audit work?

That being, we merge methodology A and B in the subsequent or

successive contract?

Mr. PETERSON. Sir, the two firms don’t really get together as far

as how they perform their audits. And I don’t know that they use

different techniques. I believe that the secondary firm probably is

quite familiar with the primary and looks for areas where the primary has thought it wasn’t beneficial to look. The secondary has

a higher recovery rate, you know, 35 percent versus 21 percent, so

they can afford to perhaps delve into some areas that may not have

been efficient or economical for the primary to do.

Mr. OSE. My point is, as Congress looks out into the future and

considers these challenges, not in this round of audit awards, if you

will, but maybe the next round, is there any rationale for us thinking that, on an RFP or RFQ or whatever it is we use to enter into

these contracts, that we would merge the methodologies?

Mr. PETERSON. Well, I don’t know that those are different methodologies, Congressman.

Mr. OSE. OK. You think the added result might be attributable

to the 13.25 percent extra in the bounty, if you will?

Mr. PETERSON. It is that and then just looking for areas—they

may approach something—use a little different computer program

than the first one used that might detect something that the first

one missed.

Mr. OSE. All right. Finally—let me make sure that is finally—

on page 5, I think you touched on something that is very important

to business people and that is the reach-back, if you will, 4 or 5

years. I can’t imagine somebody coming into my affairs and asking

me to substantiate something that happened in 1994. I see that the

audit competition and target would be 30 months. Is there any possibility of even compressing that further?

Mr. PETERSON. Not within our industry. We approach things

from the viewpoint of a commercial retailer, rather than that of a

government agency because that is our primary business is retailing.

Mr. OSE. Right.

Mr. PETERSON. And many of the items that our audit recovery

tracks are year-to-date purchases and so to compress an internal

review cycle, a primary and a secondary, into much less than 30

months would really be pressing the audit companies.

Mr. OSE. Is the 30 months an industry standard? Or is that just

what you have come to as fitting the——

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Mr. PETERSON. That is what we have come to.

Mr. OSE. OK.

Mr. PETERSON. That is our goal.

Mr. OSE. Do we support—or to what degree are we providing resources to outside firms to do these audits? In other words, we

have got a certain clerical staff. Are we, in effect, providing support

staff for audit firms? Or is this a totally arms-length, third-party

transaction where they come into AAFES. We are not providing or

AAFES isn’t providing or some of these other agencies isn’t providing committed staff to support the audit done by a third party?

Mr. PETERSON. OK. We provide no people. We do provide space

in our facility for them and we provide access to our computerized

records.

Mr. OSE. All right. Finally—Mr. Chairman, you are being very

patient with me and I appreciate that.

Mr. HORN. We have all afternoon, my friend.

Mr. OSE. Oh, lordy, lordy. [Laughter.]

I appreciate HCFA being——

Mr. HORN. No, no. Forget the bells. [Laughter.]

That is to keep us alert. [Laughter.]

Mr. OSE. I appreciate the opportunity to visit with Ms. Snyder.

The reason I do is that Medicare remains one of the largest programs we have and 14 percent, 7 percent, 5 percent of Medicare’s

number is a huge number. Which begs the question—and you are

going to have to take me through it—you have got the payment

error rate down in 2 years from 14 to 7 percent. The other testimony we have heard indicates somewhat less than that in a payment error rate. Is it possible to get to the payment error rate that

these other agencies are experiencing by their samples? And what

is the relationship between getting to it and the cost we are likely

to incur?

Ms. SNYDER. When we first started out trying to drive down the

payment error rate, it was based off of a statistically valid sample

and an extrapolation, if you will, of the error rate and the dollar

amount established by the IG. And we have continued to use that

methodology to try to measure what the error rate is for Medicare

payments. And I would also like to point out that that is a measure

of error. It is not a measure of fraud or abuse.

Mr. OSE. I understand. I understand.

Ms. SNYDER. It is just a measure of our total due to error.

Mr. OSE. Believe me, I know. I have had lots of constituents

come in and talk to me about this.

Ms. SNYDER. OK. What we have found is we do believe that we

can drive the error rate lower, since we have had such good success

in the last 2 years. A large part of the dollars that we use for that

came out of the MIP program, the Medicare Integrity Program,

which was authorized under HIPPA. So we fully expect to spend

those dollars on continuing to drive down the error rate. And that

dollar amount does increase from year to year. We were at $560

million this year and it eventually increases to $720 million.

I am cautiously optimistic that we can drive the error rate much

lower than 7 percent. I think the fact that in 2 years we have seen

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ties that we have undertaken will help us reduce that even lower.

And our goal is to get to 5 percent.

We do recognize that in a program this large, there will always

be some error. We don’t know yet where that bottom line is or what

that bottom line percentage is. Right now, as I said, we are pushing to get to 5 percent and then to evaluate where we can go from

there. Again, I would like to point out that it is sort of like the

old—if you will allow me—the diet analogy. That first 10 pounds

is easy to lose. It is that last 5 that is the killer. And we are starting to move into that last 5 pound range.

So I do believe we can drive it lower. I believe that the funds

that are available to us through the MIP program will help with

that. The return on investment for all of our program integrity activities is 15 to 1, so we still have a good return on investment. So

I am cautiously optimistic.

Mr. OSE. So the 7 percent, again, is the rate at which we are able

to identify the errors. And then, in terms of recovery, you are suggesting a 15 to 1 pay-back in terms of the cost that HCFA incurs

in doing the identification. But how much or what is the—I don’t

even know what the——

Ms. SNYDER. The recovery.

Mr. OSE. Yes. The recovery rate. Thank you.

Ms. SNYDER. It would be the recovery. Right. OK.

Mr. OSE. It’s my bill and I don’t even know the darned phrase.

[Laughter.]

Ms. SNYDER. We believe that we are going to recover the bulk of

those overpayments. And, in fact, again, if you will remember, this

is an extrapolated sample, if we look at our yearly activity and we

look at our accounts receivable and look behind that, which may

be a better place to look in terms of recoveries, what we find is that

we capture back approximately $12 billion to $13 billion annually

through offsetting collections and other receipts. And, of course,

many of those dollars never show up. And I can submit the exact

dollars to you for the record.

Mr. OSE. I think that would be helpful, Mr. Chairman.

Mr. HORN. Without objection, it will be put in the record at this

point.

[The information referred to follows:]

The dollar amounts are: 1) new receivables for FY 1998 total $15.4 billion; collections on receivables total $12.6 billion; and, 3) the amount which is offset is $7.7

billion.

Mr. OSE. My final inquiry is, Ms. Lee, Mr. Allen, and Mr. Peterson, if I understand correctly, you have third parties coming in and

doing the audits in your agencies. And they are doing it for a fee

that is negotiated and, if the pattern as identified by Mr. Peterson

is correct, basically all we are providing is a desk and a phone and

they bring their own personnel in and do the analysis. Is that correct?

Mr. ALLEN. That might be more true in AAFES, who has 16

years of experience in doing that. In case of us, within DOD, there

is a little bit more effort than that, for a wide variety of reasons.

Again, we are in a pilot program in DOD. We have not compressed

our audit cycle. We are dealing with auditing contracts that are,

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in some cases, 4 years old. We have to go find that documentation.

There is some effort associated with that.

We have the Defense Finance Accounting Service in Columbus,

OH, who makes the payments for us. They have records. They have

to provide those records and they have to go through some effort

to make the records available to the auditing firm for the audit. So

I would say, initially, there is probably a lot more work, effort, in

starting up an internal government effort to make records available

to an outside auditing firm, but over time, one of the systemic

things we would learn is we would be able to figure out how to get

that effort down to next to nothing. And we might, then, in 16

years or in some period of time be somewhere close to where

AAFES is.

Mr. OSE. Let me introduce you to Mr. Peterson. He has got a

model, I think, we ought to make——

Mr. ALLEN. Well, absolutely. We benchmarked with AAFES

when we started out the program and you are absolutely right. And

we are doing the same thing with some other agencies today.

Mr. OSE. Ms. Lee, is that consistent with your experience?

Ms. LEE. We at OMB don’t employ the auditors, but it certainly

sounds very logical. And, of course, the specific contract terms and

conditions are things that you would want the auditors to have access to to make sure that they have the right baseline.

Mr. OSE. It is timely, Mr. Chairman, that we have these discussions since we are struggling with our appropriations and, granted,

we are going to deal with it, but I daresay that if you were able

to take Mr. Peterson’s model, for instance, and apply it to Ms.

Synder’s organization and reduce not only the identification rate,

but increase the recovery rate to reflect AAFES’s, we would have

substantially greater resources to commit to serving the people of

this country and that is the underlying purpose of this bill.

While I very much appreciate the gaps that we have not addressed, in terms of recovery and, if you will, the entitlement nature of some of your organizations, you know, we are going to try

and fix this, subject to your testimony, and we are going to go forward. And I appreciate the opportunity to visit with you today. So,

thank you. Thank you, Mr. Chairman.

Mr. HORN. The gentleman is absolutely correct on the impact

that it would make in a program such as Medicare. The gentleman

from Oregon, Mr. Walden.

Mr. WALDEN. Thank you, Mr. Chairman. I had a question for Ms.

Snyder, I guess. Reading through your testimony, on page 3 you

talked about how most providers who make billing errors have no

intent to do anything wrong, simply make honest mistakes, which

I would tend to agree with.

I guess what troubles me, having served 5 years on a community

hospital board, I have seen the letters come out from the Department of Justice that allege just the opposite. And I believe it is the

Fraudulent Claims Act that is invoked by the Justice Department

on behalf of your agency, chasing claims that go back 8 or 9 years

in some cases. Are you still using those tactics?

Ms. SNYDER. What we have tried to do, also, as part of our program integrity strategic plan, is to work to have more of a partnership with our providers, because we recognize some of the same

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concerns that you just raised. And we think that is partly why we

have been so successful in pushing down the error rate. But

through provider education, making sure that people understand

the right way to bill, what the requirements are, what the right

codes are, that, indeed, they are paid correctly, then, from the beginning. We still use the False Claims Act when it is appropriate.

But I believe that it is more of a partnership effort, these days, to

try to make sure we are paying claims correctly.

Mr. WALDEN. So I guess I——

Mr. HORN. If you could move the microphone a little closer to

you, Ms. Snyder.

Mr. WALDEN. So I guess I would say, Ms. Snyder, is, again, I

have met with a lot of people and I represent a district with lots

of small rural hospitals and all and reading those letters are extraordinarily intimidating. They say you either admit that you—on

what is I think you have correctly recognized here probably a simple honest mistake, but they are being told either admit to false

claims and fraud or we are going to come do major damage to your

bottom line, taking a $2,000 error in billing and turn it into a

$100,000 issue. And I thought it was overkill and I thought if I

ever got in a position where I could say that, I would. Well, here

I am. [Laughter.]

And I guess——

Ms. SNYDER. And I certainly appreciate your guidance, sir.

Mr. WALDEN. I also wanted to be in a position to say, in reverse,

however—I am a bit off-topic here, but I think, because we are

going to be putting pressure on you to go do this and, yet, there

is this balance. And I always wondered how often does Medicare

make payment errors on the other way? And, you know, what if the

Fraudulent Claims False Claims Act was used in reverse? What is

good for the goose ought to be good for the gander. And I am glad

to see that you are kind of taking this a different direction.

Not to say there isn’t fraud out there. I realize there is.

Ms. SNYDER. I would just like to mention that the Department

of Justice just recently issued new guidelines to try to take care of

that overkill problem that you reference.

Mr. WALDEN. Good.

Mr. HORN. Can you get us those regulations?

Ms. SNYDER. Certainly.

Mr. HORN. We will save a part at this point in the record, without objection, so they are spread out in this document.

[The information referred to follows:]

A copy of the Department of Justice’s guidelines is provided here as an attachment to the transcript.

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Ms. SNYDER. Yes, sir.

Mr. HORN. Thank you very much.

Mr. WALDEN. I think that would be helpful because I know there

was a lot of pressure brought in both directions.

Ms. Snyder, in a letter back in December, I guess, of last year

to Senator Kennedy, the administrator of HCFA stated that HCFA

was unable to consider using private recovery specialists because

we don’t have the statutory authority to pay contractors a contingency fee basis. H.R. 1827 would provide that statutory authority.

Is that something you would welcome?

Ms. SNYDER. Actually, one of the things that we are looking at

is whether or not we would actually need a different kind of authority or a new authority. We believe that the authority that we

have under the Medicare Integrity Program allows us to look at a

variety of fee arrangements, if you will, including incentive payments or incentive fees with contractors. Our concern with that is

that we would have a performance measure with the contractor

that accounts not only for the identification of overpayments, but

the fact that those overpayments are sustained through the appeals process and are, indeed, overpayments when we get to the

end of the process.

So we have been looking at our current authorities. There may

be a slightly different interpretation since we responded to that letter. We don’t believe that we need additional authority for recovery

auditing.

Mr. WALDEN. You don’t. OK. All right. Thank you, Mr. Chairman.

Mr. HORN. Well, that is a very important point, the contractor

relationship within Medicare. How much control actually under the

law do you have with the contractors on, say, a program such as

this? On both error recovery and what not? Can you really get

them to do it or are they just there and defy you?

Ms. SNYDER. No, sir. I think that, again, this is another relationship that has been over a very long period of time. We have been

in business for 30 years with our fiscal intermediaries and carriers.

We do give them direct instruction about activities to undertake.

They have been involved in overpayment identification recovery audits. They do that work for us now. It is part of our contract agreement and budget agreements with them. They are paid to do that.

We are, however, very interested—and I know that we have spoken about this before, about contracting reform and our ability to

encourage competition among entities that might also be able to do

Medicare work in addition to the insurance companies.

Mr. HORN. How often does the Health Care Financing Administration take a look at contractors? And is there a fixed point in

time for each contractor or how do you handle that?

Ms. SNYDER. There is a requirement that we do yearly contractor

performance evaluations. HCFA has not been as diligent about that

in terms of our contractor oversight, as we should be. Part of our

performance evaluation expectations are around overpayment collections, financial controls, and those kinds of evaluation activities.

We renew those contracts yearly and we do look at their performance.

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Mr. HORN. Anything anybody in the panel would like to state

and comment on, based on any dialog that has gone on up here?

Often we hear people halfway home say, gee, I wish I had said

something about that. That isn’t the way I look at it. So anything

to add to this dialog, Mr. Peterson, based on the exchanges you

have heard between Members and witnesses?

Mr. PETERSON. Well, I would just second the gentleman from

GAO’s comments about picking the low-hanging fruit. That is essentially what our internal staff does. And you notice that we recovered $33.8 million at a cost of less than $500,000 in personnel

costs. So that is a very cost-effective way of recouping duplicate

payments and missed discounts and so forth and displays that you

can do it in-house instead of paying a contractor to do it. But that

does not take the place of a commercial audit recovery firm because

they possess the expertise that we don’t have and audit recovery

is not one of our core businesses. That is not what we are in business to do.

We try to pay accurately the first time, but we do make mistakes. People make mistakes. But we try to catch them internally,

if we can. Then, if we can’t, what we miss, we pay the audit recovery firms to find and that is money that we wouldn’t have if we

didn’t employ them.

Mr. HORN. Is that done by an audit firm that is internally involved on a random sample basis? Or is that a total universe examined?

Mr. PETERSON. That is the total universe. They examine all of

our records.

Mr. HORN. What have you done as a result of their findings and

recommendations that has lowered the amount of errors that have

been had within the agency? Is it just a matter of training and getting more auditors on your own payroll? Or what?

Mr. PETERSON. Well, it is partly that. And it is learning to develop programs internally to find duplicate payments. We have

found out that there are commercial auditors running computer

programs looking for these. Two of our internal auditors wrote programs for us that we can learn ourselves, that our small internal

staff runs on an ad hoc basis every month to look for these errors.

We have found that they were finding a lot of credits on vendor

statements. So we have added people to our internal staff to do

that. And that has been very cost-effective.

So we are constantly learning from them. We meet quarterly to

see what they have found, who they are finding it from, what

firms. We go back and look at it and find out why the errors occurred and try to correct them. We are not as good as what we

would like to be, but we certainly make every conscious effort to

improve.

Mr. HORN. Well, I thank you for that remark. Mr. Allen.

Mr. ALLEN. We want to be like AAFES. [Laughter.]

Mr. HORN. It depends on which AAFES you are talking about,

I think.

Ms. Lee, any comments on this?

Ms. LEE. Chairman Horn, one of the beauties of having this opportunity at OMB is to see the broad management issues. It struck

me, in preparing for this hearing, that I saw in several cases where

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there were discussions of the contractors not, for whatever reason,

feeling an affirmative requirement to notify the government if they

had been or suspected they had been overpaid. And so I have made

an action item to talk to the CFO’s. I have pulled out the payment

clauses myself and was reading them and saying, you know, perhaps this is something we ought to explore. So I have got a selfaction item from this hearing.

Mr. HORN. Good. Well, when you have a self-action item, I am

sure it is completed. So thank you. Ms. Lee, on this point, you will

recall our Debt Collection Improvement Act of 1996 that we tucked

into the Omnibus Appropriations Bill of that year. There was a

provision in there called gainsharing that would allow agencies to

retain a portion of delinquent debts collected and this provision

was designed to be an incentive for agencies to collect delinquent

debt, both in terms of human resources and in terms of up-to-date

computing capability.

As far as I know, no Federal department or agency is presently

using the gainsharing program for debt collection. Do you know

why this is?

Ms. LEE. Chairman Horn, my understanding is we at OMB have

some more work to do regarding budget authority and how that

gainsharing activity plays. And we look forward to working with

the Congressional Budget Office to sort through those issues.

Mr. HORN. When are we going to sort it out?

Ms. LEE. Soon.

Mr. HORN. How soon? Next month?

Ms. LEE. Could I try after recess, again?

Mr. HORN. Next week? Well, after the July recess, I am all with

you.

Ms. LEE. I will do that.

Mr. HORN. OK. And because there is an analogy here. And when

you return that money, to what degree will it be used? Or will

OMB be sitting on it to try and say the deficit is less than it is?

I don’t know what pot you put that in. Does it just sit in the agency

accounts and they can’t touch it?

Ms. LEE. I owe you an answer.

Mr. HORN. Pardon?

Ms. LEE. I owe you an answer.

Mr. HORN. OK. Without objection, Ms. Lee’s answer will be in

after the end of the July recess.

[The information referred to follows:]

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Mr. HORN. Very good.

Now, Mr. Peterson, according to your statement, over the last 5

years, the Army-Air Force Exchange Service recovered about $130

million through recovery auditing and I congratulate you on that.

What was the total amount that was audited? Was it all of the

$130 or did you just miss some or how did it work?

Mr. PETERSON. Well, the total amount audited would have been,

sir, approximately $5.5 or $6 billion times 5, over the 5 years.

Mr. HORN. Did you pick any goal when you started the internal

function, down the line? Did you say, gee, if we get 10 percent out

of this we will be lucky and paying the bills and so forth? Or how

did you go about it in terms of a strategic plan that related to how

you target the—one, reduce the errors; two, get the recovery.

Mr. PETERSON. For the commercial audit recovery, sir, or the internal?

Mr. HORN. Well, I would like to hear about both. I am trying to

get experiences in the record here.

Mr. PETERSON. Well, I wasn’t there in 1983 when we started,

but, I guess, at that point, we knew that private industry was

using commercial recovery firms and that we knew that we must

have some erroneous payments, overpayments. And so we started

our first contract back then. I don’t know that we really had a specific goal as far as what we were going to recoup. The percentage

in that first contract was very high. It was 35 to 40 percent and,

as we have gone forward, the percentages have gone down with

each contract that we have administered. And that is due both to

the competition within the recovery business and also the ease

with which they can audit records. But I can’t give you an answer,

sir.

Mr. HORN. Well, in other words, you used the private sector as

the model in your business, which is sort of like the private sector.

Mr. PETERSON. Yes. Yes, we have applied private business practices whenever we can.

Mr. HORN. Did you get a higher level of return than business?

How close was it to——

Mr. PETERSON. No, we recover probably 95 to 98 percent of the

claims that are validated. Now perhaps 80 percent of our claims

that are issued are validated. So out of 100 percent, 80 percent are

valid. And, of that, we probably collect 95 to 98 percent.

Mr. HORN. So your cost-benefit ratio is very high, then, on recovery.

Mr. PETERSON. Oh, yes.

Mr. HORN. Well, that is very helpful and I would ask both Mr.

Peterson and Mr. Allen, of the amounts identified through recovery

audits, how much was disputed?

Mr. PETERSON. Well, 20 percent of ours was disputed and 20 percent is what our contracting officer agrees with, when a supplier

comes back and says, well, this is the deal.

Mr. HORN. And is that, essentially, how vendor disputes are resolved? By the actual contract officer involved?

Mr. PETERSON. Yes, it is our internal procurement or purchasing

person who listens to the response and that person decides whether

or not the claim is valid or not. And if it is valid, then we deduct

from the next payments. So we get a very high percentage of the

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money. If the contracting officer feels that the vendor’s claim rebuttal is valid, then the commercial recovery firm will abide by our

wishes.

Mr. HORN. Mr. Allen, does your system work the same way with

the role of the contracting officer?

Mr. ALLEN. Yes, sir, it does. Our statistics as to how much is initially identified as potential overpayment, how much of that potential overpayment is sustained as a legitimate claim by the contracting officer, and then, subsequently, how much of that claim is collected would differ because we are in the pilot program. I can give

you those numbers if you would like.

Mr. HORN. What are some of the most common complaints by

vendors who are charged with overpayments?

Mr. ALLEN. During our initial pilot program, I think the most

common complaint is the one that Mr. Walden would have raised.

He said, I am not sure I would want anybody coming into my

records 4 years after the fact and then changing our business relationship, in effect. Having gotten past that, because there is the

contract language which allows us to do that, we needed to get

through a number of issues with regard to what is the proper interpretation of the contract warranty clause as to what discounts

should have been offered and were not offered. A whole variety of

different things.

Because part of our business was, with regard to the grocery

business, if you will, that is, contracts awarded on behalf of the Defense Commissary Agency. Some of the business practices in the

grocery business were not typical of government contracting, that

is, contractors would come into a grocery store, if you would, and

issue vendor credit memos. The contractor said that amounts to a

discount offered to you. We needed to go get that documentation

and verify as to whether or not that was true. So it was the different areas of dispute arose first from old documents and, second,

from different business practices within the commodities we audited.

And I would think that might hold within virtually any marketplace. It would vary substantially by marketplace by commodity.

Mr. HORN. Mr. Allen, the Profit Recovery Group has made recommendations to the Defense Supply Center of Philadelphia on

ways to reduce future overpayments. Do you know to what degree

these recommendations have been implemented?

Mr. ALLEN. Some of them have been implemented, some of them

have not. The ones where we will find it most difficult to implement are the instances where there are changes to the Prompt

Payment Act. And, as you know, there were hearings by this committee earlier on that subject.

The second area where it would be most difficult would be

changes to systems. You have to get a certain information technology to make those changes, in order to accommodate better recordkeeping and then better audit recovery.

We will seriously consider one of those recommendations because

one of the prime benefits out of the recovery auditing is the ability

to make systemic decisions. That is how you get from an initial

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tenth of 1 percent on the recurring basis. It is by identifying those

systemic issues. And we are very interested in doing that.

Mr. HORN. While we have you on systemic issues, let me ask the

three of you here, and Ms. Lee has certainly got her right to get

into this, and that is the year 2000 situation. To what degree have

the more businesslike operations such as Mr. Allen and Mr. Peterson, to what degree are you on and how far along are you on year

2000 compliance?

Mr. PETERSON. Sir, we are 100 percent.

Mr. HORN. 100?

Mr. PETERSON. Yes.

Mr. HORN. Good. And how about you, Mr. Allen?

Mr. ALLEN. I would have to provide that answer for the record,

sir.

Mr. HORN. Since we are looking now, Ms. Snyder, on the sort of

quarterly basis, looking at programs, not just departments and

their systems, and you are part of HHS, you are a big part of it,

you are the tail that makes the dog move in one direction or the

other, what is happening on your front with the year 2000?

Ms. SNYDER. The last report that I saw that was provided to the

Deputy Secretary is that HCFA systems, mission critical systems,

are 100——

Mr. HORN. All right, these are your self-applied and self-reported

mission critical. But we are now saying we don’t really care about

the rest of HHS, we care can they deliver on Medicare?

Ms. SNYDER. We believe we are going to be there 100 percent.

The Medicare contractor systems have gone through their first

round of certification and passed. They are now in recertification

and testing. And the HCFA internal systems are in the same place.

The system that I own as the business owner is the Financial Accounting System that has gone through its second round of testing

and passed. We believe we are ready.

Mr. HORN. Great. And, that will show in your next quarterly report? Will it? Or was it in this one?

Ms. SNYDER. Sir, I don’t know. That is submitted by the Chief

Information Officer, but I can certainly provide that for the record.

I know those reports lag behind a little bit.

[The information referred to follows:]

We are pleased to submit to you the two most recent HHS Y2K quarterly progress

resports, dated May 15, 1999, and August 13, 1999. Both make it clear that all of

HCFA’s mission-critical internal systems and external claims processing systems

were renovated, tested, and certified as compliant by April 1999.

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Mr. HORN. Well, you are right. They do. We only had two major

programs that were 100 percent and that was Social Security and

the Weather Service. So you can get your Social Security check

down in Miami and the weather will be nice, so—[laughter.]

Ms. SNYDER. OK.

Mr. HORN. Except if you have been in Miami in the summer, you

know there is no weather nice down there.

Ms. Snyder, in your statement you say you are currently using

commercial off-the-shelf software to identify many of the same payment errors that would be identified by a recovery auditor. What

benefits are you deriving from this software and how would a private recovery audit firm impact your efforts?

Ms. SNYDER. We have delivered a benefit from our correct coding

initiative we started in 1996. I believe the cumulative savings have

been identified at around $830 million, about $280 million annually. We also recently purchased or leased, if you will, some additional software edits which we are just now working through to

make sure they satisfy Medicare policy before implementing them.

So we don’t yet know what the return on that particular investment will be, although we anticipate that it will be a good return

on the investment.

It is an interesting question in how would recovery audit affect

that. I think it is two different parts of the continuum, if you will.

Most of these edits are focused at a pre-pay review and so they are

to catch the error before it actually happens. So those edits are

aimed at pre-payment. The post-pay audit would be looking at payments that got through that edit screen and went out the door and

that we would need, then, to recover.

So I think they are two different parts of overpayment reduction.

Mr. HORN. Now has any of this been discussed with your authorizing committee or your Appropriations subcommittee, in terms of

the systems you have developed and the attempt to remove the errors on overpayments? Has that question come up before either

your authorizers or your appropriators?

Ms. SNYDER. I know that there have been discussions with them,

certainly, over time. I haven’t been party to any of those discussions, but I know that there have been questions about automated

edit savings, recoveries, and that sort of question.

Mr. HORN. To improve a particular computer system and their

human resources that go with that, do you have to go to the Appropriation subcommittees? Or do you have the authority, long-range,

within Medicare, to do that?

Ms. SNYDER. There are really two types of funding authorities

that we have. One, our administrative accounts are subject to the

general appropriations process, which is where most of our software development would occur, would be in that annual appropriations process. We also have the mandatory funding and the Medicare Integrity Program, which is an appropriation that is funded

for a period of time, for a continuing, indefinite, authorization.

Mr. HORN. Now, as I understand your filing here in your written

statement, you note that in fiscal year 1998, the Department of

Health and Human Services reported estimated improper payments of $12.6 billion. This amount was down from $20.3 billion in

fiscal year 1997 and $23.2 billion in fiscal year 1996. What initiaVerDate 11-SEP-98 10:41 May 25, 2000 Jkt 000000 PO 00000 Frm 00205 Fmt 6633 Sfmt 6602 C:\DOCS\63548.TXT HGOVREF1 PsN: HGOVREF1
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tives, just for the record, were used by the Department of Health

and Human Services to reduce the estimated amounts of improper

payments? How would you sum that up?

Ms. SNYDER. I would say that it was a combination of efforts. As

you know, our error rate and our payments are a series of complicated kind of computations. I think probably, in terms of importance, probably the correct documentation and billing, talking to

providers to get them to understand how to bill certainly had, we

think, a huge impact. We did a number of seminars. We went out

to medical schools and talked to residents who were getting ready

to establish practices about how to bill. So a lot of those kinds of

educational efforts. We also——

Mr. HORN. Well, that is a very important point. Has any software

ever been provided by Medicare for medical school graduates? Or

do they just leave that to the private sector and go find your own?

Ms. SNYDER. There are two answers to that question. One, we

provide billing software free of charge so that people will know how

to bill through billing agents and to our intermediaries and carriers. But one of the things that we have done that I think is really

innovative and it is going to have a pay-off is to put what is essentially computer-based instruction online for people to be trained in,

again, how to bill claims, what are the right codes to use, and how

do you get into the Medicare system.

I think we have reached over 10,000 people at hundreds of sites

in hospitals. We have done 44 live seminars to work on this problem. We have reached more than 19,000 people this year alone.

And if you look at our website, you might find it interesting. There

is a pre-test and a post-test. We have actually been able to measure knowledge increase from taking it. And if you are interested in

the pre-test or the post-test, you can find it at

www.Medicaretraining.com. And this is——

Mr. HORN. Mr. Kaplan will write that down and will give me a

thorough analysis of that. You want to give him that again?

Ms. SNYDER. It is www.Medicaretraining—one word—.com. And

it has been a very successful web location. People are going into it

and using it, physicians and hospitals.

Mr. HORN. Well, that is very helpful. In your statement, you said

that you currently use commercial off-the-shelf software to identify

many of the same payment errors that would be identified by a recovery auditor. And I guess the question would be what benefits

are you deriving from the software and how would a private recovery audit firm impact them? As I mentioned earlier that do we

need a new development for this particular audit approach or is it

satisfactory in the private sector already and being used by people?

Ms. SNYDER. My assumption would be that recovery auditors

would have their own software tools to apply to a recovery audit

and would not need special development. What would be important

is that recovery auditors understand the use of the definitions of

medical necessity and how Medicare claims are treated for purposes of payment, which would be different than just applying software to that evaluation. That is to look behind the face of the

claim.

Mr. HORN. My last question to you, Ms. Snyder, is, according to

the April 1999 article in the Bureau of National Affairs Medicare

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report, the Health Care Financing Administration has yet to issue

guidance for health care providers to return funds they inappropriately received from Medicare. According to the article, providers

that voluntarily identify overpayments attempt to send checks back

to HCFA, only to have them returned. So, can you give us a sense

of how vast that particular situation is in terms of dollars at stake?

Or, how many people are involved in that?

Ms. SNYDER. I would need to get back with more specifics.

Mr. HORN. OK, without objection, it would be put at this point

in the record.

[The information referred to follows:]

A copy of our June 1999 Program Memorandum, that gives instructions on tracking and reporting procedures for unsolicited/voluntary refund checks from providers/

suppliers, is provided here as an attachment to the transcript.

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Mr. HORN. And then has the Health Care Financing Administration developed guidance for the acceptance of these returned overpayments?

Ms. SNYDER. Yes, sir. We have. We have issued those instructions to our contractors.

Mr. HORN. And, so that has already gone out, that guidance?

There is nothing else to do on that part?

Ms. SNYDER. I believe that there will be more to do and that we

need to followup to make sure that the guidance is, indeed, being

followed. We have given the instructions.

Mr. HORN. OK, so we will hold the record open to get your response as to the degree to which it has been passed on to the contractors and the degree of achievement of the guidance that has

been to-date.

Ms. Lee, do you have any comments, listening to this dialog?

Ms. LEE. No, sir.

Mr. HORN. OK. Well, you have all been fine witnesses and we appreciate you coming. I think we have got a lot of detail in the

record to give us a feel about how this system might work should

it become law, so thank you very much for coming.

We now go to the last panel of the day, panel three. And most

of the audience has already left, so panel three, we can stay here

for hours. OK, we have Mr. Dinkins, Mr. Kenny. Let us see. What

happened to Mr. Kenny. He is accompanying you. OK. And Mr.

Wilwerding is OK. Mr. Lyons, Mr. Booma, and Mr. Koehler. Good.

Anybody behind you that needs to be sworn in besides Mr. Kenny?

Anyone behind you? We might as well get them on the record.

Clerk will get their names.

Anyhow, raise your right hands, please.

[Witnesses sworn.]

Mr. HORN. OK, the clerk will note that the six prime witnesses

and their back-up of three are sworn in. So we will start with Mr.

Dinkins, the executive vice president of the Profit Recovery Group

International. And he is accompanied by Mr. Jack Kenny, the director for government of the Profit Recovery Group International.

So, Mr. Dinkins, we are delighted to have you here.

STATEMENTS OF PAUL DINKINS, EXECUTIVE VICE PRESIDENT, PROFIT RECOVERY GROUP INTERNATIONAL, ACCOMPANIED BY JACK KENNY, THE DIRECTOR FOR GOVERNMENT, PROFIT RECOVERY GROUP INTERNATIONAL, INC.;

DOUGLAS R. WILWERDING, CHIEF EXECUTIVE OFFICER AND

PRESIDENT, OMNIUM WORLDWIDE INC.; TERRENCE LYONS,

DIRECTOR OF ACCOUNTING, WALGREEN CO.; STEPHEN R.

BOOMA, HEALTH CARE CONSULTANT; AND ROBERT

KOEHLER, ATTORNEY-AT-LAW, PATTON BOGGS, ON BEHALF

OF THE AMERICAN LOGISTICS ASSOCIATION

Mr. DINKINS. Thank you, Mr. Chairman, for the opportunity to

testify before this committee.

Profit Recovery Group provides a unique perspective because we

are the largest and only public company in recovery auditing. We

audit several trillion dollars in transactions annually; serve over

3,000 clients, including over half of the Fortune 1,000 here in the

United States; and we have over 2,300 employees in 23 countries.

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Recovery auditing is a professional service pioneered by my company roughly 28 years ago to identify and recover overpayments

made to suppliers of goods and services. This practice has recovered billions of dollars in the private sector that would otherwise

have remained undetected. The service is risk-free. Professional

fees are paid from the proceeds of the recovered funds. The contingency fee basis for payment is the best possible approach we think

because it focuses on performance and puts all of the risk on the

contractor.

It is a fact that every organization experiences overpayments.

Overpayments typically occur as a result of human and systemic

errors. Recovery auditing is most commonly applied by PRG in

large environments. Error rates are typically small, however a

small error rate becomes very meaningful in a large environment.

For example, most large, private-sector organizations have an accuracy level of 99.9 percent in the private sector. The error rate of

0.1 percent becomes meaningful as it represents $1 million of loss

for every $1 billion of purchase.

As you have heard from prior testimony, government has already

been benefiting from recovery auditing. The Army-Air Force Exchange System has employed recovery audit services since the

early 1980’s. AAFES makes purchases of roughly $5 billion per

year and the most recently completed audit of 1998 produced $25

million in recovered moneys. To date, PRG has recovered over $114

million for AAFES.

We are now finalizing a recovery audit demonstration program

for the Department of Defense. Approximately $25 million in overpayments have been identified to date with over $4 million of this

amount recovered or in the process of being offset. The balance is

in various stages of recovery. This represents a rate of recovery of

0.40 percent or roughly $4 million per $1 billion of purchase. And,

Mr. Chairman, this rate of recovery is pretty much synonymous

with what we experienced at AAFES.

The program within DOD is now being expanded to the balance

of the Defense Working Capital Fund. In our view, the expansion

was limited to the Defense Working Capital Fund because it is a

revolving fund and all recovered moneys go back to the fund. We

recommend expansion of the program to the balance of the appropriated fund areas quickly to optimize benefits. Prior to the bill

under review, there has been no incentive for an agency to conduct

recovery audits in appropriated fund areas because moneys recovered would otherwise go back to Treasury.

Summarizing the benefits to government, everyone wins. Agencies will have money returned. General government, through the

Treasury, will recover funds. The taxpayer sees his money wellspent. And the Congress improves executive management. Hence,

it seems impossible to question the value of expanding the process.

Mr. Chairman, while we have suggestions to improve the language in this legislation, let me say at the outset that we very

strongly support this bill. We believe that the concept has been

well-tested over decades in the private sector—roughly 9 years at

AAFES and in the current demonstration program.

There are several recommendations in my written testimony and

I would like to focus on only two of them. First, in section 3562,

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we suggest changes to section 3. We respectfully submit that where

the private sector has attempted to implement internally its own

recovery audit programs, it is done only after years of experience

with a professional service. Even private sector companies that

have developed some internal capability have done so in conjunction with ongoing external professional services.

Next, in section 3564. This section is written with recoveries of

appropriated funds in mind. Revision is suggested and required to

specify how moneys from revolving funds would be treated, such as

the Defense Working Capital Fund; AAFES, which is not an appropriated fund; or HCFA, which is a trust fund. It is our understanding that all moneys, less contractor fees, should go back to these

revolving funds.

In summary, Mr. Chairman, we believe this legislation is both

well-crafted and well-intentioned. With the incorporation of the recommendations proposed in our testimony, this bill will provide a

powerful tool for all segments of government to recover overpayments, correct problems, enhance payment processes, and adopt

private sector business practices. Thank you, Mr. Chairman.

[The prepared statement of Mr. Dinkins follows:]

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Mr. HORN. Well, I thank you. I am very impressed by the detailed recommendations you have made and that is going to be very

helpful to us when we offer a manager’s amendment, namely mine,

to the markup. And so thank you very much for delving into that.

I appreciate it. And we always welcome any of you that have some

comments on the specific language of the bill. That is most helpful

to us.

We now go to Mr. Wilwerding. Thank you very much for coming.

He is the chief executive officer and president of Omnium Worldwide Inc.

Mr. WILWERDING. Thank you, Mr. Chairman, and good afternoon.

On behalf of all the people at Omnium Worldwide, founded 30

years ago, I want to offer into testimony our suggestions and our

analysis of this legislation and the important impact it can have on

the Federal Government.

Omnium Worldwide is both a domestic and international specialist in cost containment and receivable management issues.

Omnium has offices in nine States as well as in Sao Paulo and Rio

de Janeiro, Brazil, and Mexico City, Mexico. We operate on issues

from overpaid insurance claims to precharge often delinquent accounts. Omnium recovers hundreds of millions of dollars each year

for our clients.

I have been asked to speak today because of my 14 years of experience in this industry. I commend the committee’s desire to address the problem of overpayments within Federal agencies. My objectives today are as follows. First of all, to testify on the need for

overpayment identification and recovery within Federal agencies.

Second, to outline the size and potential of the overpayment market, specifically in the private health care industry, and the purpose of extending this potential to Federal agencies. Third, to speak

on everyday practices of overpayment recovery in the private sector. And, finally, to offer some suggested changes to the language

of H.R. 1827 that may enhance the effectiveness of the legislation.

Our company’s existence and that of the industry specifically

formed around the identification and recovery of medical benefit

overpayments is a testament to the problem in the marketplace

and the need for this legislation. As defined, overpayments are not

fraud, but common administrative and clerical errors, as I believe

Ms. Snyder pointed out earlier today. One of our companies, Accent

Insurance Recovery Solutions is the leading provider of overpayment identification and recovery for commercial insurers, managed

care, and self-funded organizations.

Health care benefit overpayments occur when funds are paid out

errantly. Numerous reasons exist for these overpayments, including duplicate payments, payments to ineligible beneficiaries, calculation errors, and payments to wrong providers. The vast majority of these dollars do not deal with medical necessity. These types

of overpayments are a large percentage of the estimated $12.6 billion overpaid by Medicare in 1998.

Private overpayment recovery firms employ state-of-the-art proprietary technology to identify, validate, and recover claim overpayments. Commercial payers outsource these functions because they

are not the competency of the payor, pursuing these claims is not

a cost-effective allocation of resource of the payor, and the capital

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investment to develop the technology infrastructure to carry out

these functions is not a primary investment. Given that private

payers use these services on a contingency fee basis, there is no

fund outlay to realize the benefits of the service. The entire burden

of the function falls on the vendor or contractor.

In the majority of cases, Accent is asking the provider of service,

physician, hospital or clinic for the refund. Both expertise and professionalism are mandatory as we work with the largest providers

across the country daily, resolving both clear-cut and complicated

overpayment situations. These cooperative relationships are of

paramount importance to the provider, the payor, and our company. The result is a very high recovery rate and no provider complaints.

Estimates are that 4 percent of total claims paid by the private

health insurance sector are overpaid. This results in nearly $7.6

billion in overpayments for commercial payers. Contrast this with

the reported 7 to 16.5 percent error rate for Medicare. The dollars

available for identification and recovery are staggering. And, at

this point, Mr. Chairman, I would like to offer in that I do state

the 7.5 to 16.5 percent. There is record of 16.5 percent being the

actual error rate when Medicare includes not just claims that are

entirely overpaid, but also those that are partially overpaid, which

does raise the estimate of dollars being lost to overpayment annually.

Private recovery firms average recovery rates between 50 and 70

percent of dollars validated as overpaid. We believe the success in

the private sector can be mirrored in the public sector. Private recovery firms recover from the same providers that are being overpaid by Medicare. The claims payment errors are being made by

fiscal intermediaries and carriers hired by HCFA to administer the

claims. These contractors are the very same carriers who hire private recovery firms to recover their overpaid dollars on their commercial insurance portfolio.

Over the last 3 years, the estimate is that HCFA has overpaid

some $56 billion in both fraud and waste. In that same time period,

recoveries from fines and restitutions have dropped 65 percent

from 1997 to 1998, down to $321 million. Recoveries for the first

half of 1999 are estimated at $176 million. By employing private

recovery firms, the Medicare Trust could realize conservatively billions in savings in the next 3 years.

H.R. 1827 is an important step toward implementing the mandatory use of auditing firms. A few areas of emphasis would enhance

the legislation and ensure success of this most important effort this

committee is now undertaking. First, we suggest that both auditing

and the recovery function be mandated. As the legislation currently

reads, the recovery function is assumed, but not specifically stated.

Auditing without recovery will not yield the results desired.

Second, timeframe should be added to specify the appropriate

lapse between the audit findings and the beginning of the recovery

activity. This critical element determines the recovery success.

Third, set-offs, while effective, are an extreme burden on providers and their accounting systems and I wish Mr. Walden was here

with his experience in the hospital board. I am sure he would atVerDate 11-SEP-98 10:41 May 25, 2000 Jkt 000000 PO 00000 Frm 00222 Fmt 6633 Sfmt 6602 C:\DOCS\63548.TXT HGOVREF1 PsN: HGOVREF1
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test to the fact that the accounting of set-offs is very difficult for

the provider to handle.

Fourth, the committee should be very cautious in allowing agencies to opt out of the program. Deferrals will greatly reduce the recoveries and available benefits from this prudent legislative act.

Fifth, some types of overpayment, audit, and recovery may incur

expense that exceeds the 25 percent fee cap. And here I echo Mr.

Peterson’s testimony.

Finally, the committee should consider the financial net benefit

and allow some fee arrangements to exceed the cap where appropriate.

H.R. 1827 is a very important step in the pursuit of merging the

private sector efficiency and expertise with the government improvement opportunities. I appreciate the chance to address the

committee and welcome any questions.

[The prepared statement of Mr. Wilwerding follows:]

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Mr. HORN. Thank you very much for that helpful statement. Mr.

Terrence Lyons is director of accounting, the Walgreen Co.

Mr. LYONS. Mr. Chairman, thank you for the opportunity to appear before this committee. My name is Terry Lyons and I am a

director at the Walgreen Co. Walgreen’s is a leading drug and general merchandise retailer with fiscal year sales for 1998 of $15.3

billion. My responsibilities include the management of our

outsourced recovery audit process. My testimony provides a private

sector view of recovery audit benefits and how the Walgreen Co.

uses the process.

Walgreen’s recognized long ago the benefits of using a professional service provider to identify and recover overpayments. Purchasing and payment systems used by any volume intensive organization like Walgreen’s are designed to be cost-effective and to

provide for maximum through-put to ensure timely payment of

supplier invoices. However, mistakes occur, whether through

human error or systemic breakdowns.

Our experience has indicated that human error is the most common contributing factor in payment errors. Human error can never

be entirely eliminated. Therefore, the need exists for a safety net

to audit payment transactions for accuracy and validity, recover

any overpayments, and to identify why overpayments occur.

The most attractive advantage for utilizing a recovery auditing

service is that there is no risk or investment required. The development of internal controls and/or programs to conduct comprehensive recovery auditing is simply not 100 percent cost-effective. We

use the largest service provider, the Profit Recovery Group International who has broad experience in many operating environments.

The value of recovery auditing to us is apparent in the dollars

recovered from the two most recent audit years. The audit of our

1996 purchases was completed in October 1998 and we recovered

$16.9 million in overpayments on a purchase volume of $8.5 billion.

The audit of our 1997 purchases is just now being completed and

we expect to recover approximately $17.5 million in overpayments

against a purchase base of $9.7 billion. Although the numbers are

large, nearly $35 million just over the past 2 audit years, they actually indicate an error rate of only about 0.19 percent. Meaning

that 99.8 percent of our payable transactions were processed and

paid correctly.

The success of our recovery audit activity is based on a set of mutually identified duties and expectations from both parties. We, as

the client, must fully support the process. We must provide our

service provider with the access to all required media, both electronic and paper, needed to research, identify, and document any

instances of overpayments and/or underdeductions. Points of contact are established within the purchasing, transportation, accounts payable, accounting, and finance areas to liaison with contractor personnel to provide whatever support is required.

Our recovery audit firm has responsibilities and duties to ensure

the success of their effort. They gain a full understanding of our

purchasing and payment systems for both electronic and paper

transactions. They meet and develop good working relationships

with all of the designated points of contact within our organization

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and they protect our vendor relationships. In short, we expect our

contractor to function in a fully outsourced manner that represents

the interests of the Walgreen Co.

The question of why Walgreen’s would employ an outside firm to

do recovery auditing rather than doing it internally has certainly

occurred to you. The answer is simple. As a company, we have chosen to invest our developmental dollars in what we do best: systems and technology that provides improved productivity within

our stores and improved customer service. Also the investment in

technology and resources needed to develop this kind of capability

in-house could be cost-prohibitive. We find it attractive to outsource

this function to a professional recovery audit firm. They have the

technology, the resources, and the expertise to do what they do

best.

In summary, Mr. Chairman, we have found the use of professional recovery audit services to be invaluable in both recovering

passed-over payments and improving internal controls. Among the

major benefits: We recover millions of dollars each year, we incur

no financial burden, the process is not disruptive to our normal operations, and the nature of the service is ongoing with benefits,

year after year. As a private sector user of audit recovery services,

I believe recovery auditing services for the government is a terrific

idea. It will result in the recovery of a great deal of money and further demonstrate how government can benefit from private sector

business practices. Thank you, Mr. Chairman.

[The prepared statement of Mr. Lyons follows:]

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Mr. HORN. Well, we thank you for that very thorough statement.

Our next witness is Mr. Stephen Booma, health care consultant

who has had quite a rich experience with the Travelers Insurance

Co. and Mutual of Omaha Insurance Co. We are glad to have you

here.

Mr. BOOMA. Thank you, Mr. Chairman. And I would like to

thank the subcommittee for allowing me to discuss this with you.

As you said, I do have quite a history with the health insurance

industry. I am 27 years in this business. I have 24 years with the

Travelers. At the Travelers, I was president of their regional home

office in Chicago. I also ran other strategic business units. At Mutual of Omaha most recently, I headed up their managed care area,

president of their HMO subsidiary, and I was also responsible for

all of their claim payment. So, in short, I was the one who had to

make the decision to use an outside vendor or to do it in-house.

And I will explain my comments on that. Right now I am operating

as an insurance consultant working in mergers and acquisitions,

but also working with companies in the managed care arena to improve their performance.

Today, I would really like to address my comments as a private

administrator of health plans. And I would say, from the outset,

that we chose to go outside and use private recovery firms. I also

believe strongly, at the outset, that the Federal Government, as the

largest purchaser of health plans, should also use outside recovery

firms.

The reasons why. They are really pretty simple and we are at

the point today, this afternoon, where I think we have discussed

them enough where almost everyone is in agreement. So it is wonderful. But I will just maybe emphasize a couple of points. First,

and foremost, recovery firms have the expertise and have the highest level of professionalism in handling this type of work. That is

their only business. That is not the core business of anyone other

than the recovery firms. So it makes perfect sense to allow the experts to do it.

If you have someone like HCFA start to use outside recovery

firms, you will actually see competition within other firms to do

that work and the expertise will grow. If that expertise is tried to

develop inside, I can almost guarantee you that I wouldn’t see that

type of growth in this level of business.

The amount of money in overpayments is staggering. And I think

we all agree that they can occur simply from human error. To me,

it doesn’t make any sense to have the folks that are making the

human errors try to go get the money they made the errors on.

Human nature tells you that if you make an error, there is a

strong inclination not to point that out. That would be one of the

primary reasons that we chose to go to outside, because we wanted

people that were not attached to the process to make those decisions.

In the health care business, doctors, hospitals, and health care

providers of all kinds and insurance companies are very familiar

with this process. And, in fact, it is not an adversarial process, at

least on this particular process. Oftentimes, insurance companies,

Managed Care Organizations are at opposite ends with providers,

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tions. They know, most of the time, that they have made overpayments. It is important to work with them to try to correct those

overpayments and they are pleased when they can do that in a logical and orderly manner. And the recovery firms are best positioned

to do that.

Our customers understand, especially the larger ones within the

private insurance world, that errors occur. And they are most interested in making sure that those errors are corrected and that it is

done in an orderly manner. If you don’t employ recovery firms,

then the process and the length of time is difficult and oftentimes

very burdensome. Insurance companies who take on the full risk

of contracts for individuals or small groups understand the use of

this too and benefit directly from using outside recovery firms.

That was another primary reason why we chose to do it.

So I would, in summary, strongly recommend that this bill specifically allow for insurance claims recovery for HCFA as well as

other Federal plans. I would also emphasize that I think it should

be mandatory. I don’t think there should be ways to opt-out. Because if you allow them to opt-out, the people who are running the

plans will probably want to continue to try to self-police themselves

and that won’t work. Thank you.

[The prepared statement of Mr. Booma follows:]

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Mr. HORN. Thank you. That is very helpful. Mr. Robert Koehler

is attorney-at-law, Patton Boggs here in Washington and the American Logistics Association. Have we got a little room for you there

at the table, finally? Thank you.

Mr. KOEHLER. I moved from the end of the dug-out to take the

clean-up spot. My name is Robert Koehler. I am a senior partner

in the Washington, DC, law firm of Patton Boggs. And I have specialized in government contract law for the past 30 years. I am

here on behalf of the American Logistics Association, a trade association of some 600 manufacturers, brokers, and distributors who

sell brand or trade-name items to the Federal Government. And

this involves both the commissary systems, the Defense Supply

System, as well as the non-appropriated fund activities such as

AAFES and NEXCOM.

Because of the limit of 5 minutes, I will only highlight the more

critical issues that we think we should address in this bill. Mr.

Chairman, by way of background, I have been involved with the recovery audit associated with DSCP and PRGI for the past 2 years.

In this regard, I represent 10 companies: Frito Lay, Fort James,

Hunt Wesson, Johnson and Johnson, Kellogg, Mars, Nabisco, Pillsbury, Reckitt and Colman, Tropicana, and General Mills. In my

past, I have worked extensively on the issues of price warranty as

far as GSA is concerned; as far as this agency, DSCP, is concerned;

and with the AAFES.

As we look at this legislation, I think it is fair to make comment

on what was learned—at least what we, from our perspective,

learned—from the demonstration program. From our perspective,

as we look at the demonstration program, it was envisioned to take

the basic concepts that are used in the commercial world and apply

them at the DOD level. Very simple. Unfortunately, it isn’t that

simple.

And the difficulty, Mr. Chairman, that occurs is two factors. One,

there are affinity contract terms and conditions that must be adhered to by the government in conducting either audits or seeking

to recover claims. And, two, and most importantly, there are wellestablished Federal acquisition regulations that both the government and the contractor must comport with in these audit activities. And from our perspective, when DSCP and PRGI initiated

their activities in the demonstration program, this was totally ignored.

For example, the first thing that happened in 1996 was the PRGI

and DSCP issuing thousands and thousands of collection letters to

companies demanding payment, giving them 30 days to pay and

also advising them that if the situation arose, it was going to withhold the funds on any outstanding invoice. And, fortunately, this

violated the Federal Acquisition Regulation. We brought this to

their attention and everyone of those letters had to be withdrawn.

Six months later, new letters were issued. And during this time period, when we began to look at the process that they were going

about, it became clear that what they were attempting to do was

to develop a system that they relied on in the commercial activity

that can’t be done in the government sector.

For example, they had two types of claims. What they call a unit

price claim, which was a claim that asserted that the companies

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were not paying the most favored customer price to the government. The second type of claim was what they called the prompt

payment claim. That meant that if the company was providing a

commercial entity a prompt payment discount let us say of 2 percent if you pay it in 10 days, not 30 and the government wasn’t

getting that, they demanded equal treatment.

In the commercial world, that might be appropriate. In government contracts, the essential thing is you have to adhere to the

terms of the contract. And, unfortunately for the government and

PRGI, the price warranty clause is a very specific document that

details what is the basis upon which the contractor warrants his

price, the average price, being most favorable to the government.

And in our judgment, that was totally ignored. Now we are working now through the process of trying to rectify that.

The second part was the DSCP contracting activity was associated with all the commissaries overseas. DSCP and PRGI issued

claim letters and failed to look at their own documentation that existed in the government at the local commissaries levels in Europe.

The industry brought this to their attention and, quite frankly, Mr.

Chairman, raised hell about it. After a considerable period of time,

DSCP finally got the funding to go over to Europe to look at these

documents and that was done just January of this year. We are

now advised that a significant amount of those claims that they

had made against the companies on the unit prices may be withdrawn.

Now the second part relates to the prompt payment discount.

Again, we believe that the price warranty clause specifically requires you to consider what is an average price. What DSCP and

PRGI have done is extracted this one element called billing advantage, assumed that that was not part of the average price, and that

is where a majority of the claims are that have not been recovered.

And the reason is because the contractors want the government to

adhere to the terms of the contract and these claims, we don’t

think, represent that term.

Now with this as background, we now have to look at the new

bill. And let me say, Mr. Chairman, on behalf of all the companies

that ALA represents, we have absolutely no objection to outside

audit function. None whatsoever. We recognize that it is done

throughout the government.

But I think the key difference of what is being proposed here versus what exists now and what PRGI contract is even right now is

what I think is an extremely dangerous move by allowing the agency to delegate extremely core responsibilities from the contracting

officer to the audit company. And I think that if you will ask any

government contractor, if you ask any government representative

who has been a government contractor, this particular provision is

of great, great concern to them.

It is very simple, the reason. The bill establishes giving authority

to individuals to find the claims, process the claims, pursue the

claims, and settle them. And if you looked at PRGI’s testimony that

they gave back on June 12, that is exactly what they were talking

about. You are also giving them 20 percent of what they recover.

That is not incentive fee, that is a headhunter’s fee. And that, to

me, is extremely dangerous.

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One of the principles, I think, that is lost in a lot of this is that

government contracting under the Federal Acquisition Regulation

is extremely different. I might note that Mr. Peterson, who is from

AAFES here this afternoon, testified about their great results.

Make no mistake about it, AAFES regulations are entirely different

than DOD’s. AAFES is a non-appropriated fund activity. It is not

governed by the Federal Acquisition Regulation. DSCP, the commissaries, all the activities that you are referring to are. And that

is a significant difference. So I think we have to analyze the success one might have, based upon the atmosphere that the regulations allow them to exist.

Finally, ALA believes that providing the private contractor auditor with such a broad authority and then to receive 20 percent presents a clear and unmistakable conflict of interest, violating one of

the government’s bedrock contracting principles. And I read just a

portion of the Federal Acquisition Regulation, ‘‘Transactions relating to the expenditure of public funds require the highest degree

of public trust and impeccable standards of conduct. The general

rule is to avoid, strictly, any conflict of interest or even the appearance of a conflict of interest in government contracting relationships.’’

And, again, the idea of giving the contractor a combination of the

authority that the contracting officer has and the percentage presents, I think, a conflict that cannot be overcome. ALA does not

have any difficulty with a continuation of the program. Where we

have the difficulty is trying to allow the contractor to have that

contracting responsibility. And that is where the major conflict

arises.

I also think that one of the issues that has arisen in our dealings, in discussions with the contracting officer and other government representatives is we have talked about attempting to resolve

some of these issues, settle them. One of the issues that always

comes up is, well, I might agree with you, but I have PRGI on the

other side of me who has a contract and is entitled to 20 percent

recovery. I have a conflict with him because if I settle at one level,

he might assert that he is entitled to a higher percentage. I think

the bill ought to have a provision that makes it very clear that the

government is not liable in any way, shape, or form to the contractor for any type of offset or settlement or decision that the contracting officer makes in reaching that settlement vis-a-vis that 20 percent.

Bottom line, we support the bill only if—only if—you exclude

from this bill the contracting officer delegation to the outside auditor. If it is just really a continuation, we have no difficulty with the

bill. Thank you, Mr. Chairman.

[The prepared statement of Mr. Koehler follows:]

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Mr. HORN. Thank you very much. We appreciate that comprehensive testimony.

Mr. Dinkins, in your testimony, you say that the government will

benefit from recovery auditing even more than the private sector.

However, you also state that you do not have a broad enough sampling of results within the government to accurately project the

benefit of the program. What factors support your conclusion that

the government would realize a greater benefit from recovery auditing than the private sector?

Mr. DINKINS. Well, I would say to begin with, the long experience

that we have with AAFES at just under one-half of one-tenth of 1

percent and the current experience in the demonstration program,

those numbers are roughly synonymous. So I wouldn’t venture to

state at this point—and I would say that the opportunity within

HCFA is significantly higher than that. It would be billions of dollars a year and also a higher recovery percent. But somewhere between the private sector average rate of one-tenth of a percent and

one-half of one-tenth of 1 percent and probably closer to that onehalf of one-tenth of 1 percent number is the real opportunity within

government.

Mr. HORN. In your testimony, you recommend raising the threshold for payment activity, subject to recovery audits, from $10 million to $500 million. You stated that the amounts recovered from

an audit of the $10 million payment program would not justify the

costs and administrative burdens. What are the costs associated

with performing recovery audits?

Mr. DINKINS. That statement is probably more self-serving for us

the contractor in the sense that we have a huge investment at the

beginning of any effort to access all of the relevant media, process

it through a data center, prepare and deploy staff, technology,

hardware, et cetera. And in a smaller environment, those investments would not bear fruit. And I would point you to a corollary

in the private sector. Typically, we looked at environments that are

in excess of $500 million. That is not to say that there wouldn’t be

multiple segments within any particular agency that would add up

to $500 million. That would obviously be well worthwhile looking

at, in terms of the benefits to both parties.

Mr. HORN. Well, you noted that since September 1996, when the

Defense Supply Center of Philadelphia contracted with the Profit

Recovery Group to perform these recovery audits, more than $20

million in overpayments had been identified. Only $2 million has

been recovered. Now, according to Mr. Dinkins statement, I guess

the balance is in various stages of recovery and I would be curious—and Mr. Wilwerding might want to get in on this—what is the

status of recovery of the identified by uncollected overpayments?

Mr. DINKINS. Our experience in the private sector ranges in the

high 80 percent range in terms of what is collected, as compared

with what is identified. And, typically, the difference is that there

is some piece of information that was not resident within the client’s files that the supplier may have access to that helps to create

a better understanding of the situation. I think that the reason

for—first of all, let me correct a couple of figures. Where we are

today is about $4 million: $2.5 million of which is identified, anVerDate 11-SEP-98 10:41 May 25, 2000 Jkt 000000 PO 00000 Frm 00262 Fmt 6633 Sfmt 6602 C:\DOCS\63548.TXT HGOVREF1 PsN: HGOVREF1
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other $1.5 million which has been approved by the contracting officer and ready for deduction through DFAS’s systems.

I think you heard prior testimony from Mr. Allen at DSCP saying that there was another $10 million that was ready to go on top

of that. I don’t recall the exact numbers. There is about $12 million

today that is identified and writing final determination from the

contracting officer.

Now, obviously, we don’t affect collections with the suppliers.

That is the Department of Defense’s role and responsibility as part

of the program. We identify the overpayments and then they pursue their normal course of action in terms of how to first notify the

supplier that there is a potential overpayment, ask for their comment before anything further happens, and then, at an appropriate

time, make an offset on a future payment.

Mr. HORN. Mr. Wilwerding, do you have anything to add to that?

Mr. WILWERDING. Yes, Mr. Chairman. I believe also an important part of that recovery percentage—and I agree with Mr.

Dinkins that the private sector recovery percentages do range up

toward 80 percent in some cases. A great deal of that is a result

of the working relationship between the recovery vendor and the

payees in these points and, on the health care, being the providers.

In that there is a system in place to forward information, substantiate claims, and facilitate payment back and forth. That would

take some time to develop on behalf of the government agencies,

but it is very realistic to believe that that would be in place and

would create a very synergistic environment to work together in

that recovery effort.

Mr. HORN. Well, we asked the last panel about the following and

how are disputed over payments handled by your companies, when

that is a dispute? Is there an organized process or an appeals

group? Or how does it work? Is it the contract officer? Yes, Mr.

Dinkins.

Mr. DINKINS. That is actually not our role. That is handled

through normal scenarios within the government and it is primarily a contracting officer makes the final disposition of any

claim.

Mr. HORN. So it works very much like in our debt collection legislation. If it is turned over to a private collector, why they simply

go get the amount and if there is a problem with the IRS, fine, talk

to the people at IRS. OK, I understand that. Does anybody have

any other thoughts on the appeal process in any way? Yes, Mr.

Koehler.

Mr. KOEHLER. Mr. Chairman, under the Federal Acquisition Regulation that governs all contracts, there is no debt under the regulation until the contracting officer issues a contracting officer’s final

decision. At that point, when the contracting officer issues a decision, that then constitutes a debt and the government then has the

option to withhold payment or offset, but not until that point in

time. It is also the point in time when interest begins to run.

I think earlier one of the panelists was talking about that

months and months would go by with interest or years would go

by with interest. Well, that is not true. If the government identifies

a claim and the contracting officer issues that decision, that interest begins to run on those amounts at the Treasury rate. So I think

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that we have to keep that in mind as we move forward on this

project.

Mr. HORN. Mr. Dinkins, the Government Waste Corrections Act

of 1999 recognizes that the identification of overpayments to providers of goods and services through recovery auditing has been

used successfully in the private sector. Accordingly, the proposed

legislation generally requires each executive branch agency to conduct recovery audits for its payment activities that expend at least

$10 million annually. Although the Federal Government buys

many of the same items as does the private sector, the Federal

Government is also the sole buyer of other items, such as major

weapons systems.

With that as a preface, does the—you pronounce the initials here

PRGI—does that Profit Recovery Group perform or have the capability to perform recovery audits for private sector companies such

as United Airlines that buy from the aerospace industry?

Mr. DINKINS. Yes. As a matter of fact, we do provide services to

major airlines today.

Mr. HORN. Major weapons systems manufacturers such as Boeing or Lockheed-Martin do not offer cash discounts and other overpayment type claims typically found in retail businesses. What are

some of the examples of the type of overpayment claims you anticipate finding in major weapons systems acquisitions?

Mr. DINKINS. Most of the identified overpayments in that arena

would be contract compliance related issues. You still have

incidences of duplicate payments and other types of errors. Contract compliance will be the key area of that investigation.

Mr. HORN. We have heard from the chief financial officer of

Medicare. I am just curious, how applicable is recovery auditing to

health care, be it Federal level or the State level, or just plain old

hospital level?

Mr. WILWERDING. Mr. Chairman, we would feel that it is extremely applicable. Going back to my testimony, Medicare program

is utilizing the private sector carriers to administer these health

benefits. Those carriers are currently using private sector recovery

firms to audit, identify, validate, and recover overpaid claims. They

are using very similar, if not the same, claim systems, the same

training techniques on their claim analysts, and the same internal

audit techniques they use on their private sector insurance claims.

Therefore, it would be apparent that the ability to audit and

identify these claims and recover those claims on behalf of Medicare would be similar to that of the private sector.

Mr. LYONS. I think I can speak on that issue also, Mr. Horn.

Mr. HORN. Sure.

Mr. LYONS. I was the chief operations administrator for our company’s health insurance programs in the late 1980’s and early

1990’s. Walgreen’s is self-insured and self-administered. And, we

employed outside audit recovery firms to review health insurance

claim payments with about a 4 percent recovery rate, if I recall.

Mr. DINKINS. I would add to that, Mr. Horn, that that represents

about 10 times the level of recovery demonstrated in government

and other programs today. So health care typically offers a larger

area of opportunity.

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Mr. HORN. I don’t doubt that. There are big dollars at stake

there. Mr. Wilwerding, the majority of claims deemed erroneous

stemmed from issues of lack of medical necessity, incorrectly coded

claims, and services paid for that were actually uncovered or unallowable. Given that you do not get involved in making medical

judgments, could you describe the methodology you use and the

type of errors you identify?

Mr. WILWERDING. Certainly, Mr. Chairman. Our process is to

identify errors that are primarily based on a set of data facts that

determine the eligibility and the appropriateness of the claim. That

may be associated with the beneficiary’s eligibility for the program,

the contract allowances, what the insurance policy or benefit policy

covers and what it does not cover. They could identify things such

as duplicate payments or payments that are not customarily made

or over a certain program maximum amount. The validity of those

claims tends to run very high. Of the claims we identify as potential overpayments, we acknowledge that some 80 percent of those

claims will be accurately overpaid.

We will only pursue—and I think it is an important issue to

bring out here under contingency fees and I would assume Mr.

Dinkins would support this—those of us that are operating on getting paid on successful recoveries will only pursue those claims

that are valid overpayments. We have no incentive to pursue

claims that we know are not valid and will not likely be reimbursed by the payee. It is, in the health claim area especially, since

we deal with fairly low-balance claims and a high volume of those

claims, extra effort is given to make sure that the claims we are

pursuing are accepted by the provider and we have the data inhouse to present to the provider the valid request for the reimbursement.

Mr. HORN. Mr. Wilwerding, in your testimony, you state that it

would not be efficient for the Federal departments and agencies to

collect overpayments by offsetting future payments. Why would

this process not be efficient?

Mr. WILWERDING. Perhaps that testimony needs to be revised. It

is not necessarily inefficient, but I do believe that it is burdensome

upon the provider community and we could, at some point, and I

could submit a statement into the testimony that would give an example of why this would be burdensome if you would prefer that.

Mr. HORN. Mr. Lyons, does the Walgreen Co. do any of its recovery auditing internally?

Mr. LYONS. We do have a small initiative, Mr. Horn. Frankly, we

are trying to put our dollars into developing systems that will

eliminate the post-audit recovery issues. So we are looking at new

billing systems and new accounts payable systems that will tend to

probably not eliminate completely, but at least minimize post-audit

recovery activities.

Mr. HORN. H.R. 1827, which is before us, would require a recovery audit contractor to provide departments and agencies with periodic reports on conditions giving rise to overpayments and recommendations on how to mitigate such conditions. What recommendations has the Profit Recovery Group International provided to the Walgreen Co. on ways to improve its payment processes and reduce the incidences of overpayments?

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Mr. LYONS. Well, I am not sure that I can be very specific in that

area, although various audit recovery firms in the past have made

specific recommendations. Typically, these are recommendations

having to do with system changes and/or manual procedure

changes. Some of which we have made. It is easy to make a manual procedure change. It is very difficult to make a systems change

when it is tied into a fully integrated process.

Mr. HORN. We noted earlier that the Defense Department contracting officer in most Federal departments deal with the vendorsupplier disputes over the validity of an overpayment identified by

a recovery auditor. How does Walgreen handle this?

Mr. LYONS. Well, I think the first point that I want to make is

that the Walgreen Co. controls the audit activities. So, when a dispute arises, the facts typically speak for themselves. Is there a purchase contract? And is there the supporting documentation to validate the claim? Usually, if there is, we proceed. If there is not, we

don’t. And I should say in that respect, that I see very few postaudit recovery claims that do not have a tremendous amount of

documentation, supporting documentation.

Mr. HORN. Mr. Koehler, as I understand it, the Profit Recovery

Group International identified overpayments, sent letter of indebtedness to vendors, and many vendors protested through their trade

association, the American Logistics Association, for which you are

counsel. Have vendors complained to the American Logistics Association about recovery auditing performed for private sector companies? And, if so, what are we talking about in terms of complaints?

Mr. KOEHLER. Well, Mr. Chairman, the answer is no, because the

American Logistics Association is associated just for sales to the

Federal Government so that the association itself would not have

access to that. I know on a personal level the companies that we

do represent that there are two different types of, if you will, issues

that arise on the commercial side. One is the ministerial or billing

errors. And Mr. Lyons is correct. That type of documentation is relatively easy to see and there is very little difficulty with getting

those resolved.

The other area, though, is in relation to the government contracting, is in the application, not of those type of ministerial or billing

errors, but rather in the interpretation of the price warranty clause

and the attempt to enforce it. I think George Allen, for DECA, stated that with regard to the price warranty issue, that those were

breech issues. Well, if that is the case, then that clearly is an area

that should never be delegated to an outside contractor for resolution. Because only that area is the responsibility of the contracting

officer.

Mr. HORN. Now I gave the last panel the chance to have anything to say that they haven’t said in the dialog either between the

Chair and the panel or within the panel. So anybody want to get

something off their chest now into the record? Any takers on that?

Well, we thank you very much for coming. We appreciate the

knowledge you bring to this and the experience. And that will be

very helpful in marking up the bill.

I would now like to thank the following people for setting up this

particular hearing: The Government Management, Information,

and Technology Subcommittee staff is headed by its staff director,

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Russell George, and chief counsel—I don’t see him right now. The

person to my left, to your right, who has put most of the effort into

this particular hearing, is Randy Kaplan; who is also counsel to the

subcommittee and a professional staff member. Matthew Ebert,

policy advisor, is back here on the bench. Jane Cobb of the full

committee, is liaison on this bill, with Mr. Burton’s interest. And

we have Bonnie Heald, director of communications, probably with

somebody in the media here. And Grant Newman, our clerk,

against the wall over there. We have John Phillips, intern. And

then Paul Wicker, intern; Justin Schlueter, intern; Lauren Lefton,

intern.

And, for the Democratic side, Faith Weiss, the minority counsel;

Earley Green, minority staff assistant. And Yon Lupu, the court reporter.

So thank you all. And, with that, this hearing is adjourned.

[Whereupon, at 5:01 p.m., the subcommittee was adjourned.]

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