IMPROPER PAYMENTS

Moving Forward with 

Governmentwide Reduction 

Strategies 

Statement of Beryl H. Davis, Director 

Financial Management and Assurance

Testimony before the Subcommittee on 

Government Organization, Efficiency, and 

Financial Management, Committee on 

Oversight and Government Reform, House 

of Representatives

For Release on Delivery 

Expected at 10:00 a.m. EST

Tuesday, February 7, 2012

GAO-12-405T

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-405T, a testimony 

before the Subcommittee on Government 

Organization, Efficiency, and Financial 

Management, Committee on Oversight and 

Government Reform, House of 

Representatives

February 7, 2012

IMPROPER PAYMENT

Moving Forward with Governmentwide Reduction 

Strategies 

Why GAO Did This Study

Over the past decade, GAO has issued 

numerous reports and testimonies 

highlighting improper payment issues 

across the federal government as well 

as at specific agencies. Fiscal year 

2011 marked the eighth year of 

implementation of the Improper 

Payments Information Act of 2002 

(IPIA), as well as the first year of 

implementation for the Improper 

Payments Elimination and Recovery 

Act of 2010 (IPERA). IPIA requires 

executive branch agencies to annually 

identify programs and activities 

susceptible to significant improper 

payments, estimate the amount of 

improper payments for such programs 

and activities, and report these 

estimates along with actions taken to 

reduce them. IPERA, enacted July 22, 

2010, amended IPIA and expanded 

requirements for recovering 

overpayments across a broad range of 

federal programs.

This testimony addresses (1) federal 

agencies’ reported progress in 

estimating and reducing improper 

payments, (2) remaining challenges in 

meeting current requirements to 

estimate and report improper 

payments and (3) actions that can be 

taken to move forward with improper 

payment reduction strategies. This 

testimony is primarily based on prior 

GAO reports, including GAO’s fiscal 

year 2011 audit of the Financial Report 

of the United States Government. The 

testimony also includes improper 

payment information recently 

presented in federal entities’ fiscal year 

2011 financial reports.

What GAO Found

Federal agencies reported an estimated $115.3 billion in improper payments in 

fiscal year 2011, a decrease of $5.3 billion from the prior year reported estimate 

of $120.6 billion. The $115.3 billion estimate was attributable to 79 programs 

spread among 17 agencies. Ten programs accounted for about $107 billion or 93 

percent of the total estimated improper payments agencies reported for fiscal 

year 2011. The reported decrease in fiscal year 2011 was primarily related to 

three programs—decreases in program outlays for the Department of Labor’s 

Unemployment Insurance program, and decreases in reported error rates for the 

Earned Income Tax Credit program and the Medicare Advantage program. 

Further, the Office of Management and Budget reported that agencies recaptured 

$1.25 billion in improper payments to contractors, vendors, and healthcare 

providers in fiscal year 2011. Over half of this amount, $797 million, can be 

attributed to the Medicare Recovery Audit Contractor program which identifies 

Medicare overpayments and underpayments. 

The federal government continues to face challenges in determining the full 

extent of improper payments. Some agencies have not yet reported estimates for 

all risk-susceptible programs, such as the Department of Health and Human 

Services’ Temporary Assistance for Needy Families program. Internal control 

weaknesses continue to exist, heightening the risk of improper payments. Some 

agencies’ estimating methodologies need to be refined. For example, two 

Department of Defense commercial payment programs were not included in the 

total governmentwide error rate because the estimation methodologies for these 

programs were still under development. 

A number of actions are under way across government to help advance improper 

payment reduction goals. These actions and future initiatives will be needed to 

enhance federal government efforts to reduce improper payments. For example,

• Additional information and analysis on the root causes of improper payment 

estimates would help agencies target effective corrective actions and 

implement preventive measures. Although agencies were required to report 

the root causes of improper payments in three categories beginning in fiscal 

year 2011, of the 79 programs with improper payment estimates for fiscal 

year 2011, 42 programs reported the root cause information using the 

required categories. In addition, because the three categories are general, 

additional analysis is critical to understanding the root causes.

• Implementing strong preventive controls can help defend against improper 

payments, increasing public confidence and avoiding the difficult “pay and 

chase” aspects of recovering improper payments. Preventive controls involve 

activities such as upfront validation of eligibility using electronic data 

matching, predictive analytic tests, and training programs. Further, 

addressing program design issues, such as complex eligibility requirements, 

may also warrant further consideration.

• Effective detection techniques to quickly identify and recover improper 

payments are also important to a successful reduction strategy. Detection 

activities include data mining and recovery audits. Another area for further 

exploration is the broader use of incentives to encourage and support states 

in efforts to implement effective preventive and detective controls.

View GAO-12-405T. For more information, 

contact Beryl H. Davis at (202) 512-2623 or 

davisbh@gao.gov.
 

Page 1 GAO-12-405T 

Chairman Platts, Ranking Member Towns, and Members of the 

Subcommittee:

Thank you for the opportunity to be here today to discuss the issue of 

improper payments in federal programs and activities, including efforts by 

federal agencies to identify and reduce improper payments.1 As the 

steward of taxpayer dollars, the federal government is accountable for 

how its agencies and grantees spend hundreds of billions of taxpayer 

dollars annually, including safeguarding those expenditures against 

improper payments, and establishing mechanisms to recover those funds 

when overpayments occur. It is important to note that not all of the 

reported improper payment estimates represent a loss to the government. 

For example, errors consisting of insufficient or lack of documentation are 

included in the improper payment estimates. Over the past decade, we 

have issued numerous reports and testimonies highlighting improper 

payment issues across the federal government as well as at specific 

agencies.2

Today, my testimony will focus on:

• federal agencies’ reported progress in estimating and reducing 

improper payments, and

• remaining challenges in meeting current requirements to estimate and 

report improper payments.

I will also provide observations on actions that can be taken to move 

forward with improper payment reduction strategies.

 

1

It is important to recognize that improper payment estimates reported by federal agencies 

in fiscal year 2011 are not intended to be an estimate of fraud in federal agencies’ 

programs and activities. An improper payment is defined as any payment that should not 

have been made or that was made in an incorrect amount (including overpayments and 

underpayments) under statutory, contractual, administrative, or other legally applicable 

requirements. It includes any payment to an ineligible recipient, any payment for an 

ineligible good or service, any duplicate payment, any payment for a good or service not 

received (except for such payments where authorized by law), and any payment that does 

not account for credit for applicable discounts. Office of Management and Budget (OMB) 

guidance also instructs agencies to report as improper payments any payments for which 

insufficient or no documentation was found.

2

See the Related GAO Products list at the end of this statement for a selection of the 

products related to these issues.

 
 

Page 2 GAO-12-405T 

In preparing this statement, we drew upon our previously issued work 

related to the fiscal year 2011 audit of the Financial Report of the United 

States Government,3 as well as our other previously issued products 

dealing with improper payments. Our previous products are listed at the 

end of this statement. That work was conducted in accordance with 

generally accepted government auditing standards. We are also including 

improper payment information recently presented in federal entities’ fiscal 

year 2011 performance and accountability reports (PAR) and agency 

financial reports (AFR).

Fiscal year 2011 marked the eighth year of implementation of the 

Improper Payments Information Act of 2002 (IPIA),4 as well as the first 

year of implementation for the Improper Payments Elimination and 

Recovery Act of 2010 (IPERA).5 IPIA requires executive branch agencies 

to annually review all programs and activities to identify those that are 

susceptible to significant improper payments, estimate the annual amount 

of improper payments for such programs and activities, and report these 

estimates along with actions taken to reduce improper payments for 

programs with estimates that exceed $10 million. IPERA, enacted 

July 22, 2010, amended IPIA by expanding on the previous requirements 

for identifying, estimating, and reporting on programs and activities 

susceptible to significant improper payments and expanding requirements 

for recovering overpayments across a broad range of federal programs.6

 

3

U.S. Department of the Treasury, 2011 Financial Report of the United States 

Government (Washington, D.C.: Dec. 23, 2011), pp. 211-231.

IPERA included a new, broader requirement for agencies to conduct 

recovery audits, where cost effective, for each program and activity with 

at least $1 million in annual program outlays. This IPERA provision 

significantly lowers the threshold for required recovery audits from $500 

4

Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002).

5

Pub. L. No. 111-204, 124 Stat. 2224 (July 22, 2010).

6

IPERA defines “significant improper payments” as gross annual improper payments in 

the program exceeding (1) both 2.5 percent of program outlays and $10 million of all 

program or activity payments during the fiscal year reported or (2) $100 million (regardless 

of the improper payment error rate). Further, the threshold for “significant improper 

payments” will be reduced in fiscal year 2014 and each year thereafter to gross annual 

improper payments in the program exceeding (1) both 1.5 percent of program outlays and 

$10 million of all program or activity payments during the fiscal year reported or (2) $100 

million (regardless of the improper payment error rate).

Background 
 

Page 3 GAO-12-405T 

million7

OMB continues to play a key role in the oversight of the governmentwide 

improper payments problem. OMB has established guidance for federal 

agencies on reporting, reducing, and recovering improper payments

to $1 million and expands the scope for recovery audits to all 

programs and activities. Another new IPERA provision calls for federal 

agencies’ inspectors general to annually determine whether their 

respective agencies are in compliance with key IPERA requirements and 

to report on their determinations. Under Office of Management and 

Budget (OMB) implementing guidance, these reports are required to be 

completed within 120 days of the publication of the federal agencies’ 

annual PAR or AFR, with the fiscal year 2011 reports for most agencies 

due on March 15, 2012.

8 and 

has established various work groups responsible for developing 

recommendations aimed at improving federal financial management 

activities related to reducing improper payments.

 

7

Section 831 of the National Defense Authorization Act for Fiscal Year 2002, Pub. L. No. 

107-107, div. A, 115 Stat. 1012, 1186 (Dec. 28, 2001), required that agencies that enter 

into contracts with a total value in excess of $500 million in a fiscal year carry out a costeffective program for identifying and recovering amounts erroneously paid to contractors. 

IPERA repealed these requirements.

8

OMB, Circular No. A-136 Revised, Financial Reporting Requirements (Oct. 27, 2011); 

OMB Memorandum M-11-16, Issuance of Revised Parts I and II to Appendix C of OMB 

Circular A-123 (Apr. 14, 2011); OMB Memorandum M-11-04, Increasing Efforts to 

Recapture Improper Payments by Intensifying and Expanding Payment Recapture Audits

(Nov. 16, 2010); and OMB Memorandum M-10-13, Issuance of Part III to OMB Circular A123, Appendix. C (Mar. 22, 2010). 
 

Page 4 GAO-12-405T 

Federal agencies reported improper payment estimates totaling $115.3 

billion in fiscal year 2011, a decrease of $5.3 billion from the revised prior 

year reported estimate of $120.6 billion.9

The $115.3 billion in estimated federal improper payments reported for 

fiscal year 2011 was attributable to 79 programs spread among 17 

agencies. Ten of these 79 programs account for most of the $115.3 billion 

of reported improper payments. Specifically, as shown in table 1, these 

10 programs accounted for about $107 billion or 93 percent of the total 

estimated improper payments agencies reported for fiscal year 2011.

Based on the agencies’ 

estimates, OMB estimated that fiscal year 2011 improper payments 

comprised about 4.7 percent of the $2.5 trillion in total spending during 

that year for the agencies’ related programs (i.e., a 4.7 percent error rate). 

The decrease in the fiscal year 2011 estimate is attributed primarily to 

decreases in program outlays for the Department of Labor’s 

Unemployment Insurance program, and decreases in reported error rates 

for fiscal year 2011 (compared to fiscal year 2010) for the Department of 

the Treasury’s (Treasury) Earned Income Tax Credit program and the 

Department of Health and Human Services’ (HHS) Medicare Advantage 

program.

 

9

In their fiscal year 2011 PARs and AFRs, select federal entities updated their fiscal year 

2010 improper payment estimates to reflect changes since issuance of their fiscal year 

2010 reports. These updates decreased the governmentwide improper payment estimate 

for fiscal year 2010 from $125.4 billion to $120.6 billion. Estimated improper payment 

amounts for fiscal years 2011 and 2010 may include estimates based on prior years’ data, 

if current reporting year data were not available, as allowed by OMB guidance. 

OMB and Agencies 

Reported Progress in 

Estimating and 

Reducing Improper 

Payments 
 

Page 5 GAO-12-405T 

Table 1: Improper Payment Dollar Estimates: 10 Programs with the Highest Reported Amounts in Fiscal Year 2011

Program Agency

Reported improper

payment estimates 

Reported primary cause(s) 

Dollars

(in billions) 

Error rate 

(percentages)

Medicare Fee-for-Service Health and Human 

Services 

$28.8 8.6% Medically unnecessary services and 

insufficient documentation

Medicaid Health and Human 

Services 

$21.9 8.1% Ineligible or indeterminable eligibility 

status for Medicaid beneficiaries 

Earned Income Tax Credit Treasury $15.2 23.5% Complexity of the tax law, structure of 

the program, confusion among eligible 

claimants, high turnover of eligible 

claimants, and unscrupulous return 

preparers

Unemployment Insurance Labor $13.7 12.0% Overpayments to claimants who 

continue to claim benefits after they 

return to work, ineligibility, and claimants 

who failed to meet active work search 

requirements

Medicare Advantage Health and Human 

Services 

$12.4 11.0% Insufficient documentation, errors in the 

transfer and interpretation of data, and 

payment calculations

Supplemental Security 

Income

Social Security 

Administration

$4.6 9.1% Recipients failed to provide accurate and 

timely reports of new or increased wages

Old Age Survivors’ and 

Disability Insurance

Social Security 

Administration

$4.5 0.6% Computation errors, eligibility errors, 

non-verification of earnings, and 

incorrect processing of applications or 

payments

Supplemental Nutrition 

Assistance

Agriculture $2.5 3.8% Incomplete or inaccurate reporting of 

income by participant and incorrect 

eligibility determination by caseworkers

National School Lunch Agriculture $1.7 16.0% Verification errors related to benefit 

calculation error, duplicate payments, 

insufficient documentation, and fraud or 

misrepresentation by program 

participants or others

Medicare Prescription

Drug Benefit

Health and Human 

Services 

$1.7 3.2% Payment errors, payment adjustment 

errors, and complexity of program

Source: GAO summary of agencies’ data.

The 10 programs with the highest error rates had rates ranging from 11.0 

percent to 28.4 percent. Specifically, as shown in table 2, those 10 

programs accounted for $45 billion, or 39 percent of the total estimated 

improper payments for fiscal year 2011.
 

Page 6 GAO-12-405T 

Table 2: Improper Payment Error Rates: 10 Programs with the Highest Reported Rates in Fiscal Year 2011

Program Agency

Reported improper

payment estimates

Reported primary cause(s)

Error rate 

(percentages)

Dollars

(in millions)

Disaster Assistance Loans Small Business 

Administration

28.4% $96.3 Loan documentation errors

School Breakfast Agriculture 25.0% $705.0 Authentication and administrative errors, 

including authenticating the accuracy of 

qualifying for program specific 

requirements, criteria, or conditions.

Earned Income Tax Credit Treasury 23.5% $15,200.0 Complexity of the tax law, structure of 

the program, confusion among eligible 

claimants, high turnover of eligible 

claimants, and unscrupulous return 

preparers

National School Lunch Agriculture 16.0% $1,716.0 Verification errors related to benefit 

calculation error, duplicate payments, 

insufficient documentation, and fraud or 

misrepresentation by program 

participants or others

State Home Per Diem Grants Veterans Affairs 13.7% $97.6 Documentation and administrative errors 

related to ineligible recipients, 

noncompliance with policies and 

procedures, incorrect amounts, ineligible 

goods, and lack of documentation

Supplies and Materials Veterans Affairs 13.6% $221.1 Documentation and administrative errors 

related to noncompliance with policies 

and procedures, lack of documentation, 

ineligible goods, incorrect amounts, and 

discounts not taken

Non-VA Care Fee Veterans Affairs 12.4% $522.9 Verification and documentation and 

administrative errors related to incorrect 

application of payment methodologies, 

lack of documentation, lack of 

authorization, and data entry errors 

Unemployment Insurance Labor 12.0% $13,697.0 Overpayments to claimants who 

continue to claim benefits after they 

return to work, ineligibility, and claimants 

who failed to meet active work search 

requirements

Child Care and Development 

Fund 

Health and Human 

Services 

11.2% $638.0 Documentation and administrative errors 

due to missing or insufficient 

documentation

Medicare Advantage Health and Human 

Services 

11.0% $12,390.0 Insufficient documentation, errors in the 

transfer and interpretation of data, and 

payment calculations

Source: GAO summary of agencies’ data.
 

Page 7 GAO-12-405T 

Since the implementation of IPIA in 2004, federal agencies have 

continued to identify new programs or activities as risk-susceptible and 

report estimated improper payment amounts. The fiscal year 2011 

governmentwide estimate of $115.3 billion included improper payment 

estimates for nine additional programs that did not report an estimate in 

fiscal year 2010, with the HHS Medicare Prescription Drug Benefit (Part 

D) program having the highest estimate of the newly included programs. 

We view these agencies’ efforts as a positive step towards increasing the 

transparency of the magnitude of improper payments. However, three 

additional programs providing estimates in fiscal year 2011 were not 

included in the governmentwide totals because their estimation 

methodologies were still under development. The three excluded 

programs were the: Department of Education’s Direct Loan, Department 

of Defense’s (DOD) Defense Finance and Accounting Service 

Commercial Pay, and DOD’s Army Corps of Engineers Commercial Pay.

A number of federal agencies have reported progress in reducing 

improper payment error rates in some programs and activities. For 

example, we identified 40 federal agency programs, or about 50 percent 

of the total programs reporting improper payment estimates in fiscal year 

2011, that reported a reduction in the error rate of estimated improper 

payments in fiscal year 2011 when compared to fiscal year 2010 error 

rates. We caution, however, that these rates have not been independently 

verified or audited. The following are examples of agencies that reported 

reductions in program error rates and estimated improper payment 

amounts (along with corrective actions to reduce improper payments) in 

their fiscal year 2011 PARs, AFRs, or annual reports.

• Treasury reported that the fiscal year 2011 Earned Income Tax Credit 

(EITC) program’s estimated improper payment amount decreased 

from the fiscal year 2010 amount of $16.9 billion to $15.2 billion, 

which represented a decrease in the error rate from 26.3 percent to 

23.5 percent. Treasury reported that corrective actions taken to 

reduce improper payments primarily focused on completing 

examinations on tax returns that claimed the EITC before issuing the 

EITC portion of the refund, identifying math or other statistical 

irregularities in taxpayer returns, and comparing income information 

provided by the taxpayer with matching information from employers to 

identify discrepancies.

• HHS reported that the fiscal year 2011 estimated improper payment 

amount for the Medicare Advantage (Part C) program decreased from 

the fiscal year 2010 reported amount of $13.6 billion to $12.4 billion, 
 

Page 8 GAO-12-405T 

which represented a decrease in the error rate from 14.1 percent to 

11.0 percent. HHS reported that it reduced payment errors by 

continuing to routinely implement controls in its payment system to 

ensure accurate and timely payments, and implementing three key 

initiatives, including contract level audits, physician outreach, and 

Medicare Advantage organization guidance and training.

In addition, agencies have further developed the use of recovery audits to 

recapture improper payments. In 2010, the President set goals, as part of 

the Accountable Government Initiative, for federal agencies to reduce 

overall improper payments by $50 billion, and recapture at least $2 billion 

in improper contract payments and overpayments to healthcare providers, 

by the end of fiscal year 2012. For fiscal year 2011, OMB reported that 

governmentwide agencies recaptured $1.25 billion in overpayments to 

contractors and vendors. Over half of this amount, $797 million, can be 

attributed to the Medicare recovery audit contractor program which 

identifies improper Medicare payments—both overpayments and 

underpayments—in all 50 states. Cumulatively, OMB reported $1.9 billion 

recaptured from overpayments to contractors, vendors, and healthcare 

providers for fiscal years 2010 and 2011 towards the President’s goal of 

recapturing at least $2 billion by the end of fiscal year 2012.

Despite reported progress in reducing estimated improper payment 

amounts and error rates for some programs and activities during fiscal 

year 2011, the federal government continues to face challenges in 

determining the full extent of improper payments. Specifically, some 

agencies have not yet reported estimates for all risk-susceptible programs 

and some agencies’ estimating methodologies need to be refined. We 

have also found that internal control weaknesses exist, heightening the 

risk of improper payments occurring. Until federal agencies are able to 

implement effective processes to completely and accurately identify the 

full extent of improper payments and implement appropriate corrective 

actions to effectively reduce improper payments, the federal government 

will not have reasonable assurance that the use of taxpayer funds is 

adequately safeguarded. We are currently working on engagements 

related to improper payment reporting at both DOD and HHS. 

Furthermore, as I will discuss later in this statement, additional analysis is 

needed to assess the root causes of improper payments, a key factor in 

identifying and implementing effective corrective actions.

Remaining Challenges 

in Complete and 

Accurate Reporting of 

Improper Payments
 

Page 9 GAO-12-405T 

We found that not all agencies have developed improper payment 

estimates for all of the programs and activities they identified as 

susceptible to significant improper payments. Specifically, three federal 

entities did not report fiscal year 2011 estimated improper payment 

amounts for four risk-susceptible programs.10 In one example, HHS’s 

fiscal year 2011 reporting cited various statutory barriers that hindered it 

from reporting improper payment estimated amounts. HHS cited statutory 

limitations for its state-administered Temporary Assistance for Needy 

Families (TANF) program,11 which prohibited it from requiring states to 

participate in developing an improper payment estimate for the TANF 

program. Despite these limitations, HHS officials stated that they will 

continue to work with states and explore options to allow for future 

estimates for the program. For fiscal year 2011, the TANF program 

reported outlays of about $17 billion. For another program, HHS cited the 

Children’s Health Insurance Program Reauthorization Act of 200912

As previously discussed, OMB excluded estimated improper payment 

amounts for two DOD programs from the governmentwide total because 

those programs were still developing their estimating methodologies—

Defense Finance and Accounting Service (DFAS) Commercial Pay

as 

prohibiting HHS from calculating or publishing any national or statespecific payment error rates for the Children’s Health Insurance Program 

(CHIP) until 6 months after the new payment error rate measurement rule 

became effective on September 10, 2010. According to its fiscal year 

2011 agency financial report, HHS plans to report estimated improper 

payment amounts for CHIP in fiscal year 2012. For fiscal year 2011, the 

CHIP program reported federal outlays of about $9 billion.

13

 

10The four risk-susceptible programs that did not report a required improper payments 

estimate for fiscal year 2011 were the Department of Education’s Federal Family 

Education Loan, Federal Communications Commission’s Interstate Telecommunications 

Relay Services Fund, and HHS’s Children’s Health Insurance Program and Temporary 

Assistance for Needy Families. 

with 

fiscal year 2011 outlays of $368.5 billion and U.S. Army Corps of 

Engineers Commercial Pay with fiscal year 2011 outlays of $30.5 billion.

11The term state-administered refers to federal programs that are managed on a day-today basis at the state level to carry out program objectives.

12Pub. L. No. 111-3, 123 Stat. 8 (Feb. 4, 2009).

13DOD refers to payments to contractors and vendors collectively as commercial 

payments. 
 

Page 10 GAO-12-405T 

In DOD’s fiscal year 2011 agency financial report, DOD reported that 

improper payment estimates for these programs were based on improper 

payments detected through various pre-payment and post-payment 

review processes rather than using methodologies similar to those used 

for DOD’s other programs, including statistically valid random sampling or 

reviewing 100 percent of payments. In its fiscal year 2011 agency 

financial report, DOD stated that it plans to begin statistical sampling of 

the Commercial Pay program in fiscal year 2012.

Both GAO14 and the DOD Inspector General (IG)15 have previously 

reported on weaknesses in DOD’s payment controls, including 

weaknesses in its process for assessing the risk of improper payments 

and reporting estimated amounts. DOD’s payment controls are hindered 

by problems related to inadequate payment processing, poor financial 

systems, and inadequate supporting documentation. Nonetheless, the 

DOD Comptroller testified in May 2011 that DOD assessed its 

commercial payment program as low risk because DOD management 

has concluded that it had a highly effective pre-payment examination 

process. That process includes a software tool that tests for potential 

improper payments before disbursement.16 However, the DOD IG has 

reported17 that the tool had a false positive18

 

14GAO, DOD Financial Management: Weaknesses in Controls over the Use of Public 

Funds and Related Improper Payments, 

rate of more than 95 percent 

and that its use was not standardized across payment systems. 

Additionally, the DOD IG reported that DOD’s risk of making improper 

payments was high and identified deficiencies in DOD’s estimate of highdollar overpayments that caused it to underreport the amount of improper 

GAO-11-950T (Washington, D.C.: Sept. 22, 

2011) and Improper Payments: Significant Improvements Needed in DOD’s Efforts to 

Address Improper Payment and Recovery Auditing Requirements, GAO-09-442

(Washington, D.C.: July 29, 2009).

15DOD, Inspector General, DOD Needs to Improve High Dollar Overpayment Review and 

Reporting, D-2011-050 (Arlington, Va.: Mar. 16, 2011).

16DOD, Statement of The Honorable Robert F. Hale, Under Secretary of Defense 

(Comptroller) before the Subcommittee on Federal Financial Management, Government 

Information, Federal Services, and International Security, Committee on Homeland 

Security and Governmental Affairs, U.S. Senate (Washington, D.C.: May 25, 2011). 

17D-2011-050.

18A false positive is a payment flagged as a potential improper payment that, after review, 

is determined to be proper.
 

Page 11 GAO-12-405T 

payments made.19

For fiscal year 2011, two agency auditors reported on compliance issues 

with IPIA and IPERA as part of their 2011 financial statement audits. 

Specifically, the Department of Agriculture (USDA) auditors identified 

noncompliance with the requirements of IPERA regarding the design of 

program internal controls related to improper payments. In the other 

noncompliance issue, while HHS estimated an annual amount of 

improper payments for some of its risk-susceptible programs, a key 

requirement of IPIA, it did not report an improper payment estimate for its 

TANF and CHIP programs for fiscal year 2011. Fiscal year 2011 marked 

the eighth consecutive year that auditors for HHS reported 

noncompliance issues with IPIA.

Until DOD fully and effectively implements a 

statistically valid estimating process for its commercial payments and 

addresses the known control deficiencies in its commercial payment 

processes, the governmentwide improper payment estimates are not 

complete.

A number of actions are under way across the federal government to help 

advance improper payment reduction goals. These initiatives, as well as 

additional actions in the future, will be needed to advance the federal 

government efforts to reduce improper payments. Identifying and 

analyzing the root causes of improper payments is key to developing 

effective corrective actions and implementing the controls needed to 

advance the federal government’s efforts to reduce and prevent improper 

payments. In this regard, implementing strong preventive controls can 

serve as the front-line defense against improper payments. Proactively 

preventing improper payments increases public confidence in the 

administration of benefit programs and avoids the difficulties associated 

with the “pay and chase”20

 

19D-2011-050. The IG report stated that DFAS and the Army Corps of Engineers did not 

review all payment systems for high-dollar overpayments. DFAS did not review 

approximately $2.2 billion in payments from five entitlement systems and the Corps of 

Engineers did not complete a timely review of $7.3 billion of commercial payments.

aspects of recovering overpayments. For 

example, addressing program design issues that are a factor in causing 

improper payments may be an effective preventive strategy to be 

20“Pay and chase” refers to the labor-intensive and time-consuming practice of trying to 

recover overpayments once they have already been made rather than preventing 

improper payments in the first place.

Current and Future 

Actions to Move 

Forward with 

Improper Payment 

Reduction Strategies
 

Page 12 GAO-12-405T 

considered. Effective monitoring and reporting can also help detect 

emerging issues. In addition, agencies can also enhance detective 

controls to identify and recover overpayments. For instance, enhancing 

incentives for grantees, such as state and local governments, could help 

increase attention to preventing, identifying, and recovering improper 

payments.

Agencies cited a number of causes for the estimated $115.3 billion in 

reported improper payments, including insufficient documentation; 

incorrect computations; changes in program requirements; and, in some 

cases, fraud. Beginning in fiscal year 2011, according to OMB’s 

guidance,21 agencies were required to classify the root causes of 

estimated improper payments into three general categories for reporting 

purposes: (1) documentation and administrative errors, (2) authentication 

and medical necessity errors, and (3) verification errors.22

While agencies generally reported some description of the causes of 

improper payments for their respective programs in their fiscal year 2011 

reports, many agencies did not use the three categories to classify the 

types of errors and quantify how many errors can be attributed to that 

category. Of the 79 programs with improper payment estimates in fiscal 

Information on 

the root causes of the current improper payment estimates is necessary 

for agencies to target effective corrective actions and implement 

preventive measures.

 

21OMB, Circular No. A-136 Revised, Financial Reporting Requirements (October 27, 

2011) and OMB Memorandum M-10-13, Issuance of Part III to OMB Circular A-123, 

Appendix C (Mar. 22, 2010).

22OMB defines these error types as: Documentation and Administrative Errors - Errors 

caused by the absence of supporting documentation necessary to verify the accuracy of a 

payment or errors caused by incorrect inputting, classifying, or processing of applications 

or payments by a relevant Federal agency, State agency, or third party who is not the 

beneficiary; Authentication and Medical Necessity Errors - Errors caused by an inability to 

authenticate eligibility criteria through third-party databases or other resources because no 

databases or other resources exist, or providing a service that was not medically 

necessary given the patient’s condition; and Verification Errors - Errors caused by the 

failure or inability to verify recipient information, including earnings, income, assets, or 

work status, even though verifying information does exist in third-party databases or other 

resources (in this situation, as contrasted with “authentication” errors, the “inability” to 

verify may arise due to legal or other restrictions that effectively deny access to an existing 

database or resource), or errors due to beneficiaries failing to report correct information to 

an agency. 

Identifying and Analyzing 

Root Causes of Improper 

Payments
 

Page 13 GAO-12-405T 

year 2011, we found that agencies reported the root causes information 

using the required categories for 42 programs in their fiscal year 2011 

PARs and AFRs. Together, these programs represented about $46 

billion, or 40 percent of the total reported $115 billion in improper payment

estimates for fiscal year 2011. Of the $46 billion, the estimated improper 

payment amounts were spread across the three categories, with 

documentation and administrative errors being cited most often. We did 

not calculate the dollar amounts in each category due to the imprecise 

narratives included in some of the agencies’ reporting of identified 

causes, which would have required more detailed information and/or 

detailed examination of the underlying data. Nonetheless, additional 

analysis regarding the root causes is needed in order to identify and 

implement effective corrective and preventive actions in the various 

programs.

Many agencies and programs are in the process of implementing 

preventive controls to avoid improper payments, including overpayments 

and underpayments. Preventive controls may involve a variety of 

activities such as upfront validation of eligibility, predictive analytic tests, 

training programs, and timely resolution of audit findings. Further, 

addressing program design issues that are a factor in causing improper 

payments may be an effective preventive strategy to be considered.

Upfront eligibility validation through data sharing. Data sharing allows 

entities that make payments—to contractors, vendors, participants in 

benefit programs, and others—to compare information from different 

sources to help ensure that payments are appropriate. When effectively 

implemented, data sharing can be particularly useful in confirming initial 

or continuing eligibility of participants in benefit programs and in 

identifying improper payments that have already been made. Analyses 

and reporting on the extent to which agencies are participating in data 

sharing activities, and additional data sharing efforts that agencies are 

currently pursuing or would like to pursue is another important element 

needed to advance the federal government’s efforts to reduce improper 

payments.

For example, the Department of Labor (Labor) reported that its 

Unemployment Insurance Program utilizes HHS’s National Directory of 

Implementing Effective 

Preventive Controls to 

Avoid Improper Payments
 

Page 14 GAO-12-405T 

New Hires Database23

In another case, to address the issue of inaccuracy of self-reported 

financial income on applications for student aid, the Department of 

Education (Education), in conjunction with the Internal Revenue Service 

(IRS), implemented a 6-month pilot version of an IRS data retrieval tool in 

January 2010 for its Pell Grant Program. The tool allows student aid 

applicants and, as needed, parents of applicants, to transfer certain tax 

return information from the IRS directly to Education’s online application. 

Education reported that nearly 3.5 million students used the data 

exchange tool, representing approximately 21 percent of the applications 

submitted for the 2011 - 2012 academic year.

to improve the ability to detect overpayments due 

to individuals who claim benefits after returning to work—the largest 

single cause of overpayments reported in the program. In June 2011, 

Labor established the mandatory use of the database for state benefit 

payment control no later than December 2011. Labor also issued a 

program letter that included recommended operating procedures for 

cross-matching activity for National and State Directories of New Hires.

Predictive analytic technologies. The analytic technologies used by 

HHS’s Centers for Medicare and Medicaid Services (CMS) are examples 

of preventive techniques that may be useful for other programs to 

consider. The Small Business Jobs Act of 2010 requires CMS to use 

predictive modeling and other analytic techniques—known as predictive 

analytic technologies—both to identify and to prevent improper payments 

under the Medicare fee-for-service program.24

 

23The National Directory of New Hires database, maintained by HHS, contains information 

on all newly hired employees, quarterly wage reports for all employees, and 

unemployment insurance claims nationwide. 

These predictive analytic 

technologies will be used to analyze and identify Medicare provider 

networks, billing patterns, and beneficiary utilization patterns and detect 

those that represent a high risk of fraudulent activity. Through such 

analysis, unusual or suspicious patterns or abnormalities can be identified 

and used to prioritize additional review of suspicious transactions before 

payment is made. The legislation required that contractors selected begin 

using these technologies on July 1, 2011, in the 10 states identified by 

CMS as having the highest risk of fraud, waste, or abuse in Medicare feefor-service payments. Rather than focusing on the 10 states, CMS

24Pub. L. No. 111-240, § 4241, 124 Stat. 2504, 2599 (Sept. 27, 2010). 
 

Page 15 GAO-12-405T 

contractors began using these technologies to screen all fee-for-service 

claims nationwide prior to payment as of June 30, 2011, through CMS’s 

new Fraud Prevention System.

Training programs for providers, staff, and beneficiaries. Training 

can be a key element in any effort to prevent improper payments from 

occurring. This can include both training staff on how to prevent and 

detect improper payments and training providers or beneficiaries on 

program requirements. For example, the Medicaid Integrity Institute, an 

initiative of CMS’s Medicaid Integrity Group (MIG), trains state-level staff 

and facilitates networking by sponsoring free workshops for states. In 

addition, the MIG sponsors education programs for providers and 

beneficiaries, such as for pharmacy providers, to promote best 

prescribing practices and appropriate prescribing guidelines based on 

Food and Drug Administration labeling, potentially reducing improper 

payments.25

Timely resolution of audit findings. Standards for Internal Control in 

the Federal Government26

Program design review and refinement. To the extent that provider 

enrollment and eligibility verification problems are identified as a 

significant root cause in a specific program, agencies may look to 

establish enhanced controls in this area. For example, CMS has taken 

steps to strengthen standards and procedures for Medicare provider 

enrollment to help reduce the risk of providers intent on defrauding or 

abusing the program.

requires that the findings of audits and other 

reviews be promptly resolved. Managers are to (1) evaluate findings from 

audits and other reviews promptly, including those showing deficiencies 

and recommendations reported by auditors and others who evaluate 

agencies’ operations; (2) determine proper actions in response to findings 

and recommendations from audits and reviews; and (3) complete, within 

established time frames, all actions that correct or otherwise resolve the 

matters brought to management’s attention.

27

 

25GAO, Medicaid Program Integrity: Expanded Federal Role Presents Challenges to and 

Opportunities for Assisting States,

Further, exploring whether certain complex and/or 

GAO-12-288T (Washington D.C.: Dec. 7, 2011).

26GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 

(Washington, D.C: Nov. 1999).

27GAO, Improper Payments: Reported Medicare Estimates and Key Remediation 

Strategies, GAO-11-842T (Washington, D.C.: July 28, 2011).
 

Page 16 GAO-12-405T 

inconsistent program requirements, such as eligibility criteria and 

requirements for provider enrollment, contribute to improper payments 

would lend insight to developing effective strategies for enhancing 

compliance and may identify opportunities for streamlining or changing 

eligibility or other program requirements.

Although strong preventive controls remain the frontline defense against 

improper payments, agencies also need effective detection techniques to 

quickly identify and recover those overpayments that do occur. Detection 

activities play a significant role not only in identifying improper payments, 

but also in providing data on why these payments were made and, in turn, 

highlighting areas that need strengthened prevention controls. The 

following are examples of key detection techniques to be considered.

• Data mining. Data mining is a computer-based control activity that 

analyzes diverse data for relationships that have not previously been 

discovered. The central repository of data commonly used to perform 

data mining is called a data warehouse. Data warehouses store tables 

of historical and current information that are logically grouped. As a 

tool in managing improper payments, applying data mining to a data 

warehouse allows an organization to efficiently query the system to 

identify potential improper payments, such as multiple payments for 

an individual invoice to an individual recipient on a certain date, or to 

the same address. For example, in the Medicare and Medicaid 

program, data on claims are stored in geographically disbursed 

systems and databases and are not readily available to CMS’s 

program integrity analysts. CMS has been working for most of the 

past decade to consolidate program integrity data and analytical tools 

for detecting fraud, waste, and abuse. The agency’s efforts led to the 

initiation of the Integrated Data Repository (IDR) program, which is 

intended to provide CMS and its program integrity contractors with a 

centralized source that contains Medicaid and Medicare data from the 

many disparate and dispersed legacy systems and databases. CMS 

subsequently developed the One Program Integrity (One PI) 

program,28

 

28The One PI portal is a web-based user interface that enables a single log-in through 

centralized, role-based access to the system.

a web-based portal and set of analytical tools by which 

Implement Effective 

Detective Controls to 

Identify and Recover 

Overpayments
 

Page 17 GAO-12-405T 

these data can be accessed and analyzed to help identify cases of 

fraud, waste, and abuse based on patterns of paid claims.29

• Recovery auditing. While internal control should be maintained to help 

prevent improper payments, recovery auditing is used to identify and 

recover overpayments. The Tax Relief and Health Care Act of 2006 

required CMS to implement a national Medicare recovery audit 

contractor (RAC) program by January 1, 2010.30 In fiscal year 2011, 

HHS reported that the Medicare Fee-for-Service recovery audit 

program identified $961 million in overpayments and recovered $797 

million nationwide. Further, the Medicaid RAC program was 

established by the Patient Protection and Affordable Care Act.31 Each 

state must contract with a RAC, which is tasked with identifying and 

recovering Medicaid overpayments and identifying underpayments. 

The final regulations indicated that state Medicaid RACs were to be 

implemented by January 1, 2012. Similar to the Medicare RACs, 

Medicaid RACs will be paid on a contingency fee basis—a percentage 

of any recovered overpayments plus incentive payments for the 

detection of underpayments.

It is important to note that some agencies have reported statutory or 

regulatory barriers that affect their ability to pursue recovery auditing.

For example, in fiscal year 2011, the Office of Personnel Management 

(OPM) reported that it faces regulatory barriers that restrict its ability to 

recover overpayments for its Retirement Program. OPM reported that 

based on current law and Treasury’s regulations, financial institutions 

are barred from providing OPM with the information necessary to 

recover various overpayments. Only the Social Security 

Administration, Railroad Retirement Board, and the Department of 

Veterans’ Affairs may receive the information necessary to identify the 

withdrawer to attempt to recover the overpayments because those 

agencies are the only ones named in the law to receive that type of 

information from financial institutions. According to OPM, Treasury 

 

29We reported in July 2011 that IDR includes most types of Medicare claims data, but not 

the Medicaid data needed to help analysts detect improper payments of Medicaid claims. 

See Fraud Detection Systems: Centers for Medicare and Medicaid Needs to Ensure More 

Widespread Use, GAO-11-475 (Washington D.C.: July 12, 2011).

30Pub. L. No. 109-432, div B., title III, § 302, 120 Stat. 2922, 2991-92 (Dec. 20, 2006), 

codified at 42 U.S.C. § 1395ddd(h). 

31Pub. L. No. 111-148, §6411, 124 Stat. 119, 773 (Mar. 23, 2010).
 

Page 18 GAO-12-405T 

has drafted language to address the issue and is working to publish a 

notice of proposed rulemaking to amend its regulation.

In another instance, USDA reported that Section 281 of the 

Department of Agriculture Reorganization Act of 199432

• Federal-state incentives. Another area for further exploration is the 

broader use of incentives for states to implement effective preventive 

and detective controls.

precluded the 

use of recovery auditing techniques because Section 281 provides 

that 90 days after the decision of a state, county, or an area 

committee is final, no action may be taken to recover the amounts 

found to have been erroneously disbursed as a result of the decision 

unless the participant had reason to believe that the decision was 

erroneous. This statute is commonly referred to as the Finality Rule.

33 Agencies have applied limited incentives and 

penalties for encouraging improved state administration to reduce 

improper payments. Incentives and penalties can be helpful to create 

management reform and to ensure adherence to performance 

standards.

Chairman Platts and Ranking Member Towns, this completes my 

prepared statement. I would be happy to respond to any questions that 

you or other members of the subcommittee may have at this time.

 

32Pub. L. No. 103-354, § 281, 108 Stat. 3178, 3233 (Oct. 13, 1994), codified, as 

amended, at 7 U.S.C. § 7001.

33OMB’s implementing guidance for IPERA allows agencies to use up to 25 percent of 

funds recovered under a payment recapture audit program, including providing a portion 

of funding to state and local governments.
 

Page 19 GAO-12-405T 

For more information regarding this testimony, please contact Beryl H. 

Davis, Director, Financial Management and Assurance, at (202) 512-2623 

or by e-mail at DavisBH@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this testimony. Individuals making key contributions to this testimony 

included Jack Warner, Assistant Director; W. Tyler Benson; Francine 

Delvecchio; Crystal Lazcano; Kerry Porter; and Carrie Wehrly.

Contacts and 

Acknowledgments 
Related GAO Products

Page 20 GAO-12-405T 

For our report on the U.S. government’s consolidated financial statements 

for fiscal year 2011, see U.S. Department of the Treasury. 2011 Financial 

Report of the United States Government. Washington, D.C.: December 

23, 2011, pp. 211-231.

Medicaid Program Integrity: Expanded Federal Role Presents Challenges 

to and Opportunities for Assisting States. GAO-12-288T. Washington, 

D.C.: December 7, 2011

DOD Financial Management: Weaknesses in Controls over the Use of 

Public Funds and Related Improper Payments. GAO-11-950T. 

Washington, D.C.: September 22, 2011.

Improper Payments: Reported Medicare Estimates and Key Remediation 

Strategies. GAO-11-842T. Washington, D.C.: July 28, 2011.

Fraud Detection Systems: Centers for Medicare and Medicaid Needs to 

Ensure More Widespread Use. GAO-11-475. Washington, D.C.: July 12, 

2011

Improper Payments: Recent Efforts to Address Improper Payments and 

Remaining Challenges. GAO-11-575T. Washington, D.C.: April 15, 2011.

Improper Payments: Status of Fiscal Year 2010 Federal Improper 

Payments Reporting. GAO-11-443R. Washington, D.C.: March 25, 2011.

Opportunities to Reduce Potential Duplication in Government Programs, 

Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, 

D.C.: March 1, 2011.

High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 

2011.

Improper Payments: Significant Improvements Needed in DOD’s Efforts 

to Address Improper Payment and Recovery Auditing Requirements. 

GAO-09-442. Washington, D.C.: July 29, 2009.

Improper Payments: Progress Made but Challenges Remain in 

Estimating and Reducing Improper Payments. GAO-09-628T. 

Washington, D.C.: April 22, 2009.

Related GAO Products
Related GAO Products

Page 21 GAO-12-405T 

Improper Payments: Status of Agencies’ Efforts to Address Improper 

Payment and Recovery Auditing Requirements. GAO-08-438T. 

Washington, D.C.: January 31, 2008.

Improper Payments: Federal Executive Branch Agencies’ Fiscal Year 

2007 Improper Payment Estimate Reporting. GAO-08-377R. Washington, 

D.C.: January 23, 2008.

Improper Payments: Weaknesses in USAID’s and NASA’s 

Implementation of the Improper Payments Information Act and Recovery 

Auditing. GAO-08-77. Washington, D.C.: November 9, 2007.

Improper Payments: Federal and State Coordination Needed to Report 

National Improper Payment Estimates on Federal Programs. 

GAO-06-347. Washington, D.C.: April 14, 2006.

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