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GAO_GAO-06-1085
Background The structure of the armed forces is based on the Total Force concept, which recognizes that all elements of the structure—active duty military personnel, reservists, defense contractors, host nation military and civilian personnel, and DOD federal civilian employees—contribute to national defense. In recent years, federal civilian personnel have deployed along with military personnel to participate in Operations Joint Endeavor, conducted in the countries of Bosnia-Herzegovina, Croatia, and Hungary; Joint Guardian, in Kosovo; and Desert Storm, in Southwest Asia. Further, since the beginning of the Global War on Terrorism, the role of DOD’s federal civilian personnel has expanded to include participation in combat support functions in Operations Enduring Freedom and Iraqi Freedom. DOD relies on the federal civilian personnel it deploys to support a range of essential missions, including intelligence collection, criminal investigations, and weapon systems acquisition and maintenance. To ensure that its federal civilian employees will deploy to combat zones and perform critical combat support functions in theater, DOD established the emergency-essential program in 1985. Under this program, DOD designates as “emergency-essential” those civilian employees whose positions are required to ensure the success of combat operations or the availability of combat-essential systems. DOD can deploy federal civilian employees either on a voluntary or involuntary basis to accomplish the DOD mission. DOD Has Established Force Health Protection and Surveillance Policies for Deployed Federal Civilians, but Should Do More to Ensure That Components Comply with Its Requirements DOD has established force health protection and surveillance policies aimed at assessing and reducing or preventing health risks for its deployed federal civilian personnel; however, the department lacks procedures to ensure the components’ full implementation of its policies. In reviewing DOD federal civilian deployment records and other electronic documentation at selected component locations, we found that these components lacked documentation to show that they had fully complied with DOD’s force health protection and surveillance policy requirements for some federal civilian personnel who deployed to Afghanistan and Iraq. As a larger issue, DOD’s policies did not require the centralized collection of data on the identity of its deployed civilians, their movements in theater, or their health status, further hindering its efforts to assess the overall effectiveness of its force health protection and surveillance capabilities. In August 2006, DOD issued a revised policy (to be effective in December 2006) that outlines procedures to address its lack of centralized deployment and health-related data. However, the procedures are not comprehensive enough to ensure that DOD will be sufficiently informed of the extent to which its components fully comply with its requirements to monitor the health of deployed federal civilians. DOD Components Did Not Always Implement All Force Health Protection and Surveillance Requirements The DOD components included in our review lacked documentation to show that they always implemented force health protection and surveillance requirements for deployed federal civilians. These requirements include completing (1) pre-deployment health assessments to ensure that only medically fit personnel deploy outside of the United States as part of a contingency or combat operation; (2) pre-deployment immunizations to address possible health threats in deployment locations; (3) pre-deployment medical screenings for tuberculosis and human immunodeficiency virus (HIV); and (4) post-deployment health assessments to document current health status, experiences, environmental exposures, and health concerns related to their work while deployed. DOD’s force health protection and surveillance policies require the components to assess the medical condition of federal civilians to ensure that only medically fit personnel deploy outside of the United States as part of a contingency or combat operation. The policies stipulate that all deploying civilian personnel are to complete pre-deployment health assessment forms within 30 days of their deployments, and health care providers are to review the assessments to confirm the civilians’ health readiness status and identify any needs for additional clinical evaluations prior to their deployments. While the components that we included in our review had procedures in place that would enable them to implement DOD’s pre-deployment health assessment policies, it was not clear to what extent they had done so. Our review of deployment records and other documentation at the selected component locations found that these components lacked documentation to show that some federal civilian personnel who deployed to Afghanistan and Iraq had received the required pre-deployment health assessments. For those deployed federal civilians in our review, we found that, overall, a small number of deployment records (52 out of 3,771) were missing documentation to show that they had received their pre-deployment health assessments, as reflected in table 1. As shown in table 1, the federal civilian deployment records we included in our review showed wide variation by location regarding documentation of pre-deployment health assessments, ranging from less than 1 percent to more than 90 percent. On an aggregate component-level basis, at the Navy location in our review, we found that documentation was missing for 19 of the 52 records in our review. At the Air Force locations, documentation was missing for 29 of the 37 records in our review. In contrast, all three Army locations had hard copy or electronic records which indicated that almost all of their federal deployed civilians had received pre-deployment health assessments. Pre-deployment Immunizations In addition to completing pre-deployment health assessment forms, DOD’s force health protection and surveillance policies stipulate that all DOD deploying federal civilians receive theater-specific immunizations to address possible health threats in deployment locations. Immunizations required for all civilian personnel who deploy to Afghanistan and Iraq include: hepatitis A (two-shot series); tetanus-diphtheria (within 10 years of deployment); smallpox (within 5 years of deployment); typhoid; and influenza (within the last 12 months of deployment). As reflected in table 2, based on the deployment records maintained by the components at locations included in our review, the overall number of federal civilian deployment records lacking documentation of only one of the required immunizations for deployment to Afghanistan and Iraq was 285 out of 3,771. However, 3,313 of the records we reviewed were missing documentation of two or more immunizations. At the Army’s Fort Bliss, our review of its electronic deployment data determined that none of its deployed federal civilians had documentation to show that they had received immunizations. Officials at this location stated that they believed some immunizations had been given; however, they could not provide documentation as evidence of this. Pre-deployment Medical Screenings DOD policies require deploying federal civilians to receive certain screenings, such as for tuberculosis and HIV. Table 3 indicates that 55 of the 3,771 federal civilian deployment records included in our review were lacking documentation of the required tuberculosis screening; and approximately 35 were lacking documentation of HIV screenings prior to deployment. DOD’s force health protection and surveillance policies also require returning DOD federal civilian personnel to undergo post-deployment health assessments to document current health status, experiences, environmental exposures, and health concerns related to their work while deployed. The post-deployment process begins within 5 days of civilians’ redeployment from the theater to their home or demobilization processing stations. DOD’s policies require civilian personnel to complete a post- deployment assessment that includes questions on health and exposure concerns. A health care provider is to review each assessment and recommend additional clinical evaluation or treatment as needed. As reflected in table 4, our review of deployment records at the selected component locations found that these components lacked documentation to show that most deployed federal civilians (3,525 out of 3,771) who deployed to Afghanistan and Iraq had received the required post- deployment health assessments upon their return to the United States. Federal civilian deployment records lacking evidence of post-deployment health assessments ranged from 3 at the U.S. Army Corps of Engineers Transatlantic Programs Center and Wright-Patterson Air Force Base, respectively, to 2,977 at Fort Bliss. Lack of Centralized Deployment Information Hinders the Overall Effectiveness of Force Health Protection and Surveillance for Deployed Federal Civilian Personnel Beyond the aforementioned weaknesses found in the selected components’ implementation of force health protection and surveillance requirements for deploying federal civilians, as a larger issue, DOD lacks comprehensive, centralized data that would enable it to readily identify its deployed civilians, track their movements in theater, or monitor their health status, further hindering efforts to assess the overall effectiveness of its force health protection and surveillance capabilities. The Defense Manpower Data Center (DMDC) is responsible for maintaining the department’s centralized system that currently collects location-specific deployment information for military servicemembers, such as grid coordinates, latitude/longitude coordinates, or geographic location codes. However, DOD has not taken steps to similarly maintain centralized data on its deployed federal civilians. In addition, DOD had not provided guidance that would require its components to track and report data on the locations and movements of DOD federal civilian personnel in theaters of operations. In the absence of such a requirement, each DOD component collected and reported aggregated data that identified the total number of DOD federal civilian personnel in a theater of operations, but each lacked the ability to gather, analyze, and report information that could be used to specifically identify individuals at risk for occupational and environmental exposures during deployments. In previously reporting on the military services’ implementation of DOD’s force health protection and surveillance policies in 2003, we highlighted the importance of knowing the identity of servicemembers who deployed during a given operation and of tracking their movements within the theater of operations as major elements of a military medical surveillance system. We further noted the Institute of Medicine’s finding that documentation on the location of units and individuals during a given deployment is important for epidemiological studies and appropriate medical care during and after deployments. For example, this information allows epidemiologists to study the incidences of disease patterns across populations of deployed servicemembers who may have been exposed to diseases and hazards within the theater, and health care professionals to treat their medical problems appropriately. Without location-specific information for all of its deployed federal civilians and centralized data in its department-level system, DOD limits its ability to ensure that sufficient and appropriate consideration will also be given to addressing the health care concerns of these individuals. DOD also had not provided guidance to the components that would require them to forward completed deployment health assessments for all federal civilians to the Army Medical Surveillance Activity (AMSA), where these assessments are suppose to be archived in the Defense Medical Surveillance System (DMSS), integrated with other historical and current data on personnel and deployments, and used to monitor the health of personnel who participate in deployments. The overall success of deployment force protection and surveillance efforts, in large measure, depends on the completeness of health assessment data. The lack of such data may hamper DOD’s ability to intervene in a timely manner to address health care problems that may arise from DOD federal civilian deployments to overseas locations in support of contingency operations. DOD Has Taken Steps to Address Policy Shortcomings, but Lacks Mechanism to Oversee Components’ Compliance With increases in the department’s use of federal civilian personnel to support military operations, DOD officials have recognized the need for more complete and centralized location-specific deployment information and deployment-related health information on its deployed federal civilians. In this regard, in August 2006, the Office of the Under Secretary of Defense for Personnel and Readiness issued revised policy and program guidance that generally addressed the shortcomings in DOD’s force health protection and surveillance capabilities. The revised policy and guidance, scheduled to become effective in December 2006, require the components within 3 years, to electronically report (at least weekly) to DMDC, location-specific data for all deployed personnel, including federal civilians. In addition, the policy and guidance require the components to submit all completed health assessment forms to the AMSA for inclusion in DMSS. Nonetheless, DOD’s new policy is not comprehensive enough to ensure that the department will be sufficiently informed of the extent to which its components are complying with existing health protection requirements for its deployed federal civilians. Although the policy requires DOD components to report certain location-specific and health data for all of their deployed personnel, including federal civilians, it does not establish an oversight and quality assurance mechanism for assessing and ensuring the full implementation of the force health protection and surveillance requirements by all DOD components that our prior work has identified as essential in providing care to military personnel. In a September 2003 report on the Army’s and the Air Force’s compliance with force health protection policy for servicemembers, we noted that neither of the military services had fully complied with DOD’s force health protection and surveillance policies for many active duty servicemembers, including the policies requiring that servicemembers be assessed before and after deploying overseas and receive certain immunizations. We further noted that DOD, at that time, did not have an effective quality assurance program to provide oversight of, and ensure compliance with, the department’s force health protection and surveillance requirements, and that the lack of such a system was a major cause of the high rate of noncompliance that we identified at the units we visited. In response to a legislative mandate and our recommendation, DOD established an oversight mechanism to evaluate the success of its force health protection and surveillance policies in ensuring that servicemembers received pre- and post-deployment medical examinations and that record-keeping requirements were met. This oversight mechanism included (1) periodic site visits jointly conducted with staff from the Office of the Assistant Secretary for Health Affairs and staff from the military services to assess compliance with the deployment health requirements, (2) periodic reports from the services on their quality assurance programs, and (3) periodic reports from AMSA on health assessment data maintained in the centralized database. Until the department provides a similar oversight and quality assurance mechanism for its deployed federal civilians, it will not be effectively positioned to ensure compliance with its policies, or ensure the health care and protection of these individuals as they continue to support contingency operations. DOD Has Established and Implemented Medical Treatment Policies Which Provide for the Care of Its Deployed Federal Civilians DOD has established medical treatment policies that cover its federal civilians while they are deployed to support contingency operations in Afghanistan and Iraq, and available workers’ compensation claims we reviewed confirmed that those deployed federal civilians received care consistent with the policies. These policies state that DOD federal civilians who require treatment for injuries or diseases sustained during overseas hostilities may be provided care under the DOD military health system. Thus, DOD’s deployed federal civilians may receive care through the military’s treatment facilities. As shown in figure 1, DOD’s military health system provides four levels of medical care to personnel who are injured or become ill while deployed. Specifically, medical treatment during a military contingency begins with level one care, which consists of basic first aid and emergency care at a unit in the theater of operation. The treatment then moves to a second level of care, where, at an Aid station, injured or ill personnel are examined and evaluated to determine their priority for continued movement outside of the theater of operation and to the next (third) level of care. At the third level, injured or ill personnel are treated in a medical installation staffed and equipped for resuscitation, surgery, and postoperative care. Finally, at the fourth level of care, which occurs far from the theater of operation, injured or ill personnel are treated in a hospital staffed and equipped for definitive care. Injured or ill DOD federal civilians deployed in support of contingency operations in Afghanistan and Iraq who require level four medical care are transported to DOD’s Regional Medical Center in Landstuhl, Germany. Injured or ill DOD federal civilians who cannot be returned to duty in theater are evacuated to the United States for continuation of medical care. In these cases (or where previously deployed federal civilians later identify injuries or diseases and subsequently request medical treatment), DOD’s policy provides for its federal civilians who require treatment for deployment-related injuries or occupational illnesses to receive medical care through either the military’s medical treatment facilities or civilian facilities. The policy stipulates that federal civilians who are injured or become ill as a result of their deployment must file a Federal Employees’ Compensation Act (FECA) claim with DOD, which then files a claim with the Department of Labor’s Office of Workers’ Compensation Programs (OWCP). The Department of Labor’s OWCP is responsible for making a decision to award or deny medical benefits. OWCP must establish—based on evidence provided by the DOD civilian—that the employee is eligible for workers’ compensation benefits due to the injury or disease for which the benefits are claimed. To obtain benefits under FECA, DOD federal civilians must show that (1) they were employed by the U.S. government, (2) they were injured (exposed) in the workplace, (3) they have filed a claim in a timely manner, (4) they have a disabling medical condition, and (5) there is a causal link between their medical condition and the injury or exposure. Three avenues of appeal are provided for DOD federal civilians in the event that the initial claim is denied: (1) reconsideration by an OWCP claims examiner, (2) a hearing or review of the written record by OWCP’s Branch of Hearings and Review, and (3) a review by the Employees’ Compensation Appeals Board. DOD’s medical treatment process and the OWCP’s claims process are shown in figure 2. Overall, the claims we reviewed showed that the DOD federal civilians who sustained injuries or diseases while deployed had received care that was consistent with DOD’s medical treatment policies. Specifically, in reviewing a sample of seven workers’ compensation claims (out of a universe of 83) filed under the Federal Employees’ Compensation Act by DOD federal civilians who deployed to Iraq, we found that in three cases where care was initiated in theater the affected federal civilians had received treatment in accordance with DOD’s policies. For example, in one case, a deployed federal civilian was treated for traumatic injuries at a hospital outside of the theater of operation and could not return to duty in theater because of the severity of the injuries sustained. The civilian was evacuated to the United States and received medical care through several of the military’s medical treatment facilities as well as through a civilian facility. Further, in all seven claims that we reviewed, DOD federal civilians who requested medical care after returning to the United States, had, in accordance with DOD’s policy, received initial medical examinations and/or treatment for their deployment-related injuries or illnesses and diseases through either military or civilian treatment facilities. While OWCP has primary responsibility for processing and approving all FECA claims for medical benefits, as noted earlier, the scope of our review did not include assessing actions taken by the Department of Labor’s OWCP in further processing workers’ compensation claims for injured or ill civilians and authorizing continuation of medical care once their claims were submitted for review. Special Pays and Benefits Provided to Deployed DOD Federal Civilian and Military Personnel Generally Vary in Type and Amount DOD provides a number of special pays and benefits to its federal civilian personnel who deploy in support of contingency operations, which are generally different in type and in amount from those provided to deployed military personnel. Both groups receive special pays, but the types and amounts differ. In our modeled scenarios, the overall amounts of compensation, which include special pays, were higher for DOD federal civilian personnel than for military personnel. DOD federal civilian personnel also receive different types and amounts of disability benefits, depending on specific program provisions and individual circumstances. Further, survivors of deceased DOD federal civilian and military personnel generally receive comparable types of cash survivor benefits—lump sum, recurring, or both—but benefit amounts differ for the two groups. Survivors of DOD federal civilian personnel, however, almost always receive lower noncash benefits than military personnel. Deployed DOD Federal Civilian and Military Personnel Generally Receive Various Special Pays to Compensate Them for Conditions of Deployment, but the Types and Amounts Differ DOD federal civilian and military personnel are both eligible to receive special pays to compensate them for the conditions of deployment. As shown in table 5, some of the types of special pays are similar for both DOD federal civilian and military personnel, although the amounts paid to each group differ. Other special pays were unique to each group. DOD federal civilian and military personnel deployed to posts with unusually difficult or unhealthful conditions or severe physical hardships are authorized a similar type of post (hardship) differential. In addition, danger pay is granted to both groups serving at a post where civil insurrection, civil war, or war-like conditions exist. In this context, DOD federal civilian personnel who are deployed to Afghanistan and Iraq are eligible to receive post (hardship) differential and danger pay, each equivalent to 35 percent of their base salaries. In contrast, military personnel receive monthly pays of $100 for hardship duty and $225 for imminent danger. However, some special pays are unique to each group. For example, to partially reimburse those who are involuntarily separated from their dependents, military personnel are eligible to receive a family separation allowance that is not available to deployed DOD federal civilian personnel. Additionally, unlike DOD federal civilian personnel, military personnel also receive a combat zone tax exclusion while deployed to Afghanistan and Iraq that excludes certain income from federal taxes. DOD federal civilian personnel, by contrast, are eligible for a variety of premium pays, such as overtime and night differential, that are not available to military personnel. Although DOD federal civilian and military personnel generally receive various special pays to compensate them for conditions of deployment, in certain scenarios that we modeled, the overall amounts of compensation payments were higher for DOD federal civilian personnel than for military personnel, as illustrated in tables 6 and 7. DOD Federal Civilian and Military Personnel Receive Different Types and Amounts of Disability Benefits, Depending on Specific Program Provisions and Individual Circumstances In the event of sustaining an injury while deployed, DOD federal civilian and military personnel are eligible to receive two broad categories of disability benefits—disability compensation and disability retirement. However, the benefits applicable to each group vary by type and amount, depending on specific program provisions and individual circumstances. Within these broad categories, there are three main types of disability: (1) temporary disability, (2) permanent partial disability, and (3) permanent total disability. Temporary Disability Benefits Both DOD federal civilian and military personnel who are injured in the line of duty are eligible to receive continuation of their pay during the initial period of treatment and may be eligible to receive recurring payments for lost wages. However, the payments to DOD federal civilian personnel are based on their salaries and whether the employee has any dependents, regardless of the number, which can vary significantly, whereas disability compensation payments made by the Department of Veterans Affairs (VA) to injured military personnel are based on the severity of the injury and their number of dependents. DOD federal civilian personnel are eligible to receive continuation of pay (salary) for up to 45 days, followed by a recurring payment for wage loss which is based on a percentage of salary and whether they have any dependents, up to a cap. In contrast, military personnel receive continuation of pay of their salary for generally no longer than a year, followed by a recurring VA disability compensation payment for wage loss that is based on the degree of disability and their number of dependents, and temporary DOD disability retirement for up to 5 years. Appendix II provides additional information on temporary disability compensation payments for federal civilian and military personnel. To illustrate the way in which the degree of impairment and an individual’s salary can affect temporary disability compensation, in our April 2006 review, we compared the disability benefits available to military personnel with those available to comparable civilian public safety officers at the federal, state, and local levels. We found that VA compensation payments for military personnel were based on a disability rating, regardless of salary level; in contrast, compensation payments for civilian public safety officers were based on salary level, regardless of disability level. Thus, for an individual with severe injuries and relatively low wages, VA compensation payments for military personnel were generally higher than those of the civilian public safety officers included in the reviews. However, if an individual had less severe injuries and high wages, VA compensation payments for military personnel were generally lower than those of the civilian public safety officers included in the review. Permanent Partial Disability Benefits When a partial disability is determined to be permanent, DOD federal civilian and military personnel can continue to receive recurring compensation payments. For DOD federal civilian personnel, these payments are provided for the remainder of life as long as the impairment persists, and can vary significantly depending upon the salary of the individual and the existence of dependents. Military personnel are also eligible to receive recurring VA disability compensation payments for the remainder of their lives, and these payments are based on the severity of the servicemember’s injury and the number of dependents. In addition, both groups are eligible to receive additional compensation payments beyond the recurring payments just discussed, based on the type of impairment. DOD federal civilians with permanent partial disabilities receive a schedule of payments based on the specific type of impairment (sometimes referred to as a schedule award). Some impairments may result in benefits for a few weeks, while others may result in benefits for several years. Similarly, military personnel receive special monthly VA compensation payments depending on the specific type and degree of impairment. Appendix II provides more detailed information on permanent partial disability compensation payments for DOD federal civilian and military personnel. Our April 2006 review compared the compensation benefits available to military personnel with those available to federal civilian public safety officers, among others, using several scenarios. Our analysis showed that when able to return to duty, military personnel often received a greater amount of compensation benefits over a lifetime than did civilians, even when the monthly benefit payment was substantially lower and receipt of benefits was delayed for several years. Permanent partial disabilities that prevent civilian and military personnel from returning to duty in their current jobs may entitle them to receive disability retirement benefits based on a percentage of salary in addition to compensation benefits; however, the eligibility criteria and benefit amounts differ. Under the Civil Service Retirement System (CSRS), DOD federal civilian personnel must be unfit for duty and have 5 years of service to qualify for disability retirement benefits. Under the Federal Employees’ Retirement System (FERS), civilian personnel must be unfit for duty and have 18 months of service. DOD federal civilian personnel must elect either compensation benefits or disability retirement. Military personnel who are unfit for duty are eligible for DOD disability retirement benefits if they have a disability rating of 30 percent or more regardless of length of service, or if they have 20 years or more of service regardless of disability rating. The amount of the DOD disability retirement payment is offset dollar for dollar, however, by the amount of the monthly VA disability compensation payment unless they have at least 20 years of service and a disability rating of 50 percent or more, or combat-related disabilities. Our April 2006 review of disability benefits showed that when military personnel and federal civilian public safety officers were unable to return to duty due to a permanent partial disability, such as a leg amputation, the combined compensation and retirement benefits provided to the military personnel over a lifetime were sometimes more, and sometimes less, than the combined benefits provided to civilian public safety officers. Permanent Total Disability Benefits When an injury is severe enough to be deemed permanent and total, DOD federal civilian and military personnel may receive similar types of benefits such as disability compensation and retirement payments; however, the amounts paid to each group vary. For civilian personnel, the monthly payment amounts for total disability are generally similar to those for permanent partial disability described earlier, but unlike with permanent partial disabilities, the payments do not take into account any wage earning capacity. Both groups are eligible to receive additional compensation payments beyond the recurring payments that are similar to those for permanent partial disability. DOD federal civilians with permanent disabilities receive a schedule award based on the specific type of impairment. In addition, DOD federal civilian personnel may be eligible for an additional attendant allowance—up to $1,500 per month during 2006—if such care is needed. Military personnel receive special monthly VA compensation payments for particularly severe injuries, such as amputations, blindness, or other loss of use of organs and extremities. The payments are designed to account for attendant care or other special needs deriving from the disability. In addition to disability compensation, both DOD federal civilian and military personnel have access to disability retirement benefits for permanent total disabilities. The provisions for election and offset of disability compensation and disability retirement benefits in cases of permanent total disability are similar to provisions in cases of permanent partial disability discussed earlier. Another benefit available to DOD federal civilian and military personnel with permanent total disabilities is Social Security Disability Insurance (SSDI). SSDI benefits are available to individuals who incur a physical or mental impairment that prevents them from performing substantial gainful activity and that is expected to last at least 1 year or to result in death. The benefit is based on the employee’s earnings history and lifetime contributions to Social Security; therefore, the benefit amounts vary widely among individuals. DOD federal civilian personnel covered by FERS and military personnel pay into Social Security and thus may be eligible to receive SSDI benefits. The maximum benefit to both groups in 2006 was $2,053 per month. However, DOD federal civilian personnel must choose between either compensation payments and SSDI benefits or have their disability retirement payments reduced when receiving SSDI benefits. Survivors of DOD Federal Civilian and Military Personnel Received Comparable Types of Benefits, but Benefit Amounts Differ Survivors of deceased DOD federal civilian and military personnel generally receive similar types of cash survivor benefits—either as a lump sum, a recurring payment, or both—through comparable sources. However, the benefit amounts generally differ for each group. Survivors of DOD federal civilian and military personnel also receive noncash benefits that differ in type and amounts. As shown in table 8, survivors of deceased DOD federal civilian and military personnel both receive lump sum benefits in the form of Social Security, a death gratuity, burial expenses, and life insurance. Social Security provides $255 upon the death of a DOD federal civilian employee or military member. In addition, survivors of deceased DOD federal civilian personnel receive a death gratuity of up to $10,000, while survivors of deceased military personnel receive $100,000. The payment for funeral expenses provided to survivors of deceased DOD federal civilian personnel can be as high as $800, plus $200 for costs associated with terminating employee status, while it can be $7,700 for deceased military personnel. Life insurance is another common source of benefits for the survivors of many deceased civilian and military personnel. Survivors of deceased federal civilian personnel receive a payment equal to the civilian’s rate of basic pay, rounded to the nearest thousand, plus $2,000. Military personnel automatically are insured as part of the Servicemembers’ Group Life Insurance for up to $400,000, unless they elect less or no coverage. DOD federal civilian employees also receive a survivor benefit in their retirement plans. Survivors of deceased DOD federal civilian and military personnel are also eligible for recurring benefits, some of which are specific to each group, as shown in table 9. Survivors of both deceased DOD federal civilian and military personnel may be eligible to receive recurring Social Security payments based on the deceased individual’s earnings in a covered period. However, other types of recurring payments are specific to either civilian or military personnel. For example, survivors of DOD federal civilian personnel may receive recurring payments from a retirement plan or workers’ compensation if the death occurred while in the line of duty. Survivors of deceased military personnel also receive payments through the Survivor Benefit Plan, Dependency and Indemnity Compensation, or both. In addition to lump sum and recurring benefits, survivors of deceased DOD federal civilians and military personnel receive noncash benefits. As shown in table 10, survivors of deceased military personnel receive more noncash benefits than do those of deceased DOD federal civilian personnel, with few benefits being comparable in type. For example, eligible survivors of military personnel who die while on active duty obtain benefits such as rent-free government housing or tax- free housing allowances for up to 365 days, relocation assistance, and lifetime access to commissaries and exchanges that are not available to civilian personnel who die in the line-of-duty. However, survivors of both deceased DOD federal civilian and military personnel do continue to receive health insurance that is wholly or partially subsidized. Conclusions As DOD’s federal civilian employees assume an expanding role in helping the department support its contingency operations overseas, the need for attention to the policies and benefits that affect the health and welfare of these individuals becomes increasingly significant. DOD currently has important policies in place that relate to the deployment of its federal civilians. However, it lacks an adequate oversight and quality assurance mechanism to ensure compliance and quality of service. Thus, not all of its policies—such as those that define the department’s requirements for force health protection and surveillance—are being fully implemented by the DOD components. Until DOD improves its oversight in this area, it will jeopardize its ability to be effectively informed of the extent to which its federal civilians are screened and deemed medically fit to deploy in support of contingency operations; deployed civilian personnel receive needed immunizations to counter theater disease threats; and what medical follow-up attention federal civilians require for health problems or concerns that may arise following their deployment. Recommendation for Executive Action To strengthen DOD’s force health protection and surveillance for its federal civilian personnel who deploy in support of contingency operations, we recommend that the Secretary of Defense direct the Office of the Under Secretary of Defense for Personnel and Readiness to establish an oversight and quality assurance mechanism to ensure that all components fully comply with its requirements. Agency Comments and Our Evaluation In written comments on a draft of this report, DOD partially concurred with our recommendation. The department acknowledged the necessity for all deployed civilians to receive required medical assessments and immunizations, and that documentation must be available in every instance. The department outlined several steps it intends to take to determine appropriate implementation of our recommendation. Specifically, the department stated that it has written and coordinated a new DOD instruction, scheduled to become effective before the end of 2006, that establishes a comprehensive DOD force health protection quality assurance program that will apply to DOD civilian personnel accompanying deploying military forces. While DOD’s response is encouraging, we remain concerned that the department’s description of the actions it plans to take to assess the components’ compliance with its requirements lacks sufficient detail. DOD was unable to provide us with a copy of the new instruction; thus, we could not evaluate the comprehensiveness of its new force health protection quality assurance program or determine whether the program identifies specific actions the department plans to take for assessing and ensuring the full implementation of the force health protection and surveillance requirements by all DOD components. DOD also stated that proposed revisions to its directives and instructions that address the planning, preparation, and utilization of DOD civilians include, among other things, annual assessments for compliance with pre-and post-deployment medical assessment requirements. However, the department did not describe what actions, if any, it plans to take to ensure that it will be sufficiently informed of the extent to which its components are complying with existing health protection requirements for its deployed federal civilians. In the absence of more specific details on its planned actions, we continue to emphasize the department’s need for a comprehensive oversight and quality assurance mechanism without which it will not be effectively positioned to ensure compliance with its policies, or ensure the health care and protection of its deployed federal civilians as they continue to support contingency operations. In addition to its comments on our recommendation, the department took issue with some of our specific findings. DOD questioned our findings that in many cases DOD components were unable to produce documentation confirming that deployed federal civilians had received necessary pre- or post-deployment medical assessments, or immunizations. The department stated that DOD activities, particularly regarding the Army Corps of Engineers, Transatlantic Programs Center (TPC), had determined that documentation did exist for many records included in our review, thus raising reservations about our findings. In particular, the department stated that the number (and percent) of records missing two or more immunizations that we reported for TPC was inaccurate. It stated that based on TPC’s review of the specific documentation that we used to support our findings, we had actually identified 69 records (54.3 percent) as missing two or more immunizations, rather than 85 (66.9 percent) noted in our draft report. We disagree. TPC overlooked 16 records included in our review that lacked documentation of any immunizations. Moreover, as we noted in our report, to provide assurances that the results of our review of hard copy deployment records at the selected component locations were accurate, we requested that each component’s designated medical personnel reexamine those deployment records that we determined were missing required health documentation. We then adjusted our results in those instances where documentation was subsequently provided. To provide additional assurances regarding our determinations, we requested that each component’s designated medical personnel review and sign the data collection instrument that we used to collect deployment health information from each individual civilian’s deployment record attesting to our conclusions regarding the existence of health assessment or immunization documentation. DOD also stated that we inappropriately mixed discussion of Veterans Affairs and DOD benefits without distinguishing between the two. However, our report appropriately discusses two broad categories of “government-provided” benefits: (1) those provided by DOD and (2) those provided by VA. Nonetheless, to further clarify this section of our report, we added “VA” and “DOD” to our discussions of disability compensation and retirement benefits for military personnel. DOD also stated that our discussion of military disability benefits presented incorrect information in many cases, indicating that our statements that compensation payments for military personnel were based on a disability rating, regardless of salary level is only true with regard to VA disability benefits. DOD also stated that DOD disability payments do, in fact, take into account salary level, and that if a former member is entitled to both, there is an offsetting mechanism. We agree. As we state in our report, under veterans’ compensation programs, benefits typically include cash payments to replace a percentage of the individual’s loss in wages while injured and unable to work. We also state that disability retirement benefits for military personnel are based on a percent of salary in addition to compensation benefits, and that the amount of retirement payment is offset dollar for dollar by the amount of monthly compensation payment unless military personnel have at least 20 years of service and a disability rating of 50 percent or more, or have combat-related disabilities. Further, DOD submitted detailed comments related to our analysis of special pays and benefits provided to deployed DOD federal civilian and military personnel. In particular, the department stated that our selection and presentation of the associated data on the special pays and benefits provided to DOD federal civilian and military personnel could easily mislead the reader into drawing erroneous conclusions. The department also stated that our comparisons did not take into account the relative value of certain key benefits for which explicit dollar amounts cannot be measured, such as retirement systems, health care systems, and military commissary exchange privileges. To the contrary, our report did discuss this limitation, and as is the case with any modeled scenarios based on certain assumptions, some of the factors with the potential to affect the overall outcomes of our comparisons could not be included because of, as DOD pointed out, the relative value of certain key benefits for which explicit dollar amounts cannot be measured. It is partly for this reason that we acknowledged in the report that we do not take a position on the adequacy or appropriateness of the special pays and benefits provided to DOD federal civilian and military personnel. DOD also requested that we clearly acknowledge the fundamental differences between the military and civilians systems. We believe that we have done so. As we noted in our report, we did not make direct analytical comparisons between compensation and benefits offered by DOD to deployed federal civilian and military personnel because such comparisons must account for the demands of the military service, such as involuntary relocation, frequent and lengthy separations from family, and liability for combat. DOD provided other technical comments, which we have incorporated as appropriate. The department’s comments are reprinted in their entirety in appendix III. We are sending copies of this report to the Chairman and Ranking Minority Member, Senate Committee on Armed Services; the Chairman and Ranking Minority Member, House Committee on Armed Services; the Chairman and Ranking Minority Member, Subcommittee on Defense, Senate Committee on Appropriations; and the Chairman and Ranking Minority Member, Subcommittee on Defense, House Committee on Appropriations; and other interested congressional parties. We are also sending copies to the Secretary of Defense and the Under Secretary of Defense for Personnel and Readiness. We will make copies available to other interested parties upon request. Copies of this report will also be made available at no charge on GAO’s Web site at http://www.gao.gov. Should you or your staff have any questions about this report, please contact me at (202) 512-6304 or by e-mail at melvinv@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. Appendix I: Scope and Methodology To assess the extent to which DOD has established force health protection and surveillance policies for DOD federal civilians who deploy outside of the United States in support of contingency operations, and how the components (military services and the Defense Contract Management Agency) have implemented those policies, we reviewed pertinent force health protection and surveillance policies and discussed these policies with the following offices or commands: U.S. Central Command; Joint Chiefs of Staff, Manpower and Personnel; Under Secretary of Defense for Personnel and Readiness (including the Assistant Secretary of Defense for Health Affairs, Deployment Health Support Directorate; Civilian Personnel Policy; and Civilian Personnel Management Services); the Surgeons General for the Army, Navy, and Air Force; and the Defense Contract Management Agency (DCMA). Our review focused on DOD federal civilians who (1) deployed to Afghanistan or Iraq for 30 continuous days or more between June 1, 2003, and September 30, 2005, and (2) returned to the United States by February 28, 2006. Because DOD had difficulty identifying the total number of federal civilians who deployed to Afghanistan or Iraq, we assessed the implementation of DOD’s deployment health requirements at eight component locations that were selected using a number of approaches. Given that DOD components have flexibility in where they conduct deployment processing, we selected locations for our review accordingly. Specifically, the Army uses a centralized approach, deploying its federal civilians at three primary locations; therefore, we selected all three locations for review. By contrast, the Navy and Air Force use a decentralized approach, deploying their federal civilians from their home stations. For these components, we selected five locations based on data that indicated that these locations had deployed the largest numbers of federal civilian personnel. DCMA was included in our review because it had deployed the largest number of federal civilian personnel compared to other defense agencies. DCMA has an informal agreement with the Army to process its federal civilians through two of the Army’s three deployment locations. Therefore, DCMA federal civilian deployment data in this report are included in the Army results to the extent that DCMA federal civilian deployments were documented at the two relevant Army locations. At all eight component locations, we reviewed either all available hard copy or electronic deployment records, or in one instance, a sample of the deployment records for deployed federal civilian personnel who met our criteria above. Table 11 shows the locations included in our review and the number of deployment records reviewed at each location. In total, we reviewed 3,431 hard copy and automated records for federal civilian personnel who deployed to Afghanistan and Iraq. Specifically, we reviewed hard copies of deployment records for 454 (out of a reported 822) federal civilian personnel at seven component locations and automated deployment records for 2,977 (out of the reported 2,977) federal civilian personnel at the other location where all deployment records were being maintained electronically. The results of deployment record reviews, however, could not be projected beyond the samples to all DOD federal civilians who had deployed during this time frame. To facilitate our review of federal civilian deployment records at the selected component locations, we developed a data collection instrument to review and collect deployment health information from each individual civilian’s deployment record. For federal civilians in our review at each location, we reviewed deployment records for documentation that the following force health protection and surveillance policy requirements were met: Pre-and post-deployment health assessments; Tuberculosis screening test (within 1 year of deployment); Human Immunodeficiency Virus (HIV) screening test; Pre-deployment immunizations: hepatitis A (first and second course); influenza (within 1 year of deployment); tetanus-diphtheria (within 10 years of deployment); typhoid; and smallpox (within 5 years of deployment) After our review of hard copy deployment records, we requested each component’s medical personnel to reexamine those hard copy deployment records that were missing required health documentation, and we adjusted our results where documentation was subsequently provided. We also requested and queried other documentation from information systems used by the components to capture deployment and related health information, making adjustments to our results where documentation was found in the systems. These data sources included the Army’s Medical Protection System (MEDPROS), the Army’s medical database (MedBase), the Air Force’s Preventive Health Assessment and Individual Medical Readiness (PIMR) system and its Comprehensive Immunization Tracking Application (CITA), DOD’s Defense Enrollment Eligibility Reporting System (DEERS), which is used by the Navy, and the Army Medical Surveillance Activity’s Defense Medical Surveillance System (DMSS). At the Army’s Fort Benning, we created a sampling frame (i.e., total population) of records for 606 federal civilian deployments between June 1, 2003, and September 30, 2005. Our study population was limited to DOD federal civilians who deployed to Afghanistan or Iraq. We then drew a stratified random sample of 288 deployment records and stratified the sample to isolate potential duplicate deployment records for the same federal civilian. We found two duplicate records and removed them from both the population and sample, as shown in table 12. We also removed another 14 deployment records from our sample because those DOD federal civilians had been deployed to locations other than Afghanistan or Iraq, and were not eligible for the duty population. In addition, we removed another 13 deployment records that were originally selected as potential replacement records; however, we found that those replacements were not needed. Ultimately, we identified 238 in-scope responses, for a weighted response rate of 87 percent. Each sampled record was subsequently weighted in the analysis to represent all DOD federal civilians deployed to Afghanistan or Iraq. The disposition of the federal civilian deployment records we reviewed at Fort Benning are summarized in the following table: Our probability sample is only one of a large number of samples that we might have drawn. Because each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval. This is the interval that would contain the actual population value for 95 percent of the Fort Benning, Ga., samples we could have drawn. All percentage estimates from our sample have margins of error (that is, widths of confidence intervals) of plus or minus 5 percentage points or less, at the 95 percent confidence level, unless otherwise noted. We took steps to assess the reliability of DOD federal civilian deployment and health data for the purposes of this review, including consideration of issues such as the completeness of the data from the respective information systems’ program managers and administrators. We also examined whether the data were subjected to quality control measures such as periodic testing of the data against deployment records to ensure the accuracy and reliability of the data. In addition, we reviewed existing documentation related to the data sources and interviewed knowledgeable agency officials about the data. We did not find these deployment and health data to be sufficiently reliable for (1) identifying the universe of DOD federal civilian deployments or (2) use as the sole source for reviewing the health and immunization information for all DOD federal civilian deployments, but we found the information systems to be sufficiently reliable when used as one of several sources in our review of deployment records. In those instances where we did not find a deployment health assessment or immunization in either the deployment records or in the electronic data systems, we concluded that the health assessment or immunization was not documented. To determine the extent to which DOD has established and the components have implemented medical treatment policies for DOD federal civilians who deployed in support of contingency operations, we examined pertinent medical treatment policies for DOD federal civilian employees who required treatment for injuries and diseases sustained while supporting contingency operations. In addition, we obtained workers’ compensation claims filed by DOD federal civilian personnel with the Department of Labor’s Office of Workers’ Compensation Programs(OWCP) showing those civilians who sustained injuries and diseases during deployment. We selected and reviewed a non-probability sample of claims to assess the components’ processes and procedures for implementing DOD’s medical treatment policies across a range of civilian casualties including injuries, physical and mental illnesses, and diseases. The scope of our review did not extend to the Department of Labor’s claims review process. To identify special pays and benefits provided to DOD federal civilians who deployed in support of contingency operations and to assess the extent that special pays and benefits differ from those provided to deployed active duty military personnel, we examined major statutory provisions for special pays, disability and death benefits for federal civilians and military personnel, including relevant chapters of Title 5 of the U.S. Code governing federal civilian personnel management; relevant chapters of Title 10 of the U.S. Code governing armed forces personnel management; Section 112 of Title 26 of the U.S. Code governing combat zone tax exemption; relevant chapters of Title 37 of the U.S. Code governing pay and allowances for the uniformed services; relevant chapters of Title 38 of the U.S. Code governing veterans’ benefits; relevant provisions of applicable public laws governing military and civilian pay and benefits; applicable directives and instructions related to active duty military and DOD federal civilian benefits and entitlements; DOD financial management regulations; Department of State regulations; and prior GAO reports. In addition, we discussed the statutes and guidance with cognizant officials of the Office of the Under Secretary of Defense for Personnel and Readiness, military services’ headquarters, and the Defense Contract Management Agency involved with the administration of active duty and federal civilian personnel entitlements. We did not perform a comprehensive review of all compensation—comprised of a myriad of pays and benefits—offered to active duty military and federal civilian personnel in general. Our analysis focused on selected elements of compensation such as special pays (e.g., hostile fire/imminent danger pay). Also, we did not make direct analytical comparisons between compensation and benefits offered by DOD to deployed federal civilian and military personnel because such comparisons must account for the demands of the military service, such as involuntary relocation, frequent and lengthy separations from family, and liability for combat. After reviewing documents and interviewing officials, we then compiled and analyzed the information on the types and amounts of special pays and benefits available to active duty military and DOD federal civilian personnel who deployed to Afghanistan or Iraq. We interviewed DOD officials to discuss the basis for any differences in compensation. In addition, to illustrate how special pays affect overall compensation provided to DOD federal civilian and military personnel, we modeled scenarios for both groups using similar circumstances, such as length of deployment, pay grades, special pays (e.g., post differential pay, danger pay, overtime pay, family separation allowance, basic allowance for housing, basic allowance for subsistence), and duty location. Through discussions with senior DOD officials, we made an assumption that deployed DOD federal civilians worked 30 hours of overtime per week. For deployed DOD federal civilians, we subtracted a contribution of $15,000 to the Thrift Savings Plan (TSP) to obtain the adjusted gross income. We assumed that DOD federal civilians, temporarily at a higher tax bracket, would take maximum advantage of the opportunity to defer taxes. We assumed that the military personnel would contribute a smaller percentage of pay, 5 percent of gross income, to TSP. We made this assumption because much of the military pay was not subject to federal taxes, which removes the incentive to contribute to TSP, and because unlike for federal workers, military TSP does not have a matching component. For military personnel, we also deducted the amount of pay not subject to taxes due to the combat zone exclusion, family separation allowance, basic allowance for subsistence, and basic allowance for housing. Using these assumptions, we generated an adjusted gross income and used that as input into a commercial tax program, Turbo Tax, to obtain federal taxes owed. We assumed that both DOD federal civilian and military personnel were married, filing jointly, with a spouse that earned no income. We assumed that the family had two children and qualified for two child tax credits, and the Earned Income Tax Credit, if at that income level. This resulted in four exemptions and a standard deduction of $10,000 in 2005. For purposes of validation, we repeated this exercise using an alternate tax program, Tax Cut, and obtained identical results. We conducted our review from March 2006 to August 2006 in accordance with generally accepted government auditing standards. Appendix II: Temporary and Permanent Partial Disability Benefits Provided to DOD Federal Civilian and Military Personnel Both DOD federal civilian and military personnel are eligible to receive disability benefits when they sustain a line-of-duty injury. However, these benefits vary in amount. Table 13 shows the temporary disability benefits available to eligible DOD federal civilian and military personnel. As table 13 shows, DOD federal civilians who are injured in the line of duty are eligible to receive continuation of their salary up to 45 days, followed by a recurring payment for wage loss that is based on a percentage of their salary and the existence of dependents, up to a cap. In contrast, military personnel receive continuation of their salaries for generally no longer than a year, followed by a recurring payment for wage loss, which is based on the degree of disability and their number of dependents, and temporary retirement pay based on salary for up to 5 years. When a partial disability is determined to be permanent, both DOD federal civilians and military personnel are eligible to continue receiving recurring compensation payments, but again, the amounts of these benefits vary, as shown in table 14. As table 14 shows, DOD federal civilian personnel with permanent partial disabilities receive payments based on salary and dependents while military personnel receive payments based on the severity of the injury and their number of dependents, as long as the condition persists. Appendix III: Comments from the Department of Defense Appendix IV: GAO Contact and Staff Acknowledgments Acknowledgments In addition to the contact named above, Sandra Burrell, Assistant Director; William Bates; Dr. Benjamin Bolitzer; Alissa Czyz; George Duncan; Steve Fox; Dawn Godfrey; Nancy Hess; Lynn Johnson; Barbara Joyce; Dr. Ronald La Due Lake; William Mathers; Paul Newton; Dr. Charles Perdue; Jason Porter; Julia Matta; Susan Tieh; John Townes; and Dr. Monica Wolford made key contributions to this report.
As the Department of Defense (DOD) has expanded its involvement in overseas military operations, it has grown increasingly reliant on its federal civilian workforce to support contingency operations. The Senate Armed Services Committee required GAO to examine DOD's policies concerning the health care for DOD civilians who deploy in support of contingency operations in Afghanistan and Iraq. GAO analyzed over 3,400 deployment-related records for deployed federal civilians and interviewed department officials to determine the extent to which DOD has established and the military services and defense agencies (hereafter referred to as DOD components) have implemented (1) force health protection and surveillance policies and (2) medical treatment policies and procedures for its deployed federal civilians. GAO also examined the differences in special pays and benefits provided to DOD's deployed federal civilians and military personnel. DOD has established force health protection and surveillance policies to assess and reduce or prevent health risks for its deployed federal civilian personnel, but it lacks procedures to ensure implementation. Our review of over 3,400 deployment records at eight component locations found that components lacked documentation that some federal civilian personnel who deployed to Afghanistan and Iraq had received, among other things, required pre- and post-deployment health assessments and immunizations. These deficiencies were most prevalent at Air Force and Navy locations, and one Army location. As a larger issue, DOD lacked complete and centralized data to readily identify its deployed federal civilians and their movement in theater, further hindering its efforts to assess the overall effectiveness of its force health protection and surveillance capabilities. In August 2006, DOD issued a revised policy which outlined procedures that are intended to address these shortcomings. However, these procedures are not comprehensive enough to ensure that DOD will know the extent to which its components are complying with existing health protection requirements. In particular, the procedures do not establish an oversight and quality assurance mechanism for assessing the implementation of its force health protection and surveillance requirements. Until DOD establishes a mechanism to strengthen its force health protection and surveillance oversight, it will not be effectively positioned to ensure compliance with its policies, or the health care and protection of deployed federal civilians. DOD has also established medical treatment policies for its deployed federal civilians which provide those who require treatment for injuries or diseases sustained during overseas hostilities with care that is equivalent in scope to that provided to active duty military personnel under the DOD military health system. GAO reviewed a sample of seven workers' compensation claims (out of a universe of 83) filed under the Federal Employees' Compensation Act by DOD federal civilians who deployed to Iraq. GAO found in three cases where care was initiated in theater, that the affected civilians had received treatment in accordance with DOD's policies. In all seven cases, DOD federal civilians who requested care after returning to the United States had, in accordance with DOD's policies, received medical examinations and/or treatment for their deployment-related injuries or diseases through either military or civilian treatment facilities. DOD provides certain special pays and benefits to its deployed federal civilians, which generally differ in type and/or amount from those provided to deployed military personnel. For example, both civilian and military personnel are eligible to receive disability benefits for deployment-related injuries; however, the type and amount of these benefits vary, and some are unique to each group. Further, while the survivors of deceased federal civilian and military personnel generally receive similar types of cash survivor benefits, the comparative amounts of these benefits differ.
GAO_GAO-06-1113T
Background Current Federal Taxation of Businesses Most income derived from private sector business activity in the United States is subject to federal corporate income tax, the individual income tax, or both. The tax treatment that applies to a business depends on its legal form of organization. Firms that are organized under the tax code as “C” corporations (which include most large, publicly held corporations) have their profits taxed once at the entity level under the corporate income tax (on a form 1120) and then a second time under the individual income tax when profits are transferred to individual shareholders in the form of dividends or realized capital gains. Firms that are organized as “pass-through” entities, such as partnerships, limited liability companies, and “S” corporations are generally not taxed at the entity level; however, their net incomes are passed through each year and taxed in the hands of their partners or shareholders under the individual income tax (as part of those taxpayers’ form 1040 filing). Similarly, income from businesses that are owned by single individuals enters into the taxable incomes of those owners under the individual income tax and is not subject to a separate entity-level tax. The base of the federal corporate income tax includes net income from business operations (receipts, minus the costs of purchased goods, labor, interest, and other expenses). It also includes net income that corporations earn in the form of interest, dividends, rent, royalties, and realized capital gains. The statutory rate of tax on net corporate income ranges from 15 to 35 percent, depending on the amount of income earned. The United States taxes the worldwide income of domestic corporations, regardless of where the income is earned, with a foreign tax credit for certain taxes paid to other countries. However, the timing of the tax liability depends on several factors, including whether the income is from a U.S. or foreign source and, if it is from a foreign source, whether it is earned through direct operations or through a subsidiary. The base of the individual income tax covers business-source income paid to individuals, such as dividends, realized net capital gains on corporate equity, and income from self-employment. The statutory rates of tax on net taxable income range from 10 percent to 35 percent. Lower rates (generally 5 percent and 15 percent, depending on taxable income) apply to long-term capital gains and dividend income. Sole proprietors also pay both the employer and employee shares of social insurance taxes on their net business income. Generally, a U.S. citizen or resident pays tax on his or her worldwide income, including income derived from foreign-source dividends and capital gains subject to a credit for foreign taxes paid on such income. Criteria for Evaluating Business Tax Systems Three long-standing criteria—economic efficiency, equity, and a combination of simplicity, transparency and administrability—are typically used to evaluate tax policy. These criteria are often in conflict with each other, and as a result, there are usually trade-offs to consider and people are likely to disagree about the relative importance of the criteria. Specific aspects of business taxes can be evaluated in terms of how they support or detract from the efficiency, equity, simplicity, transparency, and administrability of the overall tax system. To the extent that a tax system is not simple and efficient, it imposes costs on taxpayers beyond the payments they make to the U.S. Treasury. As shown in figure 1, the total cost of any tax from a taxpayer’s point of view is the sum of the tax liability, the cost of complying with the tax system, and the economic efficiency costs that the tax imposes. In deciding on the size of government, we balance the total cost of taxes with the benefits provided by government programs. A complete evaluation of the tax treatment of businesses, which is a critical element of our overall federal tax system, cannot be made without considering how business taxation interacts with and complements the other elements of the overall system, such as the tax treatment of individuals and excise taxes on selected goods and services. This integrated approach is also appropriate for evaluating reform alternatives, regardless of whether those alternatives take the form of a simplified income tax system, a consumption tax system, or some combination of the two. Taxes on Business Income Are a Significant Source of Federal Revenue and Must Be Part of the Overall Considerations for Fiscal Reform Businesses contribute significant revenues to the federal government, both directly and indirectly. As figure 2 shows, corporate businesses paid $278 billion in corporate income tax directly to the federal government in 2005. Individuals earn income from business investment in the form of dividends and realized capital gains from C corporations; income allocations from partnerships and S corporations; entrepreneurial income from their own sole proprietorships; and rents and royalties. In recent years this business- source income, which is all taxed under the individual income tax, has amounted to between roughly 14 percent and 19 percent of the income of individuals who have paid individual income tax. In addition to the taxes that are paid on business-source income, most of the remainder of federal taxes is collected and passed on to the government by businesses. Business tax revenues of the magnitude discussed make them very relevant to considerations about how to address the nation’s long-term fiscal imbalance. Over the long term, the United States faces a large and growing structural budget deficit primarily caused by demographic trends and rising health care costs as shown in figure 3, and exacerbated over time by growing interest on the ever-larger federal debt. Continuing on this imprudent and unsustainable fiscal path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our national security. We cannot grow our way out of this long-term fiscal challenge because the imbalance between spending and revenue is so large. We will need to make tough choices using a multipronged approach: (1) revise budget processes and financial reporting requirements; (2) restructure entitlement programs; (3) reexamine the base of discretionary spending and other spending; and (4) review and revise tax policy, including tax expenditures, and tax enforcement programs. Business tax policy, business tax expenditures, and business tax enforcement need to be part of the overall tax review because of the amount of revenue at stake. Business tax expenditures reduce the revenue that would otherwise be raised from businesses. As already noted, to reduce their tax liabilities, businesses can take advantage of preferential provisions in the tax code, such as exclusions, exemptions, deductions, credits, preferential rates, and deferral of tax liability. Tax preferences—which are legally known as tax expenditures—are often aimed at policy goals similar to those of federal spending programs. For example, there are different tax expenditures intended to encourage economic development in disadvantaged areas and stimulate research and development, while there are also federal spending programs that have similar purposes. Also, by narrowing the tax base, business tax expenditures have the effect of raising either business tax rates or the rates on other taxpayers in order to generate a given amount of revenue. Efficiency, Complexity, Compliance, and Equity Concerns Contribute to Calls for Business Tax Reform The design of the current system of business taxation causes economic inefficiency and is complex. The complexity provides fertile ground for noncompliance and raises equity concerns. Varying Effective Rates of Taxation Across Different Types of Business Investments Reduce Economic Efficiency Our current system for taxing business income causes economic inefficiency because it imposes significantly different effective rates of tax on different types of investments. Tax treatment that is not neutral across different types of capital investment causes significant economic inefficiency by guiding investments to lightly taxed activities rather than those with high pretax productivity. However, the goal of tax policy is not to eliminate efficiency costs. The goal is to design a tax system that produces a desired amount of revenue and balances economic efficiency with other objectives, such as equity, simplicity, transparency, and administrability. Every practical tax system imposes efficiency costs. There are some features of current business taxation that have attracted criticism by economists and other tax experts because of efficiency costs. My point in raising them here is not that these features need to be changed—that is a policy judgment for Congress to make as it balances various goals. Rather, my point is that these economic consequences of tax policy need to be considered as we think about reform. The following are among the most noted cases of nonneutral taxation in the federal business tax system: Income earned on equity-financed investments made by C corporations is taxed twice—under both the corporate and individual income taxes, whereas no other business income is taxed more than once. Moreover, even noncorporate business investment is taxed more heavily than owner-occupied housing—a form of capital investment that receives very preferential treatment. As a result, resources have been shifted away from higher-return business investment into owner-occupied housing, and, within the business sector, resources have been shifted from higher-return corporations to noncorporate businesses. Such shifting of investment makes workers less productive than they would be under a more neutral tax system. This results in employees receiving lower wages because increases in employee wages are generally tied to increases in productivity. As noted above, such efficiency costs may be worth paying in order to meet other policy goals. For example, many policymakers advocate increased homeownership as a social policy goal. Depreciation allowances under the tax code vary considerably in generosity across different assets causing effective tax rates to vary and, thereby, favoring investment in certain assets over others. For example, researchers have found that the returns on most types of investments in equipment are taxed more favorably than are most investments in nonresidential buildings. These biases shift resources away from some investments in buildings that would have been more productive than some of the equipment investments that are being made instead. Tax rules for corporations favor the use of debt over shareholder equity as a source of finance for investment. The return on debt- financed investment consists of interest payments to the corporation’s creditors, which are deductible by the corporations. Consequently, that return is taxed only once—in the hands of the creditors. In contrast, the return on equity-financed investment consists of dividends and capital gains, which are not deductible by the corporation. These forms of income that are taxed under the individual tax are paid out of income that has already been subject to the corporate income tax. The bias against equity finance induces corporations to have less of an “equity cushion” against business downturns. Capital gains on corporate equity are taxed more favorably than dividends because that tax can be deferred until the gains are realized (typically when shareholders sell their stock). This bias against dividend payments likely means that more profits are retained within corporations than otherwise would be the case and, therefore, the flow of capital to its most productive uses is being constrained. The complex set of rules governing U.S. taxation of the worldwide income of domestic corporations (those incorporated in the United States) leads to wide variations in the effective rate of tax paid on that income, based on the nature and location of each corporation’s foreign operations and the effort put into tax planning. In effect, the active foreign income of some U.S. corporations is taxed more heavily than if the United States followed the practice of many other countries and exempted such income from tax. However, other U.S. corporations are able to take advantage of flexibilities in the U.S. tax rules in order to achieve treatment that is equivalent to or, in some cases, more favorable than the so-called “territorial” tax systems that exempt foreign-source active business income. As a consequence, some U.S. corporations face a tax disadvantage, while others have an advantage, relative to foreign corporations when competing in foreign countries. Those U.S. corporations that have a disadvantage are likely to locate a smaller share of their investment overseas than would be the case in a tax-free world; the opposite is true for those U.S. corporations with the tax advantage. Moreover, the tax system encourages U.S. corporations to alter their cash-management and financing decisions (such as by delaying the repatriation of profits) in order to reduce their taxes. The taxation of business income is part of the broader taxation of income from capital. The taxation of capital income in general (even when that taxation is uniformly applied) causes another form of inefficiency beyond the inefficiencies caused by the aforementioned cases of differential taxation across types of investments. This additional inefficiency occurs because taxes on capital reduce the after-tax return on savings and, thereby, distort the choice that individuals make between current consumption and saving for future consumption. However, although research shows that the demand for some types of savings, such as the demand for tax exempt bonds, is responsive to tax changes, there is greater uncertainty about the effects of tax changes on other choices, such as aggregate savings. Sometimes the concerns about the negative effects of taxation on the U.S. economy are couched in terms of “competitiveness,” where the vaguely defined term competitiveness is often defined as the ability of U.S. businesses to export their products to foreign markets and to compete against foreign imports into the U.S. market. The goal of those who push for this type of competitiveness is to improve the U.S. balance of trade. However, economists generally agree that trying to increase the U.S. balance of trade through targeted tax breaks for exports does not work. Such a policy, aimed at lowering the prices of exports, would be offset by an increase in the value of the dollar which would make U.S. exports more expensive and imports into the Unites States less expensive, ultimately leaving both the balance of trade and the standard of living of Americans unchanged. An alternative definition of competitiveness that is also sometimes used in tax policy debates refers to the ability of U.S.-owned firms operating abroad to compete in foreign markets. The current U.S. policy of taxing the worldwide income of U.S. businesses places some of their foreign operations at a disadvantage. The tradeoffs between a worldwide system and a territorial tax system are discussed below. Businesses Bear Significant Compliance Burdens Arising Both from the Complexity of the Tax System and from Their Multiple Roles within the System Tax compliance requirements for businesses are extensive and complex. Rules governing the computation of taxable income, expense deductions, and tax credits of U.S. corporations that do business in multiple foreign countries are particularly complex. But even small businesses face multiple levels of tax requirements of varying difficulty. In addition to computing and documenting their income, expenses, and qualifications for various tax credits, businesses with employees are responsible for collecting and remitting (at varying intervals) several federal taxes on the incomes of those employees. Moreover, if the businesses choose to offer their employees retirement plans and other fringe benefits, they can substantially increase the number of filings they must make. Businesses also have information-reporting responsibilities—employers send wage statements to their employees and to IRS; banks and other financial intermediaries send investment income statements to clients and to IRS. Finally, a relatively small percentage of all businesses (which nevertheless number in the hundreds of thousands) are required to participate in the collection of various federal excise taxes levied on fuels, heavy trucks and trailers, communications, guns, tobacco, and alcohol, among other products. It is difficult for researchers to accurately estimate compliance costs for the tax system as a whole or for particular types of taxpayers because taxpayers generally do not keep records of the time and money spent complying with tax requirements. Studies we found that focus on the compliance costs of businesses estimate them to be between about $40 billion and $85 billion per year. None of these estimates include the costs to businesses of collecting and remitting income and payroll taxes for their employees. The accuracy of these business compliance cost estimates is uncertain due to the low rates of response to their data-collection surveys. In addition, the range in estimates across the studies is due, among other things, to differences in monetary values used (ranging between $25 per hour and $37.26 per hour), differences in the business populations covered, and differences in the tax years covered. Business Tax Complexity Also Makes IRS’s Job of Enforcing Tax Rules Very Challenging and Can Reduce Public Confidence in the Fairness of the System Although the precise amount of business tax avoidance is unknown, IRS’s latest estimates of tax compliance show a tax gap of at least $141 billion for tax year 2001 between the business taxes that individual and corporate taxpayers paid and what they should have paid under the law. Corporations contributed about $32 billion to the tax gap by underreporting about $30 billion in taxes on tax returns and failing to pay about $2 billion in taxes that were reported on returns. Individual taxpayers that underreported their business income accounted for the remaining $109 billion of the business income tax gap. A complex tax code, complicated business transactions, and often multinational corporate structures make determining business tax liabilities and the extent of corporate tax avoidance a challenge. Tax avoidance has become such a concern that some tax experts say corporate tax departments have become “profit centers” as corporations seek to take advantage of the tax laws in order to maximize shareholder value. Some corporate tax avoidance is clearly legal, some falls in gray areas of the tax code, and some is clearly noncompliance or illegal, as shown by IRS’s tax gap estimate. Often business tax avoidance is legal. For example, multinational corporations can locate active trade or business operations in jurisdictions that have lower effective tax rates than does the United States and, unless and until they repatriate the income, defer taxation in the United States on that income, thus reducing their effective tax rate. In addition, investors can avoid paying the corporate income tax by putting their money into unincorporated businesses or into real estate. Complicating corporate tax compliance is the fact that in many cases the law is unclear or subject to differing interpretations. In fact, some have postulated that major corporations’ tax returns are actually just the opening bid in an extended negotiation with IRS to determine a corporation’s tax liability. An illustration—once again from the complex area of international tax rules—is transfer pricing. Transfer pricing involves setting the appropriate price for such things as goods, services, or intangible property (such as patents, trademarks, copyrights, technology, or “know-how”) that is transferred between the U.S.-based operations of a multinational company and a foreign affiliate. If the price paid by the affiliate to the U.S. operation is understated, the profits of the U.S. operation are reduced and U.S. taxable income is inappropriately reduced or eliminated. The standard for judging the correct price is the price that would have been paid between independent enterprises acting at “arm’s length.” However, it can be extremely difficult to establish what an arm’s length price would be. Given the global economy and the number of multinational firms with some U.S.-based operations, opportunities for transfer pricing disputes are likely to grow. Tax shelters are one example of how tax avoidance, including corporate tax avoidance, can shade into the illegal. Some tax shelters are legal though perhaps aggressive interpretations of the law, but others cross the line. Abusive shelters often are complex transactions that manipulate many parts of the tax code or regulations and are typically buried among legitimate transactions reported on tax returns. Because these transactions are often composed of many pieces located in several parts of a complex tax return, they are essentially hidden from plain sight, which contributes to the difficulty of determining the scope of the abusive shelter problem. Often lacking economic substance or a business purpose other than generating tax benefits, abusive shelters have been promoted by some tax professionals, often in confidence, for significant fees, sometimes with the participation of tax-indifferent parties, such as foreign or tax-exempt entities. These shelters may involve unnecessary steps and flow-through entities, such as partnerships, which make detection of these transactions more difficult. Regarding compliance with our tax laws, the success of our tax system hinges greatly on individual and business taxpayers’ perception of its fairness and understandability. Compliance is influenced not only by the effectiveness of IRS’s enforcement efforts but also by Americans’ attitudes about the tax system and their government. A recent survey indicated that about 10 percent of respondents say it is acceptable to cheat on their taxes. Furthermore, the complexity of, and frequent revisions to, the tax system make it more difficult and costly for taxpayers who want to comply to do so and for IRS to explain and enforce tax laws. The lack of transparency also fuels disrespect for the tax system and the government. Thus, a crucial challenge in evaluating our business tax system will be to determine how we can best strengthen enforcement of existing laws to give businesses owners confidence that their competitors are paying their fair share and to give wage earners confidence that businesses in general bear their share of taxes. One option that has been suggested as a means of improving public confidence in the tax system’s fairness is to make the reconciliation between book and tax income that businesses present on schedule M-3 of their tax returns available for public review. Business Tax Reform Entails Broad Design Choices about the Overall Tax System Reform of our business tax system will necessarily mean making broad design choices about the overall tax system and how business taxes are coordinated with other taxes. The tax reform debate of the last several years has focused attention on several important choices, including the extent to which our system should be closer to the extreme of a pure income tax or the other extreme of a pure consumption tax, the extent to which sales by U.S. businesses outside of this country should be taxed, the extent to which taxes should be collected from businesses or individuals, and the extent to which taxpayers are compensated for losses or costs they incur during the transition to any new tax system. Generally there is no single “right” decision about these choices and the options are not limited to selecting a system that is at one extreme or the other along the continuum of potential systems. The choices will involve making tradeoffs between the various goals for our tax system. Income vs. Consumption as the Tax Base The fundamental difference between income and consumption taxes lies in their treatment of savings and investment. Income can be used for either consumption or saving and investment. The tax base of a pure income tax includes all income, regardless of what it is ultimately used for; in contrast, the tax base of a consumption tax excludes income devoted to saving and investment (until it is ultimately used for consumption). The current tax system is a hybrid between a pure income tax and a pure consumption tax because it effectively exempts some types of savings and investment but taxes other types. As noted earlier, evidence is inconclusive regarding whether a shift closer to a consumption tax base would significantly affect the level of savings by U.S. taxpayers. There is, however, a consensus among economists that uneven tax treatment across different types of investment should be avoided unless the efficiency costs resulting from preferential tax treatment are outweighed by the social benefits generated by the tax preference. That objective could be achieved under either a consumption tax that exempts all new savings and investment from taxation (which means that all business profits are exempt) or a revised income tax that taxed all investments at the same effective rate. In comparison to the current system, a consumption tax’s exemption of business-source income would likely encourage U.S. businesses to increase their investment in the United States relative to their foreign investment. Both income and consumption taxes can be structured in a variety of ways, as discussed in the following subsections, and the choice of a specific design for either type of tax can have as significant implications for efficiency, administrability, and equity as the choice between a consumption or income base. The exemption of saving and investment can be accomplished in different ways, so consumption taxes can be structured differently and yet still have the same overall tax base. Collecting the Tax at the Business or Individual Level Both income and consumption taxes can be levied on individuals or businesses, or on a combination of the two. Whether collected from individuals or businesses, ultimately, individuals will bear the economic burden of any tax (as wage earners, shareholders, or consumers). The choice of whether to collect a tax at the business level or the individual level depends on whether it is thought to be desirable to levy different taxes on different individuals. A business-level tax, whether levied on income or consumption, can be collected “at source”—that is, where it is generated—so there can be many fewer tax filers and returns to administer. Business-level taxes cannot, however, directly tax different individuals at different rates. Individual-level taxes can allow for distinctions between different individuals; for example, standard deductions or graduated rates can be used to tax individuals with low income (or consumption) at a lower rate than individuals with greater income (or consumption). However, individual-level taxes require more tax returns, impose higher compliance costs, and would generally require a larger tax administration system. A national retail sales tax, a consumption value-added tax, and an income value-added tax are examples of taxes that would be collected only at the business level. A personal consumption tax and an integrated individual income tax are examples of taxes that would be collected only at the individual level. The “flat tax” proposed by economists Robert Hall and Alvin Rabushka that has received attention in recent years is an example of a tax collected at both the business and individual level. Our current system for taxing corporate-source income involves taxation at both the corporate and individual level in a manner that results in the double taxation of the same income. Territorial vs. Worldwide Taxation under an Income Tax Under a pure worldwide tax system the United States would tax the income of U.S. corporations, as it is earned, regardless of where it is earned, and at the same time provide a foreign tax credit that ensures that the combined rate of tax that a corporation pays to all governments on each dollar of income is exactly equal to the U.S. corporate tax rate. Some basic differences between the current U.S. tax system and a pure worldwide system are that (1) in many cases the U.S. system permits corporations to defer U.S. tax on their foreign-source income until it is repatriated and (2) the U.S. foreign tax credit is limited to the amount of U.S. tax that would be due on a corporation’s foreign-source income. In cases where the rate of foreign tax on a corporation’s income exceeds the U.S. tax rate, the corporation is left paying the higher rate of tax. Under a pure territorial tax system the United States would simply exempt all foreign-source income. (No major country has a pure territorial system; they all tax mobile forms of foreign-source income, such as royalties and income from securities.) The current U.S. tax system has some features that result in some cases in treatment similar to what would exist under a territorial system. First, corporations can defer U.S. tax indefinitely on certain foreign-source income, as long as they keep it reinvested abroad. Second, in certain cases U.S. corporations are able to use the excess credits that they earned for taxes they paid to high-tax countries to completely offset any U.S. tax that they would normally have to pay on income they earned in low-tax countries. As a result, that income from low-tax countries remains untaxed by the United States—just as it would be under a territorial system. In fact, there are some cases where U.S. corporations enjoy tax treatment that is more favorable than under a territorial system. This occurs when they pay no U.S. tax on foreign-source income yet are still able to deduct expenses allocable to that income. For example, a U.S. parent corporation can borrow money and invest it in a foreign subsidiary. The parent corporation generally can deduct its interest payments from its U.S. taxes even if it defers U.S. tax on the subsidiary’s income by leaving it overseas. Proponents of a worldwide tax system and proponents of a territorial system both argue that their preferred systems would provide important forms of tax neutrality. Under a pure worldwide system all of the income that a U.S. corporation earns abroad would be taxed at the same effective rate that a corporation earning the same amount of income domestically would pay. Such a tax system is neutral in the sense that it does not influence the decision of U.S. corporations to invest abroad or at home. If the U.S. had a pure territorial tax system all of the income that U.S. corporations earn in a particular country would be taxed at the same rate as corporations that are residents of that country. The pure territorial system is neutral in the specific sense that U.S. corporations investing in a foreign country would not be at a disadvantage relative to corporations residing in that country or relative to other foreign corporations investing there. In a world where each country sets its own tax rules it is impossible to achieve both types of neutrality at the same time, so tradeoffs are unavoidable. A change from the current tax system to a pure territorial one is likely to have mixed effects on tax compliance and administration. On the one hand, a pure worldwide tax system, or even the current system, may preserve the U.S. tax base better than a territorial system would because U.S. taxpayers would have greater incentive under a territorial system to shift income and investment into low-tax jurisdictions via transfer pricing. On the other hand, a pure territorial system may be less complex for IRS to administer and for taxpayers to comply with than the current tax system because there would be no need for the antideferral rules or the foreign tax credit, which are among the most complex features of the current system. Destination-Principle vs. Origin-Principle Consumption Tax Broad-based consumption taxes can differ depending on whether they are imposed under a destination principle, which holds that goods and services should be taxed in the countries where they are consumed, or an origin principle, which holds that goods and services should be taxed in the countries where they are produced. In the long run, after markets have adjusted, neither type of tax would have a significant effect on the U.S. trade balance. This is true for a destination-based tax because products consumed in the United States would be taxed at the same rate, regardless of where they were produced. Therefore, such a tax would not influence a consumer’s choice between buying a car produced in the United States or one imported from Japan. And at the same time, U.S. exports of cars would not be affected by the tax because they would be exempted. An origin-based consumption tax would not affect the trade balance because the tax effects that taxes have on prices would ultimately be countered by the same price adjustment mechanism that we discussed earlier with respect to targeted tax subsidies for exports. A national retail sales tax limited to final consumption goods would be a destination-principle tax; it would tax imports when sold at retail in this country and would not tax exports. Value-added taxes can be designed as either destination or origin-principle taxes. A personal consumption tax, collected at the individual level, would apply to U.S. residents or citizens and could be formulated to tax their consumption regardless of whether it is done domestically or overseas. Under such a system, income earned abroad would be taxable but funds saved or invested abroad would be deductible. In that case, foreign- produced goods imported into the United States or consumed by U.S. citizens abroad would be taxed. U.S. exports would only be taxed to the extent that they are consumed by U.S. citizens abroad. The Extent of Transition Provisions A wide range of options exist for moving from the current business tax system to an alternative one, and the way that any transition is formulated could have significant effects for economic efficiency, equity, taxpayer compliance burden, and tax administration. For example, one transition issue involves whether tax credits and other tax benefits already earned under the current tax would be made available under a new system. Businesses that are deducting depreciation under the current system would not have the opportunity to continue depreciating their capital goods under a VAT unless special rules were included to permit it. Similar problems could arise with businesses’ carrying forward net operating losses and recovering unclaimed tax credits. Depending on how these and other issues are addressed, taxpayer compliance burden and tax administration responsibilities could be greater during the transition period than they currently are or than they would be once the transition ends. Transition rules could also substantially reduce the new system’s tax base, thereby requiring higher tax rates during the transition if revenue neutrality were to be achieved. Criteria for a Good Tax System Provide Principles to Guide Decisions and Issues for Consideration Our publication, Understanding the Tax Reform Debate: Background, Criteria, and Questions, may be useful in guiding policymakers as they consider tax reform proposals. It was designed to aid policymakers in thinking about how to develop tax policy for the 21st century. The criteria for a good tax system, which our report discusses, provide the basis for a set of principles that should guide Congress as it considers the choices and tradeoffs involved in tax system reform. And, as I also noted earlier, proposals for reforming business taxation cannot be evaluated without considering how that business taxation will interact with and complement the other elements of our overall future tax system. The proposed system should raise sufficient revenue over time to fund our expected expenditures. As I mentioned earlier, we will fall woefully short of achieving this end if current spending or revenue trends are not altered. Although we clearly must restructure major entitlement programs and the basis of other federal spending, it is unlikely that our long-term fiscal challenge will be resolved solely by cutting spending. The proposal should look to future needs. Like many spending programs, the current tax system was developed in a profoundly different time. We live now in a much more global economy, with highly mobile capital, and with investment options available to ordinary citizens that were not even imagined decades ago. We have growing concentrations of income and wealth. More firms operate multinationally and willingly move operations and capital around the world as they see best for their firms. As an adjunct to looking forward when making reforms, better information on existing commitments and promises must be coupled with estimates of the long-term discounted net present value costs from spending and tax commitments comprising longer-term exposures for the federal budget beyond the existing 10-year budget projection window. The tax base should be as broad as possible. Broad-based tax systems with minimal exceptions have many advantages. Fewer exceptions generally means less complexity, less compliance cost, less economic efficiency loss, and by increasing transparency may improve equity or perceptions of equity. This suggests that eliminating or consolidating numerous tax expenditures must be considered. In many cases tax preferences are simply a form of “back-door spending.” We need to be sure that the benefits achieved from having these special provisions are worth the associated revenue losses just as we must ensure that outlay programs— which may be attempting to achieve the same purposes as tax expenditures—achieve outcomes commensurate with their costs. And it is important to supplement these cost-benefit evaluations with analyses of distributional effects—i.e., who bears the costs of the preferences and who receives the benefits. To the extent tax expenditures are retained, consideration should be given to whether they could be better targeted to meet an identified need. If we must raise revenues, doing so from a broad base and a lower rate will help minimize economic efficiency costs. Broad-based tax systems can yield the same revenue as more narrowly based systems at lower tax rates. The combination of less direct intervention in the marketplace from special tax preferences, and the lower rates possible from broad-based systems, can have substantial benefits for economic efficiency. For instance, one commonly cited rule of thumb regarding economic efficiency costs of tax increases is that they rise proportionately faster than the tax rates. In other words, a 10 percent tax increase could raise the economic efficiency costs of a tax system by much more than 10 percent. Aside from the base-broadening that minimizes targeted tax preferences favoring specific types of investment or other business behavior, it is also desirable on the grounds of economic efficiency to extend the principle of tax neutrality to the broader structural features of a business tax system. For example, improvements in economic efficiency can also be gained by avoiding differences in tax treatment, such as the differences in the current system based on legal form of organization, source of financing, and the nature and location of foreign operations. Removing such differences can shift resources to more productive uses, increasing economic performance and the standard of living of Americans. Shifting resources to more productive uses can result in a step up in the level of economic activity which would be measured as a one-time increase in the rate of growth. Tax changes that increase efficiency can also increase the long-term rate of economic growth if they increase the rate of technological change; however, not all efficiency-increasing tax changes will do so. Impact on the standard of living of Americans is also a useful criterion for evaluating policies to improve U.S. competitiveness. As was discussed earlier, narrower goals and policies, such as increasing the U.S. balance of trade through targeted tax breaks aimed at encouraging exports, are generally viewed as ineffective by economists. What determines the standard of living of Americans and how it compares to the standard of living in other countries is the productivity of American workers and capital. That productivity is determined by factors such as education, technological innovation, and the amount of investment in the U.S. economy. Tax policy can contribute to American productivity in several ways. One, discussed in this statement, is through neutral taxation of investment alternatives. Another, which I have discussed on many occasions, is through fiscal policy. Borrowing to finance persistent federal deficits absorbs savings from the private sector reducing funds available for investment. Higher saving and investment from a more balanced fiscal policy would contribute to increased productivity and a higher standard of living for Americans over the long term. A reformed business tax system should have attributes associated with high compliance rates. Because any tax system can be subject to tax gaps, the administrability of reformed systems should be considered as part of the debate for change. In general, a reformed system is most likely to have a small tax gap if the system has few tax preferences or complex provisions and taxable transactions are transparent. Transparency in the context of tax administration is best achieved when third parties report information both to the taxpayer and the tax administrator. Minimizing tax code complexity has the potential to reduce noncompliance for at least three broad reasons. First, it could help taxpayers to comply voluntarily with more certainty, reducing inadvertent errors by those who want to comply but are confused because of complexity. Second, it may limit opportunities for tax evasion, reducing intentional noncompliance by taxpayers who can misuse the complex code provisions to hide their noncompliance or to achieve ends through tax shelters. Third, reducing tax-code complexity could improve taxpayers’ willingness to comply voluntarily. Finally, the consideration of transition rules needs to be an integral part of the design of a new system. The effects of these rules can be too significant to leave them simply as an afterthought in the reform process. Concluding Observations The problems that I have reviewed today relating to the compliance costs, efficiency costs, equity, and tax gap associated with the current business tax system would seem to make a strong case for a comprehensive review and reform of our tax policy. Further, businesses operate in a world that is profoundly different—more competitive and more global—than when many of the existing provisions of the tax code were adopted. Despite numerous and repeated calls for reform, progress has been slow. I discussed reasons for the slow progress in a previous hearing on individual tax reform before this committee. One reason why reform is difficult to accomplish is that the provisions of the tax code that generate compliance costs, efficiency costs, the tax gap and inequities also benefit many taxpayers. Reform is also difficult because, even when there is agreement on the amount of revenue to raise, there are differing opinions on the appropriate balance among the often conflicting objectives of equity, efficiency, and administrability. This, in turn, leads to widely divergent views on even the basic direction of reform. However, I have described some basic principles that ought to guide business tax reform. One of them is revenue sufficiency. Fiscal necessity, prompted by the nation’s unsustainable fiscal path, will eventually force changes to our spending and tax policies. We must fundamentally rethink policies and everything must be on the table. Tough choices will have to be made about the appropriate degree of emphasis on cutting back federal programs versus increasing tax revenue. Other principles, such as broadening the tax base and otherwise promoting tax neutrality, could help improve economic performance. While economic growth alone will not solve our long-term fiscal problems, an improvement in our overall economic performance makes dealing with those problems easier. The recent report of the President’s Advisory Panel on Federal Tax Reform recommended two different tax reform plans. Although each plan is intended to improve economic efficiency and simplify the tax system, neither of them addresses the growing imbalance between federal spending and revenues that I have highlighted. One approach for getting the process of comprehensive fiscal reform started would be through the establishment of a credible, capable, and bipartisan commission, to examine options for a combination of selected entitlement and tax reform issues. Mr. Chairman and Members of the Committee, this concludes my statement. I would be pleased to answer any questions you may have at this time. Contact and Acknowledgments For further information on this testimony, please contact James White on (202) 512-9110 or whitej@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 include Jim Wozny, Assistant Director; Donald Marples; Jeff Arkin; and Cheryl Peterson. Appendix I: List of Studies Reviewed Government Accountability Office Individual Income Tax Policy: Streamlining, Simplification, and Additional Reforms Are Desirable. GAO-06-1028T. Washington, D.C.: August 3, 2006. Tax Compliance: Opportunities Exist to Reduce the Tax Gap Using a Variety of Approaches. GAO-06-1000T. Washington, D.C.: July 26, 2006. Tax Compliance: Challenges to Corporate Tax Enforcement and Options to Improve Securities Basis Reporting. GAO-06-851T. Washington, D.C.: June 13, 2006. Understanding the Tax Reform Debate: Background, Criteria, & Questions. GAO-05-1009SP. Washington, D.C.: September 2005. Government Performance and Accountability: Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined. GAO-05-690. Washington, D.C.: Sept. 23, 2005. Tax Policy: Summary of Estimates of the Costs of the Federal Tax System. GAO-05-878. Washington, D.C.: August 26, 2005. Tax Compliance: Reducing the Tax Gap Can Contribute to Fiscal Sustainability but Will Require a Variety of Strategies. GAO-05-527T. Washington, D.C.: April 14, 2005. 21st Century Challenges: Reexamining the Base of the Federal Government. GAO-05-325SP. Washington, D.C.: February 1, 2005. Tax Administration: Potential Impact of Alternative Taxes on Taxpayers and Administrators. GAO/GGD-98-37. Washington, D.C.: January 14, 1998. Congressional Budget Office Corporate Income Tax Rates: International Comparisons. Washington, D.C.: November 2005. Taxing Capital Income: Effective Rates and Approaches to Reform. Washington, D.C.: October 2005. Effects of Adopting a Value-Added Tax. Washington, D.C.: February 1992. Congressional Research Service Brumbaugh, David L. Taxes and International Competitiveness. RS22445. Washington, D.C.: May 19, 2006. Brumbaugh, David L. Federal Business Taxation: The Current System, Its Effects, and Options for Reform. RL33171. Washington, D.C.: December 20, 2005. Gravelle, Jane G.. Capital Income Tax Revisions and Effective Tax Rates. RL32099. Washington, D.C.: January 5, 2005. Joint Committee on Taxation The Impact of International Tax Reform: Background and Selected Issues Relating to U.S. International Tax Rules and the Competitiveness of U.S. Businesses. JCX-22-06. Washington, D.C.: June 21, 2006. Options to Improve Tax Compliance and Reform Tax Expenditures. JCS- 02-05. Washington, D.C.: January 27, 2005. The U.S. International Tax Rules: Background, Data, and Selected Issues Relating to the Competitiveness of U.S.-Based Business Operations. JCX- 67-03. Washington, D.C.: July 3, 2003. Background Materials on Business Tax Issues Prepared for the House Committee on Ways and Means Tax Policy Discussion Series. JCX-23-02. Washington, D.C.: April 4, 2002. U.S. Department of the Treasury Report to The Congress on Depreciation Recovery Periods and Methods. Washington, D.C.: July 2000. Integration of The Individual and Corporate Tax Systems: Taxing Business Income Once. Washington, D.C.: January 1992. President’s Advisory Panel on Federal Tax Reform Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System. Washington, D.C.: November 2005. Appendix II: Descriptions of Alternative Tax Systems Over the past decade, several proposals for fundamental tax reform have been put forward. These proposals would significantly change tax rates, the tax base, and the level of tax (whether taxes are collected from individuals, businesses, or both). Some of the proposals would replace the federal income tax with some type of consumption tax levied only on businesses. Consumption taxes levied only on businesses include retail sales taxes (RST) and value-added taxes (VAT). The flat tax would also change the tax base to consumption but include both a relatively simple individual tax along with a business tax. A personal consumption tax, a consumption tax levied primarily on individuals, has also been proposed. Similar changes in the level at which taxes are collected could be made while retaining an income tax base. This appendix provides a brief description of several of these proposals. National Retail Sales Tax The consumption tax that Americans are most familiar with is the retail sales tax, which in many states, is levied when goods or services are purchased at the retail level. The RST is a consumption tax because only goods purchased by consumers are taxed, and sales to businesses, including sales of investment goods, are generally exempt from tax. In contrast to an income tax, then, income that is saved is not taxed until it is used for consumption. Under a national RST, different tax rates could be applied to different goods, and the sale of some goods could carry a zero tax rate (exemption). However, directly taxing different individuals at different rates for the same good would be very difficult. Consumption Value- Added Tax A consumption VAT, which like the RST, is a business-level consumption tax levied directly on the purchase of goods and services. The two taxes differ in the manner in which the tax is collected and paid. In contrast to a retail sales tax, sales of goods and services to consumers and to businesses are taxable under a VAT. However, businesses can either deduct the amount of their purchases of goods and services from other businesses (under a subtraction VAT) or can claim a credit for tax paid on purchases from other businesses (under a credit VAT). Under either method, sales between businesses do not generate net tax liability under a VAT because the amount included in the tax base by businesses selling goods is equal to the amount deducted by the business purchasing goods. The only sales that generate net revenue for the government are sales between businesses and consumers, which is the same case as the RST. Income Value-Added Tax An income VAT would move the taxation of wage income to the business level as well. No individual returns would be necessary, so the burden of complying with the tax law would be eliminated for individuals. An income VAT would not allow businesses to deduct dividends, interest, or wages, so the income VAT remitted by businesses would include tax on these types of income. Calculations would not have to be made for different individuals, which would simplify tax administration and compliance burdens but not allow for treating different individuals differently. Flat Tax The flat tax was developed in the early 1980s by economists Robert Hall and Alvin Rabushka. The Hall-Rabushka flat tax proposal includes both an individual tax and a business tax. As described by Hall and Rabushka, the flat tax is a modification of a VAT; the modifications make the tax more progressive (less regressive) than a VAT. In particular, the business tax base is designed to be the same as that of a VAT, except that businesses are allowed to deduct wages and retirement income paid out as well as purchases from other businesses. Wage and retirement income is then taxed when received by individuals at the same rate as the business tax rate. By including this individual-level tax as well as the business tax, standard deductions can be made available to individuals. Individuals with less wage and retirement income than the standard deduction amounts would not owe any tax. Personal Consumption Tax A personal consumption tax would look much like a personal income tax. The major difference between the two is that under the consumption tax, taxpayers would include all income received, amounts borrowed, and cash flows received from the sale of assets, and then deduct the amount they saved. The remaining amount would be a measure of the taxpayer’s consumption over the year. When funds are withdrawn from bank accounts, or stocks or bonds are sold, both the original amount saved and interest earned are taxable because they are available for consumption. If withdrawn funds are reinvested in another qualified account or in stock or bonds, the taxable amount of the withdrawal would be offset by the deduction for the same amount that is reinvested. While the personal consumption tax would look like a personal income tax, the tax base would be the same as an RST. Instead of collecting tax on each sale of consumer products at the business level, a personal consumption tax would tax individuals annually on the sum of all their purchases of consumption goods. Because it is an individual-level tax, different tax rates could be applied to different individuals so that the tax could be made more progressive, and other taxpayer characteristics, such as family size, could be taken into account if desired. 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Business income taxes, both corporate and noncorporate, are a significant portion of federal tax revenue. Businesses also play a crucial role in collecting taxes from individuals, through withholding and information reporting. However, the design of the current system of business taxation is widely seen as flawed. It distorts investment decisions, hurting the performance of the economy. Its complexity imposes planning and record keeping costs, facilitates tax shelters, and provides potential cover for those who want to cheat. Not surprisingly, business tax reform is part of the debate about overall tax reform. The debate is occurring at a time when long-range projections show that, without a policy change, the gap between spending and revenues will widen. This testimony reviews the nation's long term fiscal imbalance and what is wrong with the current system of business taxation and provides some principles that ought to guide the debate about business tax reform. This statement is based on previously published GAO work and reviews of relevant literature. The size of business tax revenues makes them very relevant to any plan for addressing the nation's long-term fiscal imbalance. Reexamining both federal spending and revenues, including business tax policy and compliance must be part of a multipronged approach to address the imbalance. Some features of current business taxes channel investments into tax-favored activities and away from more productive activities and, thereby, reduce the economic well-being of all Americans. Complexity in business tax laws imposes costs of its own, facilitates tax shelters, and provides potential cover for those who want to cheat. IRS's latest estimates show a business tax gap of at least $141 billion for 2001. This in turn undermines confidence in the fairness of our tax system--citizens' confidence that their friends, neighbors, and business competitors pay their fair share of taxes. Principles that should guide the business tax reform debate include: (1) The proposed system should raise sufficient revenue over time to fund our current and future expected expenditures. (2) The tax base should be as broad as possible, which helps to minimize overall tax rates. (3) The proposed system should improve compliance rates by reducing tax preferences and complexity and increasing transparency. (4) To the extent other goals, such as equity and simplicity, allow, the tax system should aim for neutrality by not favoring some business activities over others. More neutral tax policy has the potential to enhance economic growth, increase productivity and improve the competitiveness of the U.S. economy in terms of standard of living. (5) The consideration of transition rules must be an integral part of any reform proposal.
GAO_GAO-07-86
Background There are some similarities in how Medicare pays ASCs and hospital outpatient departments for the procedures they perform. However, the methods used by CMS to calculate the payment rates in each system, as well as the mechanisms used to revise the Medicare payment rates, differ. Structure of the ASC Payment System In 1980, legislation was enacted that enabled ASCs to bill Medicare for certain surgical procedures provided to Medicare beneficiaries. Under the ASC payment system, Medicare pays a predetermined, and generally all- inclusive, amount per procedure to the facility. The approximately 2,500 surgical procedures that ASCs may bill for under Medicare are assigned to one of nine payment groups that contain procedures with similar costs, but not necessarily clinical similarities. All procedures assigned to one payment group are paid at the same rate. Under the Medicare payment system, when more than one procedure is performed at the same time, the ASC receives a payment for each of the procedures. However, the procedure that has the highest payment rate receives 100 percent of the applicable payment, and each additional procedure receives 50 percent of the applicable payment. The Medicare payment for a procedure performed at an ASC is intended to cover the direct costs for a procedure, such as nursing and technician services, drugs, medical and surgical supplies and equipment, anesthesia materials, and diagnostic services (including imaging services), and the indirect costs associated with the procedure, including use of the facility and related administrative services. The ASC payment for a procedure does not include payment for implantable devices or prosthetics related to the procedure; ASCs may bill separately for those items. In addition, the payment to the ASC does not include payment for professional services associated with the procedure; the physician who performs the procedure and the anesthesiologist or anesthetist bill Medicare directly for their services. Finally, the ASC payment does not include payment for certain other services that are not directly related to performing the procedure and do not occur during the time that the procedure takes place, such as some laboratory, X-ray, and other diagnostic tests. Because these additional services are not ASC procedures, they may be performed by another provider. In those cases, Medicare makes payments to those providers for the additional services. For example, a laboratory service needed to evaluate a tissue sample removed during an ASC procedure is not included in the ASC payment. The provider that evaluated the tissue sample would bill and receive payment from Medicare for that service. Because ASCs receive one inclusive payment for the procedure performed and its associated services, such as drugs, they generally include on their Medicare claim only the procedure performed. Structure of the OPPS In 1997, legislation was enacted that required the implementation of a prospective payment system for hospital outpatient departments; the OPPS was implemented in August 2000. Although ASCs perform only procedures, hospital outpatient departments provide a much broader array of services, including diagnostic services, such as X-rays and laboratory tests, and emergency room and clinic visits. Each of the approximately 5,500 services, including procedures, that hospital outpatient departments perform is assigned to one of over 800 APC groups with other services with clinical and cost similarities for payment under the OPPS. All services assigned to one APC group are paid the same rate. Similar to ASCs, when hospitals perform multiple procedures at the same time, they receive 100 percent of the applicable payment for the procedure that has the highest payment rate, and 50 percent of the applicable payment for each additional procedure, subject to certain exceptions. Like payments to ASCs, payment for a procedure under the OPPS is intended to cover the costs of the use of the facility, nursing and technician services, most drugs, medical and surgical supplies and equipment, anesthesia materials, and administrative costs. Medicare payment to a hospital for a procedure does not include professional services for physicians or other nonphysician practitioners. These services are paid for separately by Medicare. However, there are some differences between ASC and OPPS payments for procedures. Under the OPPS, hospital outpatient departments generally may not bill separately for implantable devices related to the procedure, but they may bill separately for additional services that are directly related to the procedure, such as certain drugs and diagnostic services, including X-rays. Hospital outpatient departments also may bill separately for additional services that are not directly related to the procedure and do not occur during the procedure, such as laboratory services to evaluate a tissue sample. Because they provide a broader array of services, and because CMS has encouraged hospitals to report all services provided during a procedure on their Medicare claims for rate-setting purposes, hospital claims may provide more detail about the services delivered during a procedure than ASC claims do. History of the ASC System Rate Setting CMS set the initial 1982 ASC payment rates based on cost and charge data from 40 ASCs. At that time, there were about 125 ASCs in operation. Procedures were placed into four payment groups, and all procedures in a group were paid the same rate. When the ASC payment system was first established, federal law required CMS to review the payment rates periodically. In 1986, CMS conducted an ASC survey to gather cost and charge data. In 1990, using these data, CMS revised the payment rates and increased the number of payment groups to eight. A ninth payment group was established in 1991. These groups are still in use, although some procedures have been added to or deleted from the ASC-approved list. Although payments have not been revised using ASC cost data since 1990, the payment rates have been periodically updated for inflation. In 1994, Congress required that CMS conduct a survey of ASC costs no later than January 1, 1995, and thereafter every 5 years, to revise ASC payment rates. CMS conducted a survey in 1994 to collect ASC cost data. In 1998, CMS proposed revising ASC payment rates based on the 1994 survey data and assigned procedures performed at ASCs into payment groups that were comparable to the payment groups it was developing for the same procedures under the OPPS. However, CMS did not implement the proposal, and, as a result, the ASC payment system was not revised using the 1994 data. In 2003, MMA eliminated the requirement to conduct ASC surveys every 5 years and required CMS to implement a revised ASC payment system no later than January 1, 2008. During the course of our work, in August 2006, CMS published a proposed rule that would revise the ASC payment system effective January 1, 2008. In this proposed rule, CMS bases the revised ASC payment rates on the OPPS APC groups. However, the payment rates would be lower for ASCs. History of OPPS Rate Setting The initial OPPS payment rates, implemented in August 2000, were based on hospitals’ 1996 costs. To determine the OPPS payment rates, CMS first calculates each hospital’s cost for each service by multiplying the charge for that service by a cost-to-charge ratio computed from the hospital’s most recently reported data. After calculating the cost of each service for each hospital, the services are grouped by their APC assignment, and a median cost for each APC group is calculated from the median costs of all services assigned to it. Using the median cost, CMS assigns each APC group a weight based on its median cost relative to the median cost of all other APCs. To obtain a payment rate for each APC group, CMS multiplies the relative weight by a factor that converts it to a dollar amount. Beginning in 2002, as required by law, the APC group payment rates have been revised annually based on the latest charge and cost data. In addition, the payment rates for services paid under the OPPS receive an annual inflation update. Many Additional Billed Services Were Similar; Few Resulted in Additional Payments to ASCs or Hospital Outpatient Departments We found many similarities in the additional services provided by ASCs and hospital outpatient departments with the top 20 procedures. Of the additional services billed with a procedure, few resulted in an additional payment in one setting but not the other. Hospitals were paid for some of the related additional services they billed with the procedures. In the ASC setting, other providers billed Medicare for these services and received payment for them. Many Additional Services Billed in Each Setting Were Similar In our analysis of Medicare claims, we found many similarities in the additional services billed in the ASC or hospital outpatient department setting with the top 20 procedures. The similar additional services are illustrated in the following four categories of services: additional procedures, laboratory services, radiology services, and anesthesia services. First, one or more additional procedures was billed with a procedure performed in either the ASC or hospital outpatient department setting for 14 of the top 20 procedures. The proportion of time each additional procedure was billed in each setting was similar. For example, when a hammertoe repair procedure was performed, our analysis indicated that another procedure to correct a bunion was billed 11 percent of the time in the ASC setting, and in the hospital outpatient setting, the procedure to correct a bunion was billed 13 percent of the time. Similarly, when a diagnostic colonoscopy was performed, an upper gastrointestinal (GI) endoscopy was billed 11 percent of the time in the ASC setting, and in the hospital setting, the upper GI endoscopy was billed 12 percent of the time. For 11 of these 14 procedures, the proportion of time each additional procedure was billed differed by less than 10 percentage points between the two settings. For the 3 remaining procedures, the percentage of time that an additional procedure was billed did not vary by more than 25 percentage points between the two settings. See appendix III for a complete list of the additional procedures billed and the proportion of time they were billed in each setting. Second, laboratory services were billed with 10 of the top 20 procedures in the hospital outpatient department setting and 7 of the top 20 procedures in the ASC setting. While these services were almost always billed by the hospital in the outpatient setting, they were typically not billed by the ASCs. These laboratory services were present in our analysis in the ASC setting because they were performed and billed by another Medicare part B provider. Third, four different radiology services were billed with 8 of the top 20 procedures. Radiology services were billed with 5 procedures in the ASC setting and with 8 procedures in the hospital outpatient department setting. The radiology services generally were included on the hospital outpatient department bills but rarely were included on the ASC bills. Similar to laboratory services, hospital outpatient departments billed for radiology services that they performed in addition to the procedures. When radiology services were billed with procedures in the ASC setting, these services generally were performed and billed by another part B provider. Fourth, anesthesia services were billed with 17 of the top 20 procedures in either the ASC or hospital outpatient settings and with 14 procedures in both settings. In virtually every case in the ASC setting, and most cases in the hospital outpatient department setting, these services were billed by another part B provider. According to our analysis, ASCs did not generally include any services other than the procedures they performed on their bills. However, in the hospital outpatient setting, some additional services were included on the hospitals’ bills. We believe this is a result of the structure of the two payment systems. As ASCs generally receive payment from Medicare only for procedures, they typically include only those procedures on their bills. In contrast, hospital outpatient departments’ bills often include many of the individual items or services they provide as a part of a procedure because CMS has encouraged them to do so, whether the items or services are included in the OPPS payment or paid separately. Additional Services Resulted in Few Additional Payments to ASCs or Hospital Outpatient Departments With the exception of additional procedures, there were few separate payments that could be made for additional services provided with the top 20 procedures because most of the services in our analysis were included in the Medicare payment to the ASC or hospital. Under both the Medicare ASC and OPPS payment systems, when more than one procedure is performed at the same time, the facility receives 100 percent of the applicable payment for the procedure that has the highest payment rate and 50 percent of the applicable payment for each additional procedure. As this policy is applicable to both settings, for those instances in our analysis when an additional procedure was performed with one of the top 20 procedures in either setting, the ASC or hospital outpatient department received 100 percent of the payment for the procedure with the highest payment rate and 50 percent of the payment for each lesser paid procedure. Individual drugs were billed by hospital outpatient departments for most of the top 20 procedures, although they were not present on the claims from ASCs, likely because ASCs generally cannot receive separate Medicare payments for individual drugs. However, none of the individual drugs billed by the hospital outpatient departments in our analysis resulted in an additional payment to the hospitals. In each case, the cost of the particular drug was included in the Medicare payment for the procedure. In the case of the laboratory services billed with procedures in the ASC and hospital outpatient department settings, those services were not costs included in the payment for the procedure in either setting and were paid separately in each case. For both settings, the payment was made to the provider that performed the service. In the case of the hospital outpatient department setting, the payment was generally made to the hospital, while, for procedures performed at ASCs, payment was made to another provider who performed the service. Of the four radiology services in our analysis, three were similar to the laboratory services in that they are not included in the cost of the procedure and are separately paid services under Medicare. Therefore, when hospitals provided these services, they received payment for them. In the ASC setting, these services were typically billed by a provider other than the ASC, and the provider received payment for them. The fourth radiology service is included in the payment for the procedure with which it was associated. Therefore, no separate payment was made to either ASCs or hospital outpatient departments. With regard to anesthesia services, most services were billed by and paid to a provider other than an ASC or hospital. APC Groups Accurately Reflect ASC Procedure Costs As a group, the costs of procedures performed in ASCs have a relatively consistent relationship with the costs of the APC groups to which they would be assigned under the OPPS. That is, the APC groups accurately reflect the relative costs of procedures performed in ASCs. We found that the ASC-to-APC cost ratios were more tightly distributed around their median cost ratio than the OPPS-to-APC cost ratios were around their median cost ratio. Specifically, 45 percent of all procedures in our analysis fell within 0.10 points of the ASC-to-APC median cost ratio, and 33 percent of procedures fell within 0.10 points of the OPPS-to-APC median cost ratio. However, the costs of procedures in ASCs are substantially lower than costs for the same procedures in the hospital outpatient setting. APC Groups Accurately Reflect the Relative Costs of ASC Procedures The APC groups reflect the relative costs of procedures provided by ASCs as well as they reflect the relative costs of procedures provided in the hospital outpatient department setting. In our analysis, we listed the procedures performed at ASCs and calculated the ratio of the cost of each procedure to the cost of the APC group to which it would have been assigned, referred to as the ASC-to-APC cost ratio. We then calculated similar cost ratios for the same procedures exclusively within the OPPS. To determine an OPPS-to-APC cost ratio, we divided individual procedures’ median costs, as calculated by CMS for the OPPS, by the median cost of their APC group. Our analysis of the cost ratios showed that the ASC-to-APC cost ratios were more tightly distributed around their median than were the OPPS-to-APC cost ratios; that is, there were more of them closer to the median. Specifically, 45 percent of procedures performed in ASCs fell within a 0.10 point range of the ASC-to-APC median cost ratio, and 33 percent of those procedures fell within a 0.10 point range of the OPPS-to-APC median cost ratio in the hospital outpatient department setting (see figs. 1 and 2). Therefore, there is less variation in the ASC setting between individual procedures’ costs and the costs of their assigned APC groups than there is in the hospital outpatient department setting. From this outcome, we determined that the OPPS APC groups could be used to pay for procedures in ASCs. ASC Procedures’ Median Costs Are Generally Lower Than Those for OPPS Procedures The median costs of procedures performed in ASCs were generally lower than the median costs of their corresponding APC group under the OPPS. Among all procedures in our analysis, the median ASC-to-APC cost ratio was 0.39. The ASC-to-APC cost ratios ranged from 0.02 to 3.34. When weighted by Medicare volume based on 2004 claims data, the median ASC- to-APC cost ratio was 0.84. We determined that the median OPPS-to-APC cost ratio was 1.04. This analysis shows that when compared to the median cost of the same APC group, procedures performed in ASCs had substantially lower costs than when those same procedures were performed in hospital outpatient departments. Conclusions Generally, there are many similarities between the additional services provided in ASCs and hospital outpatient departments with one of the top 20 procedures, and few resulted in an additional Medicare payment to ASCs or hospital outpatient departments. Although costs for individual procedures vary, in general, the median costs for procedures are lower in ASCs, relative to the median costs of their APC groups, than the median costs for the same procedures in the hospital outpatient department setting. The APC groups in the OPPS reflect the relative costs of procedures performed in ASCs in the same way that they reflect the relative costs of the same procedures when they are performed in hospital outpatient departments. Therefore, the APC groups could be applied to procedures performed in ASCs, and the OPPS could be used as the basis for an ASC payment system, eliminating the need for ASC surveys and providing for an annual revision of the ASC payment groups. Recommendation for Executive Action We recommend that the Administrator of CMS implement a payment system for procedures performed in ASCs based on the OPPS. The Administrator should take into account the lower relative costs of procedures performed in ASCs compared to hospital outpatient departments in determining ASC payment rates. Agency and External Reviewer Comments and Our Evaluation We received written comments on a draft of this report from CMS (see app. IV). We also received oral comments from external reviewers representing two ASC industry organizations, AAASC and FASA. CMS Comments In commenting on a draft of this report, CMS stated that our recommendation is consistent with its August 2006 proposed revisions to the ASC payment system. Industry Comments and Our Evaluation Industry representatives who reviewed a draft of this report did not agree or disagree with our recommendation for executive action. They did, however, provide several comments on the draft report. The industry representatives noted that we did not analyze the survey results to examine differences in per-procedure costs among single-specialty and multi-specialty ASCs. Regarding this comment, we initially considered developing our survey sample stratified by ASC specialty type. However, because accurate data identifying ASCs’ specialties do not exist, we were unable to stratify our survey sample by specialty type. The industry representatives asked us to provide more explanation in our scope and methodology regarding our development of a relative weight scale for Medicare ASC-approved procedures to capture the general variation in resources associated with performing different procedures. We expanded the discussion of how we developed the relative weight scale in our methodology section. Reviewers also made technical comments, which we incorporated where appropriate. We are sending a copy of this report to the Administrator of CMS and appropriate congressional committees. The report is available at no charge on GAO’s Web site at http://www.gao.gov. We will also make copies available to others on request. If you or your staff members have any questions about this report, please contact me at (202) 512-7119 or kingk@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made significant contributions to this report are listed in appendix V. Appendix I: Analysis of the Proportion of Labor-Related Costs for Ambulatory Surgical Centers The Medicare payment rates for ambulatory surgical centers (ASC), along with those of other facilities, are adjusted to account for the variation in labor costs across the country. To calculate payment rates for individual ASCs, the Centers for Medicare & Medicaid Services (CMS) calculates the share of total costs that are labor-related and then adjusts ASCs’ labor- related share of costs based on a wage index calculated for specific geographic areas across the country. The wage index reflects how the average wage for health care personnel in each geographic area compares to the national average health care personnel wage. The geographic areas are intended to represent the separate labor markets in which health care facilities compete for employees. In setting the initial ASC payment rates for 1982, CMS determined from the first survey of ASCs that one-third of their costs were labor-related. The labor-related costs included employee salaries and fringe benefits, contractual personnel, and owners’ compensation for duties performed for the facility. To determine the payment rates for each individual ASC, CMS multiplied one-third of the payment rate for each procedure—the labor- related portion—by the local area wage index. Each ASC received the base payment rate for two-thirds of the payment rate—the nonlabor-related portion—for each procedure. The sum of the labor-related and nonlabor- related portions equaled each ASC’s payment rate for each procedure. In 1990, when CMS revised the payment system based on a 1986 ASC survey, CMS found ASCs’ average labor-related share of costs to be 34.45 percent and used this percentage as the labor-related portion of the payment rate. In a 1998 proposed rule, CMS noted that ASCs’ share of labor-related costs as calculated from the 1994 ASC cost survey had increased to an average of 37.66 percent, slightly higher than the percentage calculated from the 1986 survey. However, CMS did not implement the 1998 proposal. Currently, the labor-related proportion of costs from CMS’s 1986 survey, 34.45 percent, is used for calculating ASC payment rates. Using 2004 cost data we received from 290 ASCs that responded to our survey request for information, we determined that the mean labor-related proportion of costs was 50 percent, and the range of the labor-related costs for the middle 50 percent of our ASC facilities was 43 percent to 57 percent of total costs. Appendix II: Scope and Methodology To compare the delivery of procedures between ASCs and hospital outpatient departments, we analyzed Medicare claims data from 2003. To compare the relative costs of procedures performed in ASCs and hospital outpatient departments, we collected cost and procedure data from 2004 from a sample of Medicare-participating ASCs. We also interviewed officials at CMS and representatives from ASC industry organizations, specifically, the American Association of Ambulatory Surgery Centers (AAASC) and FASA, physician specialty societies, and nine ASCs. Analysis of Additional Services To compare the delivery of additional services provided with procedures performed in ASCs and hospital outpatient departments, we identified all additional services frequently billed in each setting when one of the top 20 procedures with the highest Medicare ASC claims volume is performed. These procedures represented approximately 75 percent of all Medicare ASC claims in 2003. Using Medicare claims data for 2003, we identified beneficiaries receiving one of the top 20 procedures in either an ASC or hospital outpatient department, then identified any other claims for those beneficiaries from ASCs, hospital outpatient departments, durable medical equipment suppliers, and other Medicare part B providers. We identified claims for the beneficiaries on the day the procedure was performed and the day after. We created a list that included all additional services that were billed at least 10 percent of the time with each of the top 20 procedures when they were performed in ASCs. We created a similar list of additional services for each of the top 20 procedures when they were performed in hospital outpatient departments. We then compared the lists for each of the top 20 procedures between the two settings to determine whether there were similarities in the additional services that were billed to Medicare. To compare the Medicare payments for procedures performed in ASCs and hospital outpatient departments, we identified whether any additional services included in our analysis resulted in an additional payment. We used Medicare claims data from the National Claims History (NCH) files. These data, which are used by the Medicare program to make payments to health care providers, are closely monitored by both CMS and the Medicare contractors that process, review, and pay claims for Medicare services. The data are subject to various internal controls, including checks and edits performed by the contractors before claims are submitted to CMS for payment approval. Although we did not review these internal controls, we did assess the reliability of the NCH data. First, we reviewed all existing information about the data, including the data dictionary and file layouts. We also interviewed experts at CMS who regularly use the data for evaluation and analysis. We found the data to be sufficiently reliable for the purposes of this report. Comparison of Per- Procedure Costs To compare the relative costs of procedures performed in ASCs and hospital outpatient departments, we first compiled information on ASCs’ costs and procedures performed. Because there were no recent existing data on ASC costs, we surveyed 600 ASCs, randomly selected from all ASCs, to obtain their 2004 cost and procedure data. We received response data from 397 ASC facilities. We assessed the reliability of these data through several means. We identified incomplete and inconsistent survey responses within individual surveys and placed follow-up calls to respondents to complete or verify their responses. To ensure that survey response data were accurately transferred to electronic files for our analytic purposes, two analysts independently entered all survey responses. Any discrepancies between the two sets of entered responses were resolved. We performed electronic testing for errors in accuracy and completeness, including an analysis of costs per procedure. As a result of our data reliability testing, we determined that data from 290 responding facilities were sufficiently reliable for our purposes. Our nonresponse analysis showed that there was no geographic bias among the facilities responding to our survey. The responding facilities performed more Medicare services than the average for all ASCs in our sample. To allocate ASCs’ total costs among the individual procedures they perform, we developed a method to allocate the portion of an ASC’s costs accounted for by each procedure. We constructed a relative weight scale for Medicare ASC-approved procedures that captures the general variation in resources associated with performing different procedures. The resources we used were the clinical staff time, surgical supplies, and surgical equipment used during the procedures. We used cost and quantity data on these resources from information CMS had collected for the purpose of setting the practice expense component of physician payment rates. For procedures for which CMS had no data on the resources used, we used information we collected from medical specialty societies and physicians who work for CMS. We summed the costs of the resources for each procedure and created a relative weight scale by dividing the total cost of each procedure by the average cost across all of the procedures. We assessed the reliability of these data through several means. We compared electronic CMS data with the original document sources for a large sample of records, performed electronic testing for errors in accuracy and completeness, and reviewed data for reasonableness. Based on these efforts, we determined that data were sufficiently reliable for our purposes. To calculate per-procedure costs with the data from the surveyed ASC facilities, we first deducted costs that Medicare considers unallowable, such as advertising and entertainment costs. (See fig. 3 for our per- procedure cost calculation methodology.) We also deducted costs for services that Medicare pays for separately, such as physician and nonphysician practitioner services. We then separated each facility’s total costs into its direct and indirect costs. We defined direct costs as those associated with the clinical staff, equipment, and supplies used during the procedure. Indirect costs included all remaining costs, such as support and administrative staff, building expenses, and outside services purchased. To allocate each facility’s direct costs across the procedures it performed, we applied our relative weight scale. We allocated indirect costs equally across all procedures performed by the facility. For each procedure performed by a responding ASC facility, we summed its allocated direct and indirect costs to determine a total cost for the procedure. To obtain a per-procedure cost across all ASCs, we arrayed the calculated costs for all ASCs performing that procedure and identified the median cost. To compare per-procedure costs for ASCs and hospital outpatient departments, we first obtained from CMS the list of ambulatory payment classification (APC) groups used for the outpatient prospective payment system (OPPS) and the procedures assigned to each APC group. We also obtained from CMS the OPPS median cost of each procedure and the median cost of each APC group. We then calculated a ratio between each procedure’s ASC median cost, as determined by the survey, and the median cost of each procedure’s corresponding APC group under the OPPS, referred to as the ASC-to-APC cost ratio. We also calculated a ratio between each ASC procedure’s median cost under the OPPS and the median cost of the procedure’s APC group, using the data obtained from CMS, referred to as the OPPS-to-APC cost ratio. To evaluate the difference in procedure costs between the two settings, we compared the ASC-to- APC and OPPS-to-APC cost ratios. To assess how well the relative costs of procedures in the OPPS, defined by their assignment to APC groups, reflect the relative costs of procedures in the ASC setting, we evaluated the distribution of the ASC-to-APC and OPPS-to-APC cost ratios. Analysis of Labor- Related Costs To calculate the percentage of labor-related costs among our sample ASCs, for each ASC, we divided total labor costs by total costs, after deducting costs not covered by Medicare’s facility payment. We then determined the range of the percentage of labor-related costs among all of our ASCs and between the 25th percentile and the 75th percentile, as well as the mean and median percentage of labor-related costs. We performed our work from April 2004 through October 2006 in accordance with generally accepted government auditing standards. Appendix III: Additional Procedures Billed with the Top 20 ASC Procedures, 2003 Appendix III: Additional Procedures Billed with the Top 20 ASC Procedures, 2003 (percentage) N/A (percentage) Appendix IV: Comments from the Centers for Medicare & Medicaid Services Appendix V: GAO Contact and Staff Acknowledgments GAO Contact Acknowledgments In addition to the contact named above, key contributors to this report were Nancy A. Edwards, Assistant Director; Kevin Dietz; Beth Cameron Feldpush; Marc Feuerberg; and Nora Hoban.
Medicare pays for surgical procedures performed at ambulatory surgical centers (ASC) and hospital outpatient departments through different payment systems. Although they perform a similar set of procedures, no comparison of ASC and hospital outpatient per-procedure costs has been conducted. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 directed GAO to compare the relative costs of procedures furnished in ASCs to the relative costs of those procedures furnished in hospital outpatient departments, in particular, how accurately the payment groups used in the hospital outpatient prospective payment system (OPPS) reflect the relative costs of procedures performed in ASCs. To do this, GAO collected data from ASCs through a survey. GAO also obtained hospital outpatient data from the Centers for Medicare & Medicaid Services (CMS). GAO determined that the payment groups in the OPPS, known as ambulatory payment classification (APC) groups, accurately reflect the relative cost of procedures performed in ASCs. GAO calculated the ratio between each procedure's ASC median cost, as determined by GAO's survey, and the median cost of each procedure's corresponding APC group under the OPPS, referred to as the ASC-to-APC cost ratio. GAO also compared the OPPS median costs of those same procedures with the median costs of their APC groups, referred to as the OPPS-to-APC cost ratio. GAO's analysis of the ASC-to-APC and OPPS-to-APC cost ratios showed that 45 percent of all procedures in the analysis fell within a 0.10 point range of the ASC-to-APC median cost ratio, and 33 percent of procedures fell within a 0.10 point range of the OPPS-to-APC median cost ratio. These similar patterns of distribution around the median show that the APC groups reflect the relative costs of procedures provided by ASCs as well as they reflect the relative costs of procedures provided in hospital outpatient departments and can be used as the basis for the ASC payment system. GAO's analysis also identified differences in the cost of procedures in the two settings. The median cost ratio among all ASC procedures was 0.39 and when weighted by Medicare claims volume was 0.84. The median cost ratio for OPPS procedures was 1.04. Thus, the cost of procedures in ASCs is substantially lower than the corresponding cost in hospital outpatient departments.
GAO_GAO-16-589T
Background IRS’s mission is to provide America’s taxpayers top-quality service by helping them to understand and meet their tax responsibilities and to enforce the law with integrity and fairness to all. During fiscal year 2015, IRS collected more than $3.3 trillion; processed more than 243 million tax returns and other forms; and issued more than $403 billion in tax refunds. IRS employs about 90,000 people in its Washington, D.C., headquarters and at more than 550 offices in all 50 states, U.S. territories, and some U.S. embassies and consulates. Each filing season IRS provides assistance to tens of millions of taxpayers over the phone, through written correspondence, online, and face-to-face. The scale of these operations alone presents challenges. In carrying out its mission, IRS relies extensively on computerized information systems, which it must effectively secure to protect sensitive financial and taxpayer data for the collection of taxes, processing of tax returns, and enforcement of federal tax laws. Accordingly, it is critical for IRS to effectively implement information security controls and an agency- wide information security program in accordance with federal law and guidance. Cyber incidents can adversely affect national security, damage public health and safety, and compromise sensitive information. Regarding IRS specifically, two recent incidents illustrate the impact on taxpayer and other sensitive information: In June 2015, the Commissioner of the IRS testified that unauthorized third parties had gained access to taxpayer information from its Get Transcript application. According to officials, criminals used taxpayer- specific data acquired from non-department sources to gain unauthorized access to information on approximately 100,000 tax accounts. These data included Social Security information, dates of birth, and street addresses. In an August 2015 update, IRS reported this number to be about 114,000, and that an additional 220,000 accounts had been inappropriately accessed. In a February 2016 update, the agency reported that an additional 390,000 accounts had been accessed. Thus, about 724,000 accounts were reportedly affected. The online Get Transcript service has been unavailable since May 2015. In March 2016, IRS stated that as part of its ongoing security review, it had temporarily suspended the Identity Protection Personal Identification Number (IP PIN) service on IRS.gov. The IP PIN is a single-use identification number provided to taxpayers who are victims of identity theft (IDT) to help prevent future IDT refund fraud. The service on IRS’s website allowed taxpayers to retrieve their IP PINs online by passing IRS’s authentication checks. These checks confirm taxpayer identity by asking for personal, financial and tax-related information. The IRS stated that it was conducting further review of the IP PIN service and is looking at further strengthening the security features before resuming service. As of April 7, the online service was still suspended. The Commissioner of Internal Revenue has overall responsibility for ensuring the confidentiality, integrity, and availability of the information and systems that support the agency and its operations. Within IRS, the senior agency official responsible for information security is the Associate CIO, who heads the IRS Information Technology Cybersecurity organization. Although IRS Has Made Improvements, Information Security Weaknesses Continue to Place Taxpayer and Financial Data at Risk As we reported in March 2016, IRS has implemented numerous controls over key financial and tax processing systems; however, it had not always effectively implemented access and other controls, including elements of its information security program. Access controls are intended to prevent, limit, and detect unauthorized access to computing resources, programs, information, and facilities. These controls include identification and authentication, authorization, cryptography, audit and monitoring, and physical security controls, among others. In our most recent review we found that IRS had improved access controls, but some weaknesses remain. Identifying and authenticating users—such as through user account-password combinations—provides the basis for establishing accountability and controlling access to a system. IRS established policies for identification and authentication, including requiring multifactor authentication for local and network access accounts and establishing password complexity and expiration requirements. It also improved identification and authentication controls by, for example, expanding the use of an automated mechanism to centrally manage, apply, and verify password requirements. However, weaknesses in identification and authentication controls remained. For example, the agency used easily guessable passwords on servers supporting key systems. Authorization controls limit what actions users are able to perform after being allowed into a system and should be based on the concept of “least privilege,” granting users the least amount of rights and privileges necessary to perform their duties. While IRS established policies for authorizing access to its systems, it continued to permit excessive access in some cases. For example, users were granted rights and permissions in excess of what they needed to perform their duties, including for an application used to process electronic tax payment information and a database on a human resources system. Cryptography controls protect sensitive data and computer programs by rendering data unintelligible to unauthorized users and protecting the integrity of transmitted or stored data. IRS policies require the use of encryption and it continued to expand its use of encryption to protect sensitive data. However, key systems we reviewed had not been configured to encrypt sensitive user authentication data. Audit and monitoring is the regular collection, review, and analysis of events on systems and networks in order to detect, respond to, and investigate unusual activity. IRS established policies and procedures for auditing and monitoring its systems and continued to enhance its capability by, for example, implementing an automated mechanism to log user activity on its access request and approval system. But it had not established logging for two key applications used to support the transfer of financial data and access and manage taxpayer accounts; nor was the agency consistently maintaining key system and application audit plans. Physical security controls, such as physical access cards, limit access to an organization’s overall facility and areas housing sensitive IT components. IRS established policies for physically protecting its computer resources and physical security controls at its enterprise computer centers, such as a dedicated guard force at each of its computer centers. However, the agency had yet to address weaknesses in its review of access lists for both employees and visitors to sensitive areas. IRS also had weaknesses in configuration management controls, which are intended to prevent unauthorized changes to information system resources (e.g., software and hardware) and provide assurance that systems are configured and operating securely. Specifically, while IRS developed policies for managing the configuration of its information technology (IT) systems and improved some configuration management controls, it did not, for example, ensure security patch updates were applied in a timely manner to databases supporting 2 key systems we reviewed, including a patch that had been available since August 2012. To its credit, IRS had established contingency plans for the systems we reviewed, which help ensure that when unexpected events occur, critical operations can continue without interruption or can be promptly resumed, and that information resources are protected. Specifically, IRS had established policies for developing contingency plans for its information systems and for testing those plans, as well as for implementing and enforcing backup procedures. Moreover, the agency had documented and tested contingency plans for its systems and improved continuity of operations controls for several systems. Nevertheless, the control weaknesses can be attributed in part to IRS’s inconsistent implementation of elements of its agency-wide information security program. The agency established a comprehensive framework for its program, including assessing risk for its systems, developing system security plans, and providing employees with security awareness and specialized training. However, IRS had not updated key mainframe policies and procedures to address issues such as comprehensively auditing and monitoring access. In addition, the agency had not fully addressed previously identified deficiencies or ensured that its corrective actions were effective. During our most recent review, IRS told us it had addressed 28 of our prior recommendations; however, we determined that 9 of these had not been effectively implemented. The collective effect of the deficiencies in information security from prior years that continued to exist in fiscal year 2015, along with the new deficiencies we identified, are serious enough to merit the attention of those charged with governance of IRS and therefore represented a significant deficiency in IRS’s internal control over financial reporting systems as of September 30, 2015. Implementing GAO Recommendations Can Help IRS Better Protect Sensitive Taxpayer and Financial Data To assist IRS in fully implementing its agency-wide information security program, we made two new recommendations to more effectively implement security-related policies and plans. In addition, to assist IRS in strengthening security controls over the financial and tax processing systems we reviewed, we made 43 technical recommendations in a separate report with limited distribution to address 26 new weaknesses in access controls and configuration management. Implementing these recommendations—in addition to the 49 outstanding recommendations from previous audits—will help IRS improve its controls for identifying and authenticating users, limiting users’ access to the minimum necessary to perform their job-related functions, protecting sensitive data when they are stored or in transit, auditing and monitoring system activities, and physically securing its IT facilities and resources. Table 1 below provides the number of our prior recommendations to IRS that were not implemented at the beginning of our fiscal year 2015 audit, how many were resolved by the end of the audit, new recommendations, and the total number of outstanding recommendations at the conclusion of the audit. In commenting on drafts of our reports presenting the results of our fiscal year 2015 audit, the IRS Commissioner stated that while the agency agreed with our new recommendations, it will review them to ensure that its actions include sustainable fixes that implement appropriate security controls balanced against IT and human capital resource limitations. In addition, IRS can take steps to improve its response to data breaches. Specifically, in December 2013 we reported on the extent to which data breach policies at eight agencies, including IRS, adhered to requirements and guidance set forth by the Office of Management and Budget and the National Institute of Standards and Technology. While the agencies in our review generally had policies and procedures in place that reflected the major elements of an effective data breach response program, implementation of these policies and procedures was not consistent. With respect to IRS, we determined that its policies and procedures generally reflected key practices, although the agency did not require considering the number of affected individuals as a factor when determining if affected individuals should be notified of a suspected breach. In addition, IRS did not document lessons learned from periodic analyses of its breach response efforts. We recommended that IRS correct these weaknesses, but the agency has yet to fully address them. Billions of Dollars Have Been Lost to IDT Refund Fraud, and IRS Faces Challenges in Combating This Evolving Threat The importance of protecting taxpayer information is further highlighted by the billions of dollars that have been lost to IDT refund fraud, which continues to be an evolving threat. IRS develops estimates of the extent of IDT refund fraud to help direct its efforts to identify and prevent the crime. While its estimates have inherent uncertainty, IRS estimated that it prevented or recovered $22.5 billion in fraudulent IDT refunds in filing season 2014 (see figure 1). However, IRS also estimated, where data were available, that it paid $3.1 billion in fraudulent IDT refunds. Because of the difficulties in knowing the amount of undetectable fraud, the actual amount could differ from these estimates. IRS has taken steps to address IDT refund fraud; however, it remains a persistent and continually changing threat. IRS recognized the challenge of IDT refund fraud in its fiscal year 2014-2017 strategic plan and increased resources dedicated to combating IDT and other types of refund fraud. In fiscal year 2015, IRS reported that it staffed more than 4,000 full-time equivalents and spent about $470 million on all refund fraud and IDT activities. As described above, IRS received an additional $290 million for fiscal year 2016 to improve customer service, IDT identification and prevention, and cybersecurity efforts and the agency plans to use $16.1 million of this funding to help prevent IDT refund fraud, among other things. The administration requested an additional $90 million and an additional 491 full-time equivalents for fiscal year 2017 to help prevent IDT refund fraud and reduce other improper payments. IRS estimates that this $90 million investment in IDT refund fraud and other improper payment prevention would help it protect $612 million in revenue in fiscal year 2017, as well as protect revenue in future years. IRS has taken action to improve customer service related to IDT refund fraud. For example, between the 2011 and 2015 filing seasons, IRS experienced a 430 percent increase in the number of telephone calls to its Identity Theft Toll Free Line—as of March 19, 2016, IRS had received over 1.1 million calls to this line. Moreover, 77 percent of callers seeking assistance on this telephone line received it compared to 54 percent during the same period last year. Average wait times during the same period have also decreased—taxpayers are waiting an average of 14 minutes to talk to an assistor, a decrease from 27 minutes last year. IRS also works with third parties, such as tax preparation industry participants, states, and financial institutions to try to detect and prevent IDT refund fraud. In March 2015, the IRS Commissioner convened a Security Summit with industry and states to improve information sharing and authentication. IRS officials said that 40 state departments of revenue and 20 tax industry participants have officially signed a partnership agreement to enact recommendations developed and agreed to by summit participants. IRS plans to invest a portion of the $16.1 million it received in fiscal year 2016 into identity theft prevention and refund fraud mitigation actions from the Security Summit. These efforts include developing an Information Sharing and Analysis Center where IRS, states, and industry can share information to combat IDT refund fraud. Even though IRS has prioritized combating IDT refund fraud, fraudsters adapt their schemes to identify weaknesses in IDT defenses, such as gaining access to taxpayers’ tax return transcripts through IRS’s online Get Transcript service. According to IRS officials, with access to tax transcripts, fraudsters can create historically consistent returns that are hard to distinguish from a return filed by a legitimate taxpayer, potentially making it more difficult for IRS to identify and detect IDT refund fraud. Implementing Past GAO Recommendations Could Help IRS Combat IDT Refund Fraud Without additional action by IRS and Congress, the risk of issuing fraudulent IDT refunds could grow. We previously made recommendations to IRS to help it better combat IDT refund fraud: Authentication. In January 2015, we reported that IRS’s authentication tools have limitations and recommended that IRS assess the costs, benefits and risks of its authentication tools. For example, individuals can obtain an e-file PIN by providing their name, Social Security number, date of birth, address, and filing status for IRS’s e-file PIN application. Identity thieves can easily find this information, allowing them to bypass some, if not all, of IRS’s automatic checks, according to our analysis and interviews with tax software and return preparer associations and companies. After filing an IDT return using an e-file PIN, the fraudulent return would proceed through IRS’s normal return processing. In November 2015, IRS officials told us that the agency had developed guidance for its Identity Assurance Office to assess costs, benefits, and risk, and that its analysis will inform decision-making on authentication-related issues. IRS also noted that the methods of analysis for the authentication tools will vary depending on the different costs and other factors for authenticating taxpayers in different channels, such as online, phone, or in-person. In February 2016, IRS officials told us that the Identity Assurance Office plans to complete a strategic plan for taxpayer authentication across the agency in September 2016. While IRS is taking steps, it will still be vulnerable until it completes and uses the results of its analysis of costs, benefits, and risk to inform decision-making. Form W-2, Wage and Tax Statement (W-2) Pre-refund Matching. In August 2014 we reported that the wage information that employers report on Form W-2 is not available to IRS until after it issues most refunds, and that if IRS had access to W-2 data earlier, it could match such information to taxpayers’ returns and identify discrepancies before issuing billions of dollars of fraudulent IDT refunds. We recommended that IRS assess the costs and benefits of accelerating W-2 deadlines. In response to our recommendation, IRS provided us with a report in September 2015 discussing (1) adjustments to IRS systems and work processes needed to use accelerated W-2 information, (2) the potential impacts on internal and external stakeholders, and (3) other changes needed to match W-2 data to tax returns prior to issuing refunds, such as delaying refunds until W-2 data are available. In December 2015, the Consolidated Appropriations Act of 2016 amended the tax code to accelerate W-2 filing deadlines to January 31. IRS’s report will help IRS determine how to best implement pre- refund W-2 matching, given the new January 31st deadline for filing W-2s. Additionally, we suggested that Congress should consider providing the Secretary of the Treasury with the regulatory authority to lower the threshold for electronic filing of W-2s, which could make more W-2 information available to IRS earlier. External Leads. IRS partners with financial institutions and other external parties to obtain information about emerging IDT refund trends and fraudulent returns that have passed through IRS detection systems. In August 2014, we reported that IRS provides limited feedback to external parties on IDT external leads they submit and offers external parties limited general information on IDT refund fraud trends and recommended that IRS provide actionable feedback to all lead generating third parties. In November 2015, IRS reported that it had developed a database to track leads submitted by financial institutions and the results of those leads. IRS also stated that it had held two sessions with financial institutions to provide feedback on external leads provided to IRS. In December 2015, IRS officials stated that the agency sent a customer satisfaction survey asking financial institutions for feedback on the external leads process and was considering other ways to provide feedback to financial institutions. In April 2016, IRS officials stated they plan to analyze preliminary survey results by mid-April 2016. Additionally, IRS officials reported that the agency shared information with financial institutions in March 2016 and plans to do so on a quarterly basis, with the next information sharing session scheduled in June 2016. The 2016 Filing Season Has Generally Been Smooth, and Telephone Service Has Improved IRS and industry partners have characterized that returns processing and refund issuance during this filing season has been generally smooth. Through April 1, 2016, IRS had processed about 95 million returns and issued 76 million refunds totaling about $215 billion. While IRS experienced a major system failure in February that halted returns processing for about a day, the agency reported that it had minimal effect on overall processing of returns and refunds. In addition to filing returns, many taxpayers often call IRS for assistance. IRS’s telephone service has generally improved in 2016 over last year. From January 1 through March 19, 2016 IRS received about 35.4 million calls to its automated and live assistor telephone lines, about a 2 percent decrease compared to the same period last year. Of the 13.4 million calls seeking live assistance, IRS had answered 9.1 million calls—a 75 percent increase over the 5.2 million calls answered during the same period last year. IRS anticipated that 65 percent of callers seeking live assistance would receive it this filing season, which runs through April 18, and 47 percent of callers would receive live assistance through the entire 2016 fiscal year. As of March 19, 2016, 75 percent of callers had received live assistance, an increase from 38 percent during the same period last year. Further, the average wait time to speak to an assistor also decreased from 24 to 9 minutes. As we reported in March 2016, however, IRS’s telephone level of service for the full fiscal year has yet to reach the levels it had achieved in earlier years. IRS attributed this year’s service improvement to a number of factors. Of the additional $290 million IRS received in December 2015, it allocated $178.4 million (61.5 percent) for taxpayer services to make measurable improvements in its telephone level of service. With the funds, IRS hired 1,000 assistors who began answering taxpayer calls in March, in addition to the approximately 2,000 seasonal assistors it had hired in fall 2015. To help answer taxpayer calls before March, IRS officials told us that they detailed 275 staff from one of its compliance functions to answer telephone calls. IRS officials said they believe this step was necessary because the additional funding came too late in the year to hire and train assistors to fully cover the filing season. IRS also plans to use about 600 full-time equivalents of overtime for assistors to answer telephone calls and respond to correspondence in fiscal year 2016, compared to fewer than 60 full-time equivalents of overtime used in fiscal year 2015. In December 2014, we recommended that IRS systematically and periodically compare its telephone service to the best in business to identify gaps between actual and desired performance. IRS disagreed with this recommendation, noting that it is difficult to identify comparable organizations. We do not agree with IRS’s position; many organizations run call centers that would provide ample opportunities to benchmark IRS’s performance. In fall 2015, Department of the Treasury (Treasury) and IRS officials said they had no plans to develop a comprehensive customer service strategy or specific goals for telephone service tied to the best in the business and customer expectations. Without such a strategy, Treasury and IRS can neither measure nor effectively communicate to Congress the types and levels of customer service taxpayers should expect and the resources needed to reach those levels. Therefore, in December 2015 we suggested that Congress consider requiring that Treasury work with IRS to develop a comprehensive customer service strategy. In April 2016, IRS officials told us that the agency established a team to consider our prior work in developing this strategy or benchmarking its telephone service. In summary, while IRS has made progress in implementing information security controls, it needs to continue to address weaknesses in access controls and configuration management and consistently implement all elements of its information security program. The risks IRS and the public are exposed to have been illustrated by recent incidents involving public- facing applications, highlighting the importance of securing systems that contain sensitive taxpayer and financial data. In addition, fully implementing key elements of a breach response program will help ensure that when breaches of sensitive data do occur, their impact on affected individuals will be minimized. Weaknesses in information security can also increase the risk posed by identity theft refund fraud. IRS needs to establish an approach for addressing identity theft refund fraud that is informed by assessing the cost, benefits, and risks of IRS’s various authentication options and improving the reliability of fraud estimates. While this year’s tax filing season has generally gone smoothly and IRS has improved customer service, it still needs to develop a comprehensive approach to customer service that will meet the needs of taxpayers while ensuring that their sensitive information is adequately protected. Chairman Hatch, Ranking Member Wyden, and Members of the Committee, this concludes my statement. I look forward to answering any questions that you may have at this time. Contacts and Staff Acknowledgments If you have any questions regarding this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or wilshuseng@gao.gov, Nancy Kingsbury at (202) 512-2928 or kingsburyn@gao.gov, or James R. McTigue, Jr. at (202) 512-9110 or mctiguej@gao.gov or Jessica K. Lucas-Judy at (202) 512-9110 or LucasJudyJ@gao.gov. Other key contributors to this statement include Jeffrey Knott, Neil A. Pinney, and Joanna M. Stamatiades (assistant directors); Dawn E. Bidne; Mark Canter; James Cook; Shannon J. Finnegan; Lee McCracken; Justin Palk; J. Daniel Paulk; Erin Saunders Rath; and Daniel Swartz. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
In collecting taxes, processing returns, and providing taxpayer service, IRS relies extensively on computerized systems. Thus it is critical that sensitive taxpayer and other data are protected. Recent data breaches at IRS highlight the vulnerability of taxpayer information. In addition, identity theft refund fraud is an evolving threat to honest taxpayers and tax administration. This crime occurs when a thief files a fraudulent return using a legitimate taxpayer's identity and claims a refund. In 2015, GAO added identity theft refund fraud to its high-risk area on the enforcement of tax laws and expanded its government-wide high-risk area on federal information security to include the protection of personally identifiable information. This statement discusses (1) IRS information security controls over financial and tax processing systems, (2) IRS actions to address identity theft refund fraud, and (3) the status of selected IRS filing season operations. This statement is based on previously published GAO work as well as an update of selected data. In March 2016, GAO reported that the Internal Revenue Service (IRS) had instituted numerous controls over key financial and tax processing systems; however, it had not always effectively implemented other controls intended to properly restrict access to systems and information, among other security measures. In particular, while IRS had improved some of its access controls, weaknesses remained in key controls for identifying and authenticating users, authorizing users' level of rights and privileges, encrypting sensitive data, auditing and monitoring network activity, and physically securing facilities housing its information technology resources. These weaknesses were due in part to IRS's inconsistent implementation of its agency-wide security program, including not fully implementing prior GAO recommendations. GAO concluded that these weaknesses collectively constituted a significant deficiency for the purposes of financial reporting for fiscal year 2015. As a result, taxpayer and financial data continue to be exposed to unnecessary risk. Identity theft refund fraud also poses a significant challenge. IRS estimates it paid $3.1 billion in these fraudulent refunds in filing season 2014, while preventing $22.5 billion (see figure). The full extent is unknown because of the challenges inherent in detecting this form of fraud. IRS has taken steps to combat identity theft refund fraud such as improving phone service for taxpayers to report suspected identity theft and working with industry, states, and financial institutions to detect and prevent it. However, as GAO reported in August 2014 and January 2015, additional actions can further assist the agency in addressing this crime, including pre-refund matching of taxpayer returns with information returns from employers, and assessing the costs, benefits, and risks of improving methods for authenticating taxpayers. In addition, the Consolidated Appropriations Act 2016 includes a provision that would help IRS with pre-refund matching and also includes an additional $290 million to enhance cybersecurity, combat identity theft refund fraud, and improve customer service. According to IRS and industry partners, the 2016 filing season has generally gone smoothly, with about 95 million returns and $215 billion in refunds processed through April 1, 2016. In addition, IRS increased its level of phone service to taxpayers, although it has not developed a comprehensive strategy for customer service as GAO recommended in December 2015.
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Dataset Card for GovReport

Dataset Summary

Government report dataset consists of reports and associated summaries written by government research agencies including Congressional Research Service and U.S. Government Accountability Office.

Compared with other long document summarization datasets, government report dataset has longer summaries and documents and requires reading in more context to cover salient words to be summarized.

Versions

  • 1.0.1 (default): remove extra whitespace.
  • 1.0.0: the dataset used in the original paper.

To use different versions, set the revision argument of the load_dataset function.

Supported Tasks and Leaderboards

[More Information Needed]

Languages

English

Dataset Structure

Three configs are available:

  • plain_text (default): the text-to-text summarization setting used as in the original paper.
  • plain_text_with_recommendations: the text-to-text summarization setting, with "What GAO recommends" included in the summary.
  • structure: data with the section structure.

To use different configs, set the name argument of the load_dataset function.

Data Instances

plain_text & plain_text_with_recommendations

An example looks as follows.

{
    "id": "GAO_123456",
    "document": "This is a test document.",
    "summary": "This is a test summary"
}

structure

An example looks as follows.

{
    "id": "GAO_123456",
    "document_sections": {
      "title": ["test docment section 1 title", "test docment section 1.1 title"],
      "paragraphs": ["test document\nsection 1 paragraphs", "test document\nsection 1.1 paragraphs"],
      "depth": [1, 2]
    },
    "summary_sections": {
      "title": ["test summary section 1 title", "test summary section 2 title"],
      "paragraphs": ["test summary\nsection 1 paragraphs", "test summary\nsection 2 paragraphs"]
    }
}

Data Fields

plain_text & plain_text_with_recommendations

  • id: a string feature.
  • document: a string feature.
  • summary: a string feature.

structure

  • id: a string feature.
  • document_sections: a dictionary feature containing lists of (each element corresponds to a section):
    • title: a string feature.
    • paragraphs: a of string feature, with \n separating different paragraphs.
    • depth: a int32 feature.
  • summary_sections: a dictionary feature containing lists of (each element corresponds to a section):
    • title: a string feature.
    • paragraphs: a string feature, with \n separating different paragraphs.

Data Splits

  • train: 17519
  • valid: 974
  • test: 973

Dataset Creation

Curation Rationale

[More Information Needed]

Source Data

Initial Data Collection and Normalization

[More Information Needed]

Who are the source language producers?

Editors of the Congressional Research Service and U.S. Government Accountability Office.

Personal and Sensitive Information

None.

Considerations for Using the Data

Social Impact of Dataset

[More Information Needed]

Discussion of Biases

[More Information Needed]

Other Known Limitations

[More Information Needed]

Additional Information

Dataset Curators

[More Information Needed]

Licensing Information

CC BY 4.0

Citation Information

@inproceedings{huang-etal-2021-efficient,
    title = "Efficient Attentions for Long Document Summarization",
    author = "Huang, Luyang  and
      Cao, Shuyang  and
      Parulian, Nikolaus  and
      Ji, Heng  and
      Wang, Lu",
    booktitle = "Proceedings of the 2021 Conference of the North American Chapter of the Association for Computational Linguistics: Human Language Technologies",
    month = jun,
    year = "2021",
    address = "Online",
    publisher = "Association for Computational Linguistics",
    url = "https://aclanthology.org/2021.naacl-main.112",
    doi = "10.18653/v1/2021.naacl-main.112",
    pages = "1419--1436",
    abstract = "The quadratic computational and memory complexities of large Transformers have limited their scalability for long document summarization. In this paper, we propose Hepos, a novel efficient encoder-decoder attention with head-wise positional strides to effectively pinpoint salient information from the source. We further conduct a systematic study of existing efficient self-attentions. Combined with Hepos, we are able to process ten times more tokens than existing models that use full attentions. For evaluation, we present a new dataset, GovReport, with significantly longer documents and summaries. Results show that our models produce significantly higher ROUGE scores than competitive comparisons, including new state-of-the-art results on PubMed. Human evaluation also shows that our models generate more informative summaries with fewer unfaithful errors.",
}
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