Improper Payments: Incomplete Reporting under the Improper Payments Information Act Masks the Extent of the Problem
Published: 2006-12-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Fiscal year 2005 marked the second year that executive agencies were required to report improper payment information under the Improper Payments Information Act of 2002 (IPIA). The ultimate goal is to minimize such payments because, as a practical matter, they cannot be entirely eliminated. GAO's testimony is primarily based on its recently issued report, GAO-07-92 , which included a review of improper payment information reported by 35 agencies in their fiscal year 2005 performance and accountability or annual reports. This statement focuses on the progress agencies have made in their improper payment reporting, the challenges that remain, and the total amount of improper payments recouped through recovery auditing.
section_title: What GAO Found
paragraphs: While agencies are making progress, their fiscal year 2005 reporting under IPIA does not yet reflect the full scope of improper payments across executive branch agencies. Major challenges remain in meeting the goals of the act and ultimately improving the integrity of payments. GAO found that three challenges in particular continue to hinder full reporting of improper payment information: First, existing reporting incomplete. Although 18 agencies collectively identified and estimated improper payments for 57 programs and activities totaling $38 billion, some agencies still had not instituted systematic methods of reviewing all programs, resulting in their identification of none or only a few programs as susceptible to significant improper payments. In many cases, these same agencies had well-known and well-documented financial management weaknesses as well as fraudulent, improper, and questionable payments. Further, improper payments estimates totaling about $389 million for 9 programs were not based on a valid statistical sampling methodology as required. Materially higher estimates would have been expected had the correct methods been used, given that total outlays for these 9 programs exceeded $58.2 billion. Second, large programs still not included. Estimates of improper payments for 10 risk-susceptible programs with outlays totaling over $234 billion still have not been provided. Most of these programs were subject to OMB reporting requirements that preceded IPIA. Third, threshold criteria limit reporting. The act includes broad criteria to identify risk-susceptible programs. OMB's implementing guidance includes more specific criteria that limit the disclosure and transparency of agencies' improper payments. GAO's preliminary review of fiscal year 2006 data indicates that while additional progress is being made, agencies continue to face many of the significant challenges noted in GAO's report on fiscal year 2005 reporting. With regard to agencies' recovery audit efforts, GAO found that the data reported may present an overly optimistic view of these efforts. While 21 agencies were required to report on their recovery audit efforts, GAO identified discrepancies in several agencies' information and found limited reviews over contract payments. For example, for fiscal year 2005, the National Aeronautics and Space Administration (NASA) reported that it had identified and recovered $617,442 in contract payments, a 100 percent recovery rate. Yet, the NASA Office of Inspector General reported it had identified over $515 million in questioned contract costs during fiscal year 2005, of which NASA management decided to pursue recovery of $51 million. Had this amount been compared to the $617,442 NASA actually recovered, its recovery rate would drop from the reported 100 percent to 1.2 percent.

section_title: Letter
paragraphs: Thank you for the opportunity to be here today to discuss the  governmentwide problem of improper payments in federal programs and  activities. My testimony today is based on our November 2006 report as  well as on our previous testimonies on this topic issued earlier this year.  We focused on agencies’ fiscal year 2005 reporting under the Improper  Payments Information Act of 2002 (IPIA), the most recent data available  at the time we started this body of work. As agencies recently reported  their fiscal year 2006 data, my testimony today also includes some  preliminary observations on this information. IPIA has increased visibility  over improper payments by requiring executive agency heads, based on  guidance from the Office of Management and Budget (OMB), to identify  programs and activities susceptible to significant improper payments,  estimate amounts improperly paid, and report on the amounts of improper  payments and their actions to reduce them. As the steward of taxpayer  dollars, the federal government is accountable for how its agencies and  grantees spend hundreds of billions of taxpayer dollars and is responsible  for safeguarding those funds against improper payments. However,  although the ultimate goal is to identify and minimize these payments  through a variety of strategies, it is important to recognize that, given the  complexity, diversity, and magnitude of federal payments across the  executive branch, such improper payments will never be completely  eliminated.
Today, my testimony will focus on the following key points:  trends in agencies’ reporting under IPIA from fiscal year 2004 through  fiscal year 2006,    several major challenges that continue to hinder full reporting of improper    agencies’ reporting of recovery auditing efforts to recoup improper    our proposals for continued progress in capturing the full extent of  improper payments.
This testimony is primarily based on our recent review, which included the  35 federal agencies that the Department of the Treasury (Treasury)  determined to be significant to the U.S. government’s consolidated  financial statements. We reviewed improper payment information reported  by the 35 agencies in their fiscal year 2005 performance and accountability  reports (PAR) or annual reports. We also performed a preliminary review  of agencies’ fiscal year 2006 PARs or annual reports. We reviewed OMB  guidance on implementation of IPIA and its report on the results of  agency-specific reports, significant findings, agency accomplishments, and  remaining challenges. We did not independently validate the data that  agencies reported in their PARs or annual reports or the data that OMB  reported. However, we are providing agency-reported data as descriptive  information that will inform interested parties about the magnitude of  governmentwide improper payments and other improper payment-related  information. We believe the data to be sufficiently reliable for this  purpose. We conducted our work from April 2006 through September 2006  in accordance with generally accepted government auditing standards.  Our November 2006 report contains additional details on our scope and  methodology.
subsections: section_title: Significant Trends in IPIA Reporting
paragraphs: I would now like to focus on the progress that has been made in the first   3 years of IPIA implementation. Regarding the first year reporting under  IPIA, as we reported in March 2005, the improper payment estimate of   $45 billion reported by 17 agencies did not include any amounts for some  of the highest risk programs, such as Medicaid with outlays in excess of   $175 billion for fiscal year 2004. Further, we noted that some agencies still  had not instituted systematic methods of reviewing all programs and  activities or had not identified all programs susceptible to significant  improper payments. We concluded that the magnitude of the  governmentwide improper payments problem was still unknown because  agencies had not yet prepared improper payment estimates for all of their  programs. In that report, we made three recommendations to OMB to help  ensure successful implementation of IPIA requirements. OMB commented  that its management emphasis and inspector general oversight offer  sufficient incentives to ensure agencies meet IPIA requirements.
Regarding the second year of IPIA reporting, we recently reported in  November 2006 that while making progress, agencies’ fiscal year 2005  reporting under IPIA does not yet reflect the full scope of improper  payments across executive branch agencies. For fiscal year 2005, 18  agencies reported improper payment estimates totaling in excess of   $38 billion, which is $7 billion less than the $45 billion reported for fiscal  year 2004. All indications are that the estimate should be markedly higher  because the total improper payment estimate did not include certain  factors that if included, would increase the estimate. For example,  agencies had not estimated improper payments for 10 risk-susceptible  programs with outlays totaling over $234 billion, even though most of  these programs had such reporting requirements predating IPIA. In  addition, we found that improper payment estimates totaling about   $389 million for 9 programs were not based on a statistical sampling  methodology. Given that total outlays for these 9 programs exceeded  $58.2 billion in fiscal year 2005, estimates for these programs would likely  have been much greater had statistically valid methods been used. Further,  we reported that agencies identified a number of statutory or regulatory  barriers that limited their corrective actions in reducing improper  payments. I will discuss these matters in greater detail later in my  statement. We concluded that major challenges remain in meeting the  goals of the act and ultimately improving the integrity of payments.
Based on our preliminary review of available information for fiscal year  2006, 18 agencies estimated improper payments totaling about $42 billion,  a net increase of about $4 billion, or 11 percent, from the prior year  improper payment estimate of $38 billion. This increase was attributable  to 10 newly reported programs with improper payment estimates totaling  about $2.3 billion and federal agencies reporting an increase in estimates  for programs that had previously reported.
Our preliminary review of federal agencies’ fiscal year 2006 reporting of  selected improper payment information identified that while progress is  being made, improvements are still needed to fully address improper  payments reporting requirements. Similar to our previous results, we  found that some agencies have not yet annually reviewed all programs and  activities, have not yet estimated improper payments for their risk- susceptible programs, or only estimated improper payments for one  component of the program. For example, we noted that the fiscal year  2006 total improper payment estimate of $42 billion still does not include 9  risk-susceptible federal programs, including Medicaid with total program  outlays of about $183 billion for fiscal year 2006. In addition, some federal  agency auditors continue to identify weaknesses in agencies’ compliance  with the requirements of IPIA. Five agency auditors that tested compliance  with IPIA cited agencies that were either in noncompliance with the act or  had not fully complied with certain aspects of the act requirements, such  as not estimating for all risk-susceptible programs, excluding certain types  of payments from reviews, and estimating improper payments using  samples that were not statistically derived. In addition to the  noncompliance issues, many federal agencies’ OIGs again reported on  major management challenges, including reducing improper payments in  programs and payment activities. For example, one agency’s OIG reported  that ineffective oversight and monitoring of policies, programs, and its  program participants has hindered the agency’s ability to identify and  correct improper payments. Another agency’s OIG reported that improving  acquisition and contract management is needed to reduce cost and  eliminate improper payments.
I would also like to address certain concerns recently raised by OMB’s  Controller in a letter to us dated November 28, 2006. In that letter, the  Controller stated that our report issued on November 14, 2006, contained  out-of-date information because it was based on agencies’ fiscal year 2005  reporting. We had a number of reasons for the timing of our analysis and  report issuance. First, it is important to note that we first stated our  findings related to fiscal year 2005 improper payments less than 4 months  after agencies reported their fiscal year 2005 information. On March 9,  2006, and again on April 5, 2006, we testified before the Senate and House  Government Reform subcommittees on agencies’ progress in meeting IPIA  reporting requirements for fiscal year 2005. In those testimony statements,  we focused on selected reporting requirements, and our objectives  included (1) the extent to which agencies performed risk assessments of  all programs and activities, (2) the annual amount of improper payments  estimated by reporting agencies, and (3) the amount of improper payments  recouped through recovery audits. For our November 14 report, the  objectives were similar but broader, and focused on additional improper  payment reporting requirements as well as on the definition and the types  of improper payments included in IPIA and OMB’s implementing guidance.  The latter issues, it should be noted, are unrelated to specific fiscal year  reporting. Thus, the issuance of our report was timely, given the body of  work we issued prior to November 14—the two testimonies mentioned  above, another related report on improper payments in state-administered  programs, and our responses to posthearing questions.
Second, the issuance of our report was in accordance with the  congressional schedule this fall, which included a lengthy recess for mid- term elections. Third, the information in our November 14 report provides  a sound framework for documenting the issues that affected agencies and  OMB in fiscal year 2005 and which they continue to face. Most of the  findings discussed in our report continue to be relevant for the fiscal year  2006 improper payment reporting. Specifically, our November 14 report  highlighted incomplete reporting of improper payment information related  to agencies’ risk assessments and improper payment estimates, as well as  risk-susceptible programs that still are unable to report improper payment  estimates. As discussed previously, based on our preliminary review of the  fiscal year 2006 PARs, these issues continue to exist.
Finally, let me add that we provided a draft of our report to OMB prior to  publication for its review and comment. The Controller sent detailed  written comments in a letter dated October 26, 2006, which are reprinted  in full in our final report. These comments make no mention of any  concerns with the timeliness of the data included in our report. Indeed, the  official comments state that OMB generally agreed with our assessment  that challenges remain in meeting the goals of IPIA.
section_title: Challenges That Hinder Full Reporting of Improper Payment Information
paragraphs: While showing progress, agencies’ fiscal year 2005 reporting under IPIA  does not yet reflect the full scope of improper payments across executive  branch agencies. Major challenges remain in meeting the goals of the act  and ultimately improving the integrity of payments. We found that the  following challenges continue to hinder full reporting of improper  payment information: existing reporting remains incomplete, large  programs are still not included, and OMB’s threshold criteria limit  complete reporting.
subsections: section_title: Improvements Needed in Agencies’ Reporting of Improper Payment Information
paragraphs: Of the 35 agencies whose fiscal year 2005 agency PARs or annual reports  were included in our review, 23, the same number of agencies that  reported having risk assessments in our prior year review, reported they  had performed risk assessments of all of their programs and activities. The  remaining 12 agencies either did not report this information in their PARs  or annual reports, or included some improper payment details in their  PARs but did not report assessing for the risk of improper payments for all  of their programs and activities.
Although OMB’s guidance identifies the scope of payments agencies are to  review, such as federal awards made by recipients and subrecipients  subject to the Single Audit Act, as amended, it does not provide agencies  detailed information on how to conduct a risk assessment in order to  adequately carry out their responsibilities to meet the requirements of the  act. Specifically, we found that OMB’s guidance lacks a description of the  common types of risk factors agencies should consider when annually  reviewing their programs, such as program complexity; operational  changes; and findings from investigative, financial statement, and  performance audit reports. Developing such a framework would begin the  process to effectively identify and target high-risk areas within a program  and better position agencies as they determine which control activities to  implement to reduce risks and ultimately reduce fraud and errors.
Although 23 agencies reported meeting this requirement for all of their  programs and activities, other readily available information suggests to us  that the adequacy of agencies’ risk assessments was questionable. For  example, auditors for the Department of Justice (DOJ) and the  Department of Homeland Security (DHS) cited agency noncompliance  with IPIA in their fiscal year 2005 annual audit reports, primarily caused by  inadequate risk assessments. The DOJ auditors stated that one agency  component had not established a program to assess, identify, and track  improper payments. The DHS auditors reported that the department did  not institute a systematic method of reviewing all programs and identifying  those it believed were susceptible to significant erroneous payments. This  was the second consecutive year that the auditors reported IPIA  noncompliance for DHS. Although the auditors identified the agency’s risk  assessment methodology as inadequate, DHS again reported in its PAR  that it had assessed all of its programs for risk and found none susceptible  to significant improper payments.
However, existing significant financial management weaknesses at these  agencies highlight visible, well-known risks for improper payments. For  example, DHS continues to face significant financial management  weaknesses as illustrated by previous reviews of the Federal Emergency  Management Agency’s (FEMA)—a DHS component—Individuals and  Households Program (IHP). The DHS OIG has also cited disaster response  and recovery as one of DHS’s major management challenges for fiscal year  2005.
In May 2005, the DHS OIG reported weaknesses in DHS’s IHP, including  inspection and verification of losses reported by individuals related to the  2004 hurricane season as well as eligibility issues. Subsequently, in July  2005, the Senate Committee on Homeland Security and Governmental  Affairs released its investigation results of FEMA’s response to the 2004  Florida hurricanes, in particular, Hurricane Frances, and found similar  weaknesses in FEMA’s IHP. In discussing its risk assessment  methodology, DHS reported that FEMA’s IHP might be at high risk for  issuing improper payments as a result of the weaknesses identified in the  DHS OIG report and performed a second round of testing of its fiscal year  2004 disbursements. From its test results, DHS concluded that its estimate  of improper payments for IHP did not meet OMB’s criteria of exceeding  $10 million and 2.5 percent of program payments. DHS reported that IHP  would receive closer scrutiny and undergo an independent payment  review in fiscal year 2006, but that its sample payment testing did not show  the program to be at high risk for improper payments.
Our recent review of FEMA’s IHP shows a dramatically different result. In  our June 2006 report, we estimated improper payments related to  FEMA’s IHP of about $1 billion as of February 2006, related to individual  assistance payments in response to hurricanes Katrina and Rita that  occurred in 2005. This amount represents 16 percent of the IHP payments.  For example, we determined that millions of dollars in expedited and  housing assistance payments went to registrants who provided the names  and Social Security numbers of individuals incarcerated in federal and  state prisons during the hurricanes. In addition, FEMA improperly paid  individuals twice for their lodging—paying both hotels and rental  assistance. Also, FEMA could not confirm that 750 debit cards worth   $1.5 million went to Hurricane Katrina victims.
In addition to these problems with agency risk assessments, we found that  only a limited number of agencies were estimating improper payments and  several of those that were did not base their estimates on a valid statistical  sampling methodology as required. Of the 35 agencies, 18 agencies  accounting for 57 programs reported improper payment estimates totaling  in excess of $38 billion for some or all of their high-risk programs. (See  GAO-07-92, app. II, for further details.) This represents approximately   2 percent of the total fiscal year 2005 government outlays of $2.5 trillion.  For the remaining 17 agencies that did not report estimates, 8 said they did  not have any programs susceptible to significant improper payments, 8  were silent about whether they had programs susceptible to significant  improper payments, and the remaining agency identified programs  susceptible to significant improper payments and said it planned to report  an estimate by fiscal year 2007. (See GAO-07-92, table 2, for further  details.)
Unless previously approved by OMB, the improper payments estimates  must be based on a statistically valid sampling methodology and should  include a gross total of both over- and underpayments. In its Circular No.  A-136, OMB encourages agencies to break out over- and underpayments as  part of improper payment reporting, if available. (For more details related  to over- and underpayment estimates, see GAO-07-92, app. III.) With  statistical sampling, sample results can be generalized to the entire  population from which the sample was taken. From our review, we found  six agencies that did not use statistical sampling as a basis for reporting  improper payments totaling approximately $389 million for nine programs  with outlays exceeding $58 billion.
For example, the Department of Labor (Labor) analyzed fiscal year 2003  single audits to identify questioned costs for its Workforce Investment  Act program, which, in turn, were used as a proxy for reporting its  improper payment estimate. Specifically, the improper payment rate was  determined by calculating the projected questioned costs and dividing this  total amount by the corresponding outlays. We do not believe this is a  reasonable proxy for improper payment levels because single audits, by  themselves, may lack the level of detail necessary for achieving IPIA  compliance. Specifically, single audits generally focus on the largest  dollars in an auditee’s portfolio. Thus, all programs identified as  susceptible to improper payments at the federal level may not receive  extensive coverage under a single audit. Consequently, both the depth and  level of detail of single audit results are, generally, insufficient to identify  improper payments, estimate improper payments, or both.
We also found instances where agencies estimated improper payments for  only one component of the risk-susceptible program. For example, HHS’s  Medicare program is the largest program constituting the total improper  payment estimate, with an estimate of $12.1 billion for fiscal year 2005.  However, this estimate represents payment errors only for its fee-for- service program component. HHS has not yet begun to estimate improper  payments for its managed care component, with outlays totaling about   $52 billion, or 15 percent of Medicare program outlays. In its fiscal year  2005 financial report, HHS’s Centers for Medicare and Medicaid Services  (CMS) identified bringing the Medicare managed care component into  compliance with IPIA as a key challenge in the coming years. In addition,  CMS’s external auditors identified Medicare’s managed care benefits  payment cycle as a material weakness in its report on internal controls.  Specifically, the auditors found that existing CMS policies and procedures  are not sufficient to adequately reduce the risk of material benefit payment  errors from occurring or not being detected and corrected in a timely  manner.
subsections: section_title: Statutory or Regulatory Barriers That May Hinder Agency Reporting and Corrective Actions
paragraphs: A key element that agencies are required to address as part of their  improper payment reporting includes a description of any statutory or  regulatory barrier that may limit the agencies’ corrective actions in  reducing improper payments. Reporting this type of information gives the  Congress the ability to use its authorization, appropriation, and oversight  responsibility to help agencies meet performance goals. Citing specific  statutory or regulatory barriers as part of its improper payments reporting  allows the Congress to determine whether the public’s needs are  adequately served by federal programs, and thus can take corrective  action through legislative changes. It should be recognized that this type  and other barriers exist as a result of decisions to ensure beneficiary  privacy and other data safeguards and the inherent nature of some federal  programs. As a result, it may be difficult to eliminate or mitigate these  barriers to the point where they no longer restrict agency actions in  certain areas to better manage their improper payment problems.
During our review of agencies’ fiscal year 2005 PARs, we found that nine  agencies identified statutory or regulatory barriers that may limit  corrective actions to reduce improper payments. Agencies cited various  barriers that restrict their ability to manage their programs against  improper payments, including three agencies that cited barriers related to  data matching. Data matching and other computer-related techniques  play a significant role not only in identifying improper payments, but also  in providing data on why these payments were made and, in turn,  highlighting areas that need strengthened prevention controls. The  adoption of these techniques allows agencies to have effective detection  methods to quickly identify and recover improper payments. These  powerful internal control tools provide more useful and timely access to  information. The use of these techniques can achieve potentially  significant savings by identifying client-related reporting errors and  misinformation during the eligibility determination process—before  payments are made—or by detecting improper payments that have been  made. Therefore, it will be critical for the Congress, federal agencies, and  the administration to carefully consider the information reported on  statutory barriers to ensure that agencies can take advantage of such tools  to the greatest extent possible.
For example, Education reported that requirements in the Internal  Revenue Code precluded data matching, but that a database match with  the Internal Revenue Service (IRS) would likely improve the accuracy of  Pell Grant awards. In addition, it would eliminate the need for schools to  rely on paper copies of tax returns submitted by applicants, which are  used to verify applicants’ adjusted gross income and taxes paid. Currently,  the schools have limited assurance that the tax returns submitted by the  applicants contain the same information that is filed with IRS. However,  Education’s proposal to amend the Internal Revenue Code to permit a   100 percent database match has not yet been enacted, and Education is  uncertain whether or when such legislation may be enacted. As a further  illustration, Labor reported that for its Federal Employees’ Compensation  Act (FECA) program, legislation does not currently permit FECA to  verify employment earnings with the Social Security Administration (SSA)  without the claimant’s written permission. Compensation benefits may be  overpaid if an employee has unreported earnings and does not grant Labor  permission to verify earnings with SSA.
section_title: Improper Payments Estimate Does Not Include Several Large, Risk- Susceptible Programs
paragraphs: The fiscal year 2005 governmentwide improper payments estimate of      $38 billion did not include any amounts for 10 programs, with fiscal year  2005 outlays totaling over $234 billion. OMB had specifically required 7 of  these programs to report selected improper payment information for  several years before IPIA reporting requirements became effective. After  passage of IPIA, OMB’s implementing guidance required that these  programs continue to report improper payment information under IPIA.  The remaining 3 risk-susceptible programs, with no previous reporting  requirement, provided target dates for estimating improper payments. As  shown in table 1, the fiscal year 2005 improper payment estimate does not  include one of the largest federal programs determined to be susceptible  to risk, HHS’s Medicaid program, with outlays exceeding $181 billion  annually.
OMB reported that some of the agencies were unable to determine the rate  or amount of improper payments because of measurement challenges or  time and resource constraints, which OMB expects to be resolved in future  reporting years. For example, since fiscal year 2002, HHS has conducted  pilots at the state level to further its progress toward reporting a national  improper payments estimate for its Medicaid program. Each state is  responsible for designing and overseeing its own Medicaid program within  the federal government structure. This type of program structure presents  challenges for implementing a methodology to estimate improper  payments as HHS must work with states to obtain applicable  documentation used in the calculation. An additional challenge HHS and  other agencies with state-administered programs say they face is the  ability to hold states accountable for meeting targets to reduce and  recover improper payments in the absence of specific statutory authority.
Of the three programs that did not report a target date for estimating, the  Department of Housing and Urban Development’s (HUD) Community  Development Block Grant (CDBG) program was the only one that did not  report any actions under way to begin estimating improper payments. In  its fiscal year 2005 PAR, HUD reported that based on completed testing of  fiscal year 2003 payments, this program is below OMB’s threshold  criteria—exceeding $10 million and 2.5 percent of program payments—for  significant improper payments and, therefore, was removed from HUD’s  at-risk inventory. HUD stated that this program was not subject to  retesting unless there was a significant change in the nature of activity or  internal control structure.
We have several problems with HUD’s position. The CDBG program was  subject to the previous OMB Circular No. A-11 requirements and thus was  required by OMB’s guidance to continue to report improper payment  information under IPIA, regardless of the agency-determined risk level,  which based on other known information may not reflect actual risk.  During a June 2006 hearing on the CDBG program, HUD’s OIG reported  on numerous instances of fraudulent, improper, and abusive use of  program funds identified over a 2-½-year period based on 35 audits. The  HUD OIG reported that its office has recovered over $120 million in  program funds, identified over $100 million in questioned costs, indicted  159 individuals, initiated administrative actions against 143 individuals,  and took 5 civil actions and 39 personnel actions. As evidenced by the  HUD OIG reviews, the CDBG program may be at risk of significant  improper payments.
Further, we noted that the total improper payment estimate of about       $38 billion represents almost a $7 billion, or 16 percent, decrease from the  $45 billion of improper payments reported by agencies in fiscal year 2004.  On the surface, this would suggest that significant progress has been  made. However, the reported $7 billion decrease in the governmentwide  estimate is primarily attributable to a decrease in Medicare’s estimate.
Based on our review, the Medicare improper payment estimate decrease  was principally caused by increased efforts to educate health care  providers about its Medicare error rate testing program and the  importance of responding to its requests for medical records to perform  detailed statistical reviews of Medicare payments. HHS reported that these  more intensive efforts had dramatically reduced the number of “no  documentation” errors in its medical reviews. HHS reported marked  reductions in its error rate attributable to fewer cases of (1) nonresponses  to requests for medical records and (2) insufficient documentation  submitted by the provider. We noted that these improvements partially  resulted from HHS extending the time that providers have for responding  to documentation requests from 55 days to 90 days.
These changes primarily affected HHS’s processes related to its efforts to  perform detailed statistical reviews for the purposes of calculating an  annual improper payment estimate for the Medicare program. While this  may represent a refinement in the program’s improper payment estimate,  the reported reduction may not reflect improved accountability over  program dollars. Therefore, the federal government’s progress in reducing  improper payments may be exaggerated because the reported improper  payments decrease in the Medicare program accounts for the bulk of the  overall reduction in the governmentwide improper payments estimate.
Our work did not include an overall assessment of HHS’s estimating  methodology. However, we noted that the changes made for the fiscal year  2005 estimate were not related to improvements in prepayment validation  processes, and we did not find any evidence that HHS had significantly  enhanced its preventive controls in the Medicare payment process to  prevent future improper payments. Further, we also found that HHS’s OIG  continues to cite the integrity of Medicare payments as a top management  challenge. In addition, health care fraud schemes continue to hamper  HHS’s efforts to improve accountability. For example, in May 2006, DOJ  reported that a businessman pleaded guilty to conspiracy to defraud  Medicare of $40 million in fraudulent billings over a 16-month period. The  fraud scheme included billing Medicare for motorized wheelchairs that  were either not required by the Medicare beneficiary, not delivered, or  both.
section_title: Threshold Criteria in OMB Guidance Limit Agency Reporting
paragraphs: For purposes of assessing what programs and activities are at risk of  improper payments, IPIA states that agency heads must review their  agencies’ programs and activities to determine those that are susceptible  to significant improper payments. The law does not define susceptibility.  In its implementing guidance, OMB directed that a program or activity is  susceptible to significant improper payments if it meets two criteria— potential improper payments exceeding $10 million and 2.5 percent of  program payments. Therefore, both criteria must be met for an agency to  subject the program to the later steps requiring the agency to estimate  improper payments and address the various improper payment reporting  requirements.
As I stated earlier, the information developed during a risk assessment  forms the foundation upon which management can determine the nature  and type of corrective actions needed. It also gives management baseline  information for measuring progress in reducing improper payments. Thus,  these assessment criteria affect how agencies identify, estimate, report on,  and reduce those programs susceptible to significant improper payments.  For example, of the 23 agencies that reported assessing all programs and  activities, we found that 6 agencies limited their risk assessment reviews  to only those programs that would likely meet OMB’s definition of  programs susceptible to significant improper payments. Two of these 6  agencies reported that they did not perform a comprehensive risk  assessment for those programs with outlays of less than $10 million  because the programs would not have exceeded both of OMB’s threshold  criteria. The remaining 4 agencies did not perform a comprehensive risk  assessment of programs with outlays ranging from $40 million to   $200 million, generally citing the threshold criteria as the reason for their  exclusion.
We also noted instances where agencies with large program outlays  reported that their programs or activities were not susceptible to  significant improper payments because the improper payment estimates  only exceeded one of OMB’s criteria for reporting improper payment  information, another example of how OMB’s criteria could materially  affect the extent to which agencies report improper payment information  in their PARs. From our review of the 57 agency programs and activities  that were included in the total $38 billion improper payment estimate, we  identified 20 programs or activities that reported improper payment  estimates exceeding $10 million, but not 2.5 percent of program outlays.  We also identified 1 program that reported an error rate exceeding   2.5 percent of program outlays, but not $10 million. See table 2 for  additional details.
We identified, in total, 21 programs or activities with improper estimates  exceeding $5.6 billion that meet only one of OMB’s reporting criteria. Most  of these program estimates greatly exceeded $10 million and, without  certain stipulations, could have avoided reporting improper payment  information under OMB’s reporting criteria. However, OMB has required  that 13 of these 21 programs estimate improper payments regardless of  dollar amount or error rate, because they had previous reporting  requirements under OMB Circular No. A-11. Nonetheless, if the Circular  No. A-11 requirements did not apply or agencies decided not to voluntarily  report on their improper payment estimates that were under OMB’s  reporting threshold, OMB’s definition of significant improper payments  could potentially mask the full scope of improper payments.
Although we do not know the extent of improper payments that are not  reported, a limited number of agencies voluntarily provided information in  their PARs that allowed us to determine the amount of improper payments  for certain programs and activities that were excluded from the total  improper payments estimate of $38 billion for fiscal year 2005. For  example, the Department of Education identified three programs with  estimated improper payments exceeding $10 million for each program,  which totaled about $155 million in improper payments. In light of OMB’s  criteria, because these estimates did not exceed 2.5 percent of program  outlays, they were not included in the agency’s total improper payment  estimate. In another example, the Department of Defense (DOD) OIG  reported it had identified about $23 million in improper payments related  to the procurement of fuel at the Defense Energy Support Center during  fiscal year 2005. DOD did not report this information in its PAR since the  improper fuel payments did not exceed 2.5 percent of program payments.
As these examples illustrate, OMB’s current criteria for identifying risk- susceptible programs limit the disclosure of valuable information that the  Congress, the public, and others with oversight and monitoring interests  need to hold agencies accountable for reporting and reducing improper  payments. Thus, amending existing IPIA provisions to define risk- susceptible programs and activities, such as the use of a specific dollar  threshold, would allow for more complete disclosure and transparency of  governmentwide improper payment reporting and, in turn, would require  OMB to revise its implementing guidance to reflect such amendments as  well as align existing guidance with the intent of the act.
section_title: IPIA Definition of Improper Payments Excludes Certain Payments from Reporting
paragraphs: IPIA defines an improper payment as a payment that should not have been  made or that was made in an incorrect amount (including overpayments  and underpayments) under statutory, contractual, administrative, or other  legally applicable requirements. This includes any payment to an ineligible  recipient, any payment for an ineligible service, any duplicate payment,  any payment for services not received, and any payment that does not  account for credit for applicable discounts.
On August 28, 2003, OMB advised the Social Security Administration (SSA)  on improper payment reporting. Under this advice, SSA was allowed to  exclude from its estimate of improper payments those payments that it  made following constitutional, statutory, or judicial requirements, even  though those payments were subsequently determined to be incorrect.  These payments were deemed by OMB to be “unavoidable” improper  payments, as there are no administrative changes SSA could implement  that would eliminate such payments, nor would SSA be likely to receive  other relief from such requirements.
As we previously reported, although the definition of improper payments  does not use the terms avoidable or unavoidable, we agree with OMB that  a payment that was made because of a legal requirement to make the  payment subject to subsequent determinations that the payment is not due  should not be included in an agency’s estimate of its improper payments.  We agree with OMB’s conclusion not because it is an “unavoidable”  payment but rather because it does not meet the definition of an improper  payment under the act.
In its Supplemental Security Income (SSI) program, SSA disburses  disability payments to recipients at the beginning of the month based on  the income and asset levels recipients expect to maintain during the  month. If SSA initially determines that an overpayment occurred, court  decisions and language in the Social Security Act allow individuals to  continue receiving the same amount of SSI benefits pending the results of  a hearing to determine eligibility. If the initial determination is affirmed,  the payments made during the hearing and appeals processes are  considered overpayments, which SSA may recover using a variety of  means.
In this example, SSA, because of the statutory requirement, must make the  payment. The statute requires SSA to make the payment until applicable  due process requirements result in a determination that the person is  ineligible; therefore, the mandatory payments whether subsequently  deemed to be correct or incorrect, have not been made to an ineligible  recipient at the time they were made. Accordingly, the facts would not  support inclusion of these overpayments as improper payments as defined  under IPIA. However, if as a result of the due process procedures, it is  subsequently determined that the recipient is no longer eligible for  benefits and SSA makes a payment subsequent to these procedures, that  amount would be an improper payment.
Yet, we would not go so far as to conclude that any payment that is  unavoidable should not be included as an improper payment under IPIA.  Rather, the exclusion of payments should be made individually on a fact- specific basis using the definition provided in IPIA. In addition, we believe  that agencies should track and monitor these types of payments as part of  their debt collection efforts and have the ability to readily report this type  of information upon request. OMB currently does not require SSA to  report in its PAR details relating to these types of overpayments, nor does  OMB require governmentwide reporting of these types of overpayments,  thus the magnitude of this issue is unknown. Having agencies annually  report on these types of overpayments would provide the Congress,  agency management, and other decision makers valuable information with  which to determine the extent of these types of overpayments and to make  policy decisions, if needed, to appropriately address this issue.
section_title: Agencies’ Reporting of Recovery Auditing Information Questionable
paragraphs: We noted discrepancies in selected agencies’ reporting of recovery audit  information and limited reviews over contract payments. As a result,  reporting for recovery auditing information may not represent an accurate  view of the extent of agencies’ efforts. From our review of agencies’ PARs  and discussions with OMB, we determined that 21 agencies reported  entering into contracts with a total value in excess of $500 million and thus  were subject to recovery auditing requirements under section 831 of the  National Defense Authorization Act for Fiscal Year 2002. Generally, these  agencies reported on their recovery auditing efforts, such as the amount  identified for recovery and the amount recovered. However, we noted a  few instances where the agency amount of contract costs identified for  recovery was considerably lower than the corresponding OIG amount  identified from current year audit reviews. These discrepancies raise  questions as to whether the agency amount identified for recovery should  have been much higher, thereby significantly decreasing the reported  agency-specific and overall governmentwide high rate of recovery. We also  noted that 5 of the 21 agencies did not review all of their agency  components as part of their recovery audit efforts, and 2 agencies reported  that recovery auditing was not cost beneficial.
Section 831 of the National Defense Authorization Act provides an impetus  for applicable agencies to systematically identify and recover contract  overpayments. The law authorizes federal agencies to retain recovered  funds to cover in-house administrative costs as well as to pay contractors,  such as collection agencies. Any residual recoveries, net of these program  costs, are to be credited back to the original appropriation from which the  improper payment was made, subject to restrictions as described in  legislation. As we previously testified, with the passage of this law, the  Congress has provided agencies a much-needed incentive for identifying  and recovering their improper payments that slip through agency  prepayment controls.
Recovery auditing is a method that agencies can use to recoup detected  improper payments. Recovery auditing is a detective control to help  determine whether contractor costs were proper. Specifically, it focuses  on the identification of erroneous invoices, discounts offered but not  received, improper late penalty payments, incorrect shipping costs, and  multiple payments for single invoices. Recovery auditing can be conducted  in-house or contracted out to recovery audit firms. The techniques used in  recovery auditing offer the opportunity for identifying weaknesses in  agency internal controls, which can be modified or upgraded to be more  effective in preventing improper payments before they occur for  subsequent contract outlays.
Nonetheless, effective internal control calls for a sound, ongoing invoice  review and approval process as the first line of defense in preventing  unallowable contract costs. Given the large volume and complexity of  federal payments and historically low recovery rates for certain programs,  it is much more efficient to pay bills and provide benefits properly in the  first place. Aside from minimizing overpayments, preventing improper  payments increases public confidence in the administration of benefit  programs and avoids the difficulties associated with the “pay and chase”  aspects of recovering improper payments. Without strong preventive  controls, agencies’ internal control activities over payments to contractors  will not be effective in reducing the risk of improper payments.
For fiscal year 2005, OMB expanded the type of recovery auditing  information that agencies are to report in their annual PARs. Prior to fiscal  year 2005, agencies were only required to report on the amount of  recoveries expected, the actions taken to recover them, and the business  process changes and internal controls instituted or strengthened to  prevent further occurrences. In addition, OMB was not reporting agencies’  recovery audit activities on a governmentwide basis in its annual report on  agencies’ efforts to improve the accuracy and integrity of federal  payments. In fiscal year 2005, OMB required applicable agencies to discuss  any contract types excluded from review and justification for doing so. In  addition, agencies were required to report, in a standard table format,  various amounts related to contracts subject to review and actually  reviewed, contract amounts identified for recovery and actually recovered,  and prior year amounts.
Twenty-one agencies reported over $340 billion as amounts subject to  review for fiscal year 2005, while the contract amounts reviewed totaled  over $287 billion. In addition, the 21 agencies reported identifying about  $557 million in contracts for recovery, which represented less than two- tenths of a percentage of the $287 billion amount reviewed. Of the         $557 million identified, agencies reported recovering $467 million in  improper payments, an 84 percent recovery rate. However, we found two  instances where the agency amount of contract costs identified for  recovery was considerably lower than the corresponding OIG amount  identified from current year audit reviews. These discrepancies raise  questions as to whether the agency amount identified for recovery should  have been much higher, thereby significantly decreasing the agency- specific and overall high rate of recovery.
For example, for fiscal year 2005, NASA reported in its PAR that it had  identified and recovered $617,442 in contract payments, a 100 percent  recovery rate. Yet, the NASA OIG reported it had identified over   $515 million in questioned contract costs during fiscal year 2005. Of this  amount, NASA management decided that $51 million in contract costs  should be pursued for recovery. When comparing the $51 million in  questioned contract costs identified for recovery to the $617,442 NASA  actually recovered, the recovery rate decreases from the reported   100 percent recovery rate to a 1.2 percent rate. In another example, DOD  reported in its PAR that it had identified for recovery $473 million and  recovered about $419 million in contract payments, an 89 percent recovery  rate. However, the DOD OIG reported it had identified over $2 billion in  questioned contract costs as of September 30, 2005. When comparing the  $2 billion in questioned contract costs to the $419 million DOD actually  recovered, the recovery rate significantly decreases from a reported   89 percent recovery rate to 21 percent.
These two discrepancies alone significantly decrease OMB’s reported  overall recovery rate of 84 percent to a 22 percent recovery rate. Other  factors would also suggest the recovery rate is indeed much lower. We  noted other instances where OIG-reported questioned costs exceeded  agency contract amounts identified for recovery. Because these costs were  not specifically identified as contractor costs versus other payment types,  we were unable to determine how much of the OIG-identified questioned  costs related to contract costs.
In addition, another factor that may call into question the reported high  recovery rate is that 5 of the 21 agencies did not review all of their agency  components as part of their recovery audit efforts, and 2 agencies (HUD  and Labor) reported that recovery auditing was not cost beneficial. For  example, HUD determined that based on its review of $206.6 million in  contract payments, none were found to be improper. Thus, HUD  determined that pursuit of an ongoing recovery auditing program was not  cost beneficial or necessary. Because section 831 of the National Defense  Authorization Act requires agencies to carry out a cost-effective program  for identifying errors made in paying contractors and for recovering  amounts erroneously paid to contractors, agencies have determined that  they may opt out of conducting a recovery audit if it is not deemed to be  cost beneficial. However, neither of the two agencies that determined it  was not cost beneficial to conduct a recovery audit provided support in  their fiscal year 2005 PARs for this determination.
section_title: GAO Recommendations for Continued Progress in Capturing the Full Extent of Improper Payments
paragraphs: Our November 2006 report included one matter for congressional  consideration and four recommendations for executive action.  Specifically, to ensure that the full extent of improper payments is being  captured, the Congress should consider amending existing IPIA provisions  to define specific criteria, such as a dollar threshold, agencies should use  to identify which programs and activities are susceptible to significant  improper payments, thereby triggering improper payment estimating and  reporting requirements. In addition, to facilitate agencies’ progress in  ensuring accurate and complete improper payments and recovery auditing  reporting, we recommended that OMB take several actions regarding   (1) risk assessment methodologies and the level of detail necessary to  meet the annual improper payment reporting requirements, (2) statistically  valid estimates, (3) extent of payments agencies make under statute or  judicial determinations that later are determined to be overpayments, and  (4) agencies’ rationale that recovery auditing is not cost beneficial.
OMB generally agreed with our recommendations and also agreed with  our assessment that challenges remain in meeting the goals of IPIA.  However, in a subsequent letter to GAO, OMB’s Controller raised concerns  about the report, including the timing of our analysis and report issuance,  which I previously discussed in this testimony. In its original comments,  OMB emphasized that progress in estimating and reporting improper  payments had been made by agencies in fiscal year 2005 and highlighted  initiatives under way to measure improper payments in other programs  susceptible to significant improper payments. OMB pointed out that  agencies estimated improper payments for 17 additional programs for  fiscal year 2005, and that this number will increase by 10 programs for  fiscal year 2006. OMB also said that beginning with fiscal year 2007, it  expects HHS to begin reporting component error rates for its Medicaid,  Temporary Assistance for Needy Families, and State Children’s Health  Insurance programs.
While we agree with OMB that there has been progress, we continue to  question the validity of certain agencies’ risk assessment methodologies  used to identify, estimate, and report improper payments for all risk- susceptible programs and are concerned with how OMB defines high-risk  programs for purposes of agencies’ improper payment reporting. Our  continuing concern with OMB’s criteria relates to those agencies with  large program outlays that have improper payment estimates that exceed  the $10 million threshold but not the 2.5 percent of program payments  threshold. Applying the 2.5 percent threshold criteria to large programs  could exclude potentially billions of dollars of improper payments from  being reported.
According to OMB, the rationale for its threshold criteria is to ensure that  agencies focus their resources on programs with the highest levels of risk  for improper payments. OMB commented that going forward, it is now  requiring agencies to track any programs that exceed the $10 million  threshold but have an error rate of less than 2.5 percent. OMB stated that  this tracking facilitates a framework that would appropriately mitigate the  risk that high-risk programs will be left out of IPIA reporting activities. We  view this as a positive step. Although OMB’s recently revised  implementing guidance was outside the scope of our recent review, our  preliminary assessment found no mention of this tracking requirement.  The guidance does state that OMB may determine on a case-by-case basis  that certain programs that do not meet the threshold requirements may  still be subject to the annual PAR improper payment reporting  requirement. In light of OMB’s stated intention to require agencies to track  such programs, we believe it is key that the revised implementing guidance  clearly reflects this tracking requirement and that agencies be required to  publicly report this information as part of their annual improper payments  reporting. Visibility over this type of information would help facilitate the  Congress’s understanding of the nature and extent of the governmentwide  improper payments problem.
In closing, Mr. Chairman, improper payments are a serious problem.  Agencies are working on this issue at different paces, and OMB has  continued to provide important leadership. We recognize that measuring  improper payments and designing and implementing actions to reduce  them are not simple tasks and will not be easily accomplished. The  ultimate success of the executive branch’s effort to reduce improper  payments depends, in part, on each agency’s continuing diligence and  commitment to meeting the requirements of IPIA and the related OMB  guidance. Full and reasonable disclosure of the extent of the problem  could be enhanced by modifying the act’s underlying criteria used to  identify which programs and activities are susceptible to significant  improper payments. OMB’s implementing guidance can also be  strengthened in several key areas. With the ongoing imbalance between  revenues and outlays across the federal government, and the Congress’s  and the American public’s increasing demands for accountability over  taxpayer funds, identifying, reducing, and recovering improper payments  become even more critical. Fulfilling the requirements of IPIA will require  sustained attention to implementation on the part of OMB and the  agencies, as well as continued congressional oversight, such as this  hearing today, to monitor whether desired results are being achieved.
Mr. Chairman, this concludes my prepared statement. I would be happy to  answer any questions that you or other members of the Subcommittee  may have at this time.
section_title: Contact and Acknowledgments
paragraphs: For further information about this testimony, please contact McCoy  Williams at (202) 512-9095 or williamsm1@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this testimony. In addition to the above contacts, the following  individuals made key contributions to this testimony: Carla Lewis,  Assistant Director; Sharon Byrd; Francine DelVecchio; Francis Dymond;  Lisa M. Galvan; Jacquelyn Hamilton; Christina Quattrociocchi; Donell Ries;  and Chris Rodriguez.
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