Improper Payments: Government-Wide Estimates and Reduction Strategies
Published: 2014-07-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Over the past decade, GAO has issued numerous reports and testimonies highlighting improper payment issues across the federal government as well as at specific agencies. The Improper Payments Information Act of 2002, as amended by the Improper Payments Elimination and Recovery Act of 2010 and the Improper Payments Elimination and Recovery Improvement Act of 2012, requires federal executive branch agencies to (1) review all programs and activities, (2) identify those that may be susceptible to significant improper payments, (3) estimate the annual amount of improper payments for those programs and activities, (4) implement actions to reduce improper payments and set reduction targets, and (5) report on the results of addressing the foregoing requirements. In general, reported improper payment estimates include payments that should not have been made, were made in the incorrect amount, or were not supported by sufficient documentation.
This testimony addresses (1) federal agencies' reported estimates of improper payments, (2) remaining challenges in meeting current requirements to estimate and report improper payments, and (3) strategies for reducing improper payments. This testimony is primarily based on GAO's fiscal year 2013 audit of the Financial Report of the United States Government and prior GAO reports related to improper payments issued over the past 3 years. The testimony also includes improper payment information recently presented in federal agencies' fiscal year 2013 financial reports.
section_title: What GAO Found
paragraphs: Federal agencies reported an estimated $105.8 billion in improper payments in fiscal year 2013, a decrease from the prior year revised estimate of $107.1 billion. The fiscal year 2013 estimate was attributable to 84 programs spread among 18 agencies. The specific programs included in the government-wide estimate may change from year to year. For example, with Office of Management and Budget (OMB) approval, an agency can obtain relief from estimating improper payments if the agency has reported improper payments under a certain threshold for at least 2 consecutive years. A net of 10 additional programs were added to the government-wide estimate by OMB in fiscal year 2013 when compared to fiscal year 2012.
For fiscal year 2013, GAO identified the federal government's inability to determine the full extent to which improper payments occur and reasonably assure that appropriate actions are taken to reduce them as a material weakness in internal control. In addition, existing internal control weaknesses at the agency level continued to increase the risk of improper payments occurring. In fiscal year 2013, four agencies did not report estimates for four risk-susceptible programs, including the Department of Health and Human Services' (HHS) Temporary Assistance for Needy Families (TANF) program. HHS cited a statutory barrier that prevents it from requiring states to estimate improper payments for TANF. Estimates reported for two programs were also not included in the government-wide total because their estimation methodologies were not approved by OMB. Further, inspectors general reported deficiencies related to compliance with criteria listed in the Improper Payments Elimination and Recovery Act of 2010 for fiscal year 2013, such as the use of estimation methodologies that were not statistically valid.
As GAO has previously found, a number of strategies across government, some of which are currently under way, could help to reduce improper payments. For example
Analysis of the root causes of improper payments can help agencies target effective corrective actions. Some agencies reported root causes of improper payments using three error categories required by OMB (documentation and administrative, authentication and medical necessity, and verification). However, because the three categories are general, more detailed analysis to understand the root causes could help agencies identify and implement more effective corrective actions.
Designing and implementing strong preventive controls can help defend against improper payments, increasing public confidence and avoiding the difficult “pay and chase” aspects of recovering improper payments. Preventive controls involve activities such as up-front validation of eligibility through data sharing, predictive analytic tests, and training programs.
Implementing effective detection techniques to quickly identify and recover improper payments after they have been made is also important to a successful reduction strategy. Detection activities include data mining and recovery audits. Another area for further exploration is the broader use of incentives to encourage and support states in efforts to implement effective preventive and detective controls in state-administered programs.

section_title: Letter
paragraphs: Thank you for the opportunity to be here today to discuss the issue of  improper payments in federal programs and activities, including efforts by  federal agencies to identify and reduce improper payments. As the  steward of taxpayer dollars, the federal government is accountable for  how its agencies and grantees spend hundreds of billions of taxpayer  dollars annually, including safeguarding those expenditures against  improper payments and establishing mechanisms to recover those funds  when overpayments occur. It is important to note that reported improper  payment estimates may or may not represent a loss to the government.  For example, errors consisting of insufficient or lack of documentation for  a payment are included in the improper payment estimates. Over the past  decade, we have issued numerous reports and testimonies highlighting  improper payment issues across the federal government as well as at  specific agencies.
My testimony today will focus on  federal agencies’ reported estimates of improper payments,  remaining challenges in meeting current requirements to estimate and  report improper payments, and  strategies for reducing improper payments.
In preparing this statement, we primarily drew upon our February 2014  report on the fiscal year 2013 audit of the Financial Report of the United  States Government, as well as our other products dealing with improper  payments issued over the last 3 years. We are also including improper  payment information recently presented in federal agencies’ fiscal year  2013 performance and accountability reports (PAR) and agency financial  reports (AFR). The GAO reports cited in this statement each provide  detailed information on our scope and methodology. The work we  performed upon which this statement is based was conducted in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The Improper Payments Information Act of 2002 (IPIA)—as amended by  the Improper Payments Elimination and Recovery Act of 2010 (IPERA)  and the Improper Payments Elimination and Recovery Improvement Act  of 2012 (IPERIA)—requires federal executive branch agencies to   (1) review all programs and activities, (2) identify those that may be  susceptible to significant improper payments,amount of improper payments for those programs and activities,   (4) implement actions to reduce improper payments and set reduction  targets, and (5) report on the results of addressing the foregoing  requirements. IPERA also established a requirement for agency  inspectors general (IG) to report annually on agencies’ compliance with  criteria listed in IPERA. Under Office of Management and Budget (OMB)  implementing guidance, these reports should be completed within 120   (3) estimate the annual  days of the publication of the federal agencies’ annual PARs or AFRs.  IPERIA also enacted into law a Do Not Pay (DNP) initiative, elements of  which were already being developed under executive branch authority.  DNP is a web-based, centralized data-matching service that allows  agencies to review multiple databases to determine a recipient’s award or  payment eligibility prior to making payments. In addition to the laws and  guidance noted above, the Disaster Relief Appropriations Act of 2013  requires that all funding received under the act be deemed susceptible to  significant improper payments and consequently requires agencies to  estimate improper payments, implement corrective actions, and report on  their results for these funds.
OMB continues to play a key role in the oversight of government-wide  improper payments. OMB has set a goal of reaching a government-wide  improper payment error rate of 3 percent or less by the end of fiscal year  2016. Further, OMB has established guidance for federal agencies on  reporting, reducing, and recovering improper payments as required by  IPIA and IPERA and on protecting privacy while reducing improper   IPERIA requires that OMB issue  payments with the DNP initiative. guidance to agencies for improving estimates of improper payments.  OMB has reported that it plans to revise its guidance related to improper  payments.
Office of Management and Budget, Revised, Financial Reporting Requirements, OMB  Circular No. A-136 (Oct. 21, 2013); Protecting Privacy while Reducing Improper Payments  with the Do Not Pay Initiative, OMB Memorandum M-13-20 (Washington, D.C.: Aug. 16,  2013); Issuance of Revised Parts I and II to Appendix C of OMB Circular A-123, OMB  Memorandum M-11-16 (Washington, D.C.: Apr. 14, 2011); Increasing Efforts to Recapture  Improper Payments by Intensifying and Expanding Payment Recapture Audits, OMB  Memorandum M-11-04 (Washington, D.C.: Nov. 16, 2010); and Issuance of Part III to  OMB Circular A-123, Appendix C, OMB Memorandum M-10-13 (Washington, D.C.:   Mar. 22, 2010).
section_title: OMB and Agencies Reported Estimates of Improper Payments
paragraphs: Federal agency improper payment estimates totaled $105.8 billion in  fiscal year 2013, a decrease of $1.3 billion from the prior year’s revised  estimate of $107.1 billion. The decrease in the fiscal year 2013 estimate  is attributed primarily to a decrease in program outlays for the Department  of Labor’s (DOL) Unemployment Insurance program and decreases in  reported error rates for fiscal year 2013 for the Department of Health and  Human Services’ (HHS) Medicaid and Medicare Advantage (Part C)  programs. The $105.8 billion in estimated federal improper payments  reported for fiscal year 2013 was attributable to 84 programs spread  among 18 agencies. Five of these 84 programs account for most of the  $105.8 billion of reported improper payments. Specifically, these five  programs accounted for about $82.9 billion or 78 percent of the total  estimated improper payments agencies reported for fiscal year 2013.  Table 1 lists the five programs with the highest reported improper  payment estimates for fiscal year 2013.
OMB reported a government-wide improper payment error rate of 3.5  percent of program outlays in fiscal year 2013 when including the  Department of Defense’s (DOD) Defense Finance and Accounting  Service (DFAS) Commercial Pay program, a decrease from 3.7 percent  in fiscal year 2012. When excluding the DFAS Commercial Pay program,  the reported government-wide error rate was 4.0 percent of program  outlays in fiscal year 2013 compared to the revised 4.3 percent reported  in fiscal year 2012. In May 2013, we reported on major deficiencies in  DOD’s process for estimating fiscal year 2012 improper payments in the  DFAS Commercial Pay program and recommended that DOD (1) develop  key quality assurance procedures to ensure the completeness and  accuracy of sampled populations and (2) revise its sampling procedures  to meet OMB guidance and generally accepted statistical standards and  produce a statistically valid error rate and dollar estimate with appropriate  confidence intervals. According to its fiscal year 2013 AFR, DOD is  reevaluating its sampling methodology for fiscal year 2014 for the DFAS  Commercial Pay program based on our recommendations. Consequently,  the fiscal year 2013 improper payment estimate for the DFAS  Commercial Pay program may not be reliable.
Additionally, in fiscal year 2013, federal agencies reported improper  payment error rates for seven risk-susceptible programs—accounting for  more than 50 percent of the government-wide improper payment  estimate—that exceeded 10 percent. As shown in table 2, the seven  programs with error rates exceeding 10 percent ranged from 10.1 percent  to 25.3 percent. Under IPERA, an agency reporting an improper payment  rate of 10 percent or greater for any risk-susceptible program or activity  must submit a plan to Congress describing the actions that the agency  will take to reduce improper payment rates below 10 percent.
Since the implementation of IPIA in 2004, federal agencies have  continued to identify new programs or activities as risk susceptible and to  report estimated improper payment amounts. Federal agencies have also  identified programs or activities that they have determined to no longer be  risk susceptible and therefore did not report improper payment estimates  for these programs. For example, with OMB approval an agency can  obtain relief from estimating improper payments if the agency has  reported improper payments under the threshold for significant improper  payments at least 2 consecutive years. Consequently, the specific  programs included in the government-wide improper payment estimate  may change from year to year. For example, a net of 10 additional  programs were added to the government-wide estimate by OMB in fiscal  year 2013 when compared to fiscal year 2012.Department of Education’s improper payment estimate for the Direct Loan  program, approximately $1.1 billion, was included in the government-wide  improper payment estimate for the first time in fiscal year 2013. We view   Most notably, the  these agencies’ efforts as a positive step toward increasing the  transparency of the magnitude of improper payments.
In addition, agencies have continued efforts to recover improper  payments, for example through recovery audits. OMB reported that  government-wide, agencies recovered over $22 billion in overpayments  through recovery audits and other methods in fiscal year 2013.
section_title: Challenges in Achieving Complete and Accurate Reporting of Improper Payments
paragraphs: In our fiscal year 2013 audit of the Financial Report of the United States  Government, we reported the issue of improper payments as a material  weakness in internal control because the federal government is unable to  determine the full extent to which improper payments occur and  reasonably assure that appropriate actions are taken to reduce them.the agency level, we also found that existing internal control  weaknesses—such as financial system limitations and information system  control weaknesses—heighten the risk of improper payments occurring.
We found that not all agencies have developed improper payment  estimates for all of the programs and activities they identified as  susceptible to significant improper payments. Specifically, four federal  agencies did not report fiscal year 2013 estimated improper payment  amounts for four risk-susceptible programs. For example, HHS’s fiscal  year 2013 reporting cited statutory limitations for its state-administered  Temporary Assistance for Needy Families (TANF) program, which  prohibited it from requiring states to participate in developing an improper  payment estimate for the TANF program. Despite these limitations, HHS  reported that the agency has taken actions to assist states in reducing  improper payments, such as providing guidance related to appropriate  uses of TANF program funds. For fiscal year 2013, the TANF program  reported outlays of about $16.5 billion.
In addition, two programs that reported estimates in fiscal year 2013 were  not included in the government-wide totals because their estimation  methodologies were not approved by OMB. The two excluded programs  were the Department of Transportation’s High-Speed Intercity Passenger  Rail program, with fiscal year 2013 outlays of $2.3 billion, and the  Railroad Retirement Board’s Railroad Unemployment Insurance program,  with fiscal year 2013 outlays of $119.2 million.
Compliance with statutory requirements is another challenge for some  federal agencies. For fiscal year 2013, two agency auditors reported on  compliance issues with IPIA and IPERA as part of their 2013 financial  statement audits. Specifically, auditors of the Department of Agriculture  (USDA) reported noncompliance with the requirements of IPERA  regarding the design of program internal controls related to improper  payments. HHS auditors reported that, as previously noted, HHS did not  report an improper payment estimate for its TANF program for fiscal year  2013. In addition to noncompliance reported in financial statement audits,  various IGs reported deficiencies related to compliance with the criteria  listed in IPERA for fiscal year 2013 at their respective federal agencies,  including risk-susceptible programs that did not have reported improper  payment estimates, estimation methodologies that were not statistically  valid, and risk assessments that may not accurately assess the risk of  improper payment.
As reported in our March 2014 update to items identified in our annual  reports on fragmentation, overlap, and duplication, to determine the full  extent of improper payments government-wide and to more effectively  recover and reduce them, continued agency attention is needed to   (1) identify programs susceptible to improper payments, (2) develop  reliable improper payment estimation methodologies, (3) report on  improper payments as required, and (4) implement effective corrective  actions based on root cause analysis.
section_title: Strategies to Reduce Improper Payments
paragraphs: As previously reported, there are a number of strategies that can help  agencies in reducing improper payments, including analyzing the root  causes of improper payments and implementing effective preventive and  detective controls. Designed and implemented effectively, these  strategies could help advance the federal government’s efforts to reduce  improper payments.
subsections: section_title: Identifying and Analyzing Root Causes of Improper Payments
paragraphs: Agencies cited a number of causes for the estimated $105.8 billion in  reported improper payment estimates for fiscal year 2013, including  insufficient documentation, incorrect calculations, and duplicate  payments. According to OMB guidance, agencies are required to  classify the root causes of estimated improper payments into three  general categories for reporting purposes: (1) documentation and  administrative errors, (2) authentication and medical necessity errors, and  (3) verification errors.improper payments for their respective programs in their fiscal year 2013  financial reports using these categories, a more detailed analysis beyond  these general categories regarding the root causes can help agencies to  identify and implement more effective preventive, detective, and  corrective actions in the various programs. For example, in its fiscal year  2013 AFR, HHS reported diagnosis coding errors as a root cause of  improper payments in its Medicaid program and cited corrective actions   While some agencies reported the causes of  related to provider communication and education. OMB has reported  plans to develop more granular categories of improper payments in an  upcoming revision to its guidance.
section_title: Designing and Implementing Effective Preventive Controls to Avoid Improper Payments
paragraphs: Implementing strong preventive controls can serve as the frontline  defense against improper payments. Proactively preventing improper  payments increases public confidence in the administration of benefit  programs and avoids the difficulties associated with the “pay and chase”  aspects of recovering overpayments. Many agencies and programs are  in the process of implementing preventive controls to avoid improper  payments, including overpayments and underpayments.controls may involve a variety of activities such as up-front validation of  eligibility, predictive analytic tests, and training programs. Further,  addressing program design issues that are a factor in causing improper  payments is an effective preventive strategy to be considered. The  following are examples of preventive strategies, some of which are  currently under way.
Up-front eligibility validation through data sharing. Data sharing  allows entities that make payments—to contractors, vendors, participants  in benefit programs, and others—to compare information from different  sources to help ensure that payments are appropriate. When effectively  implemented, data sharing can be particularly useful in confirming initial  or continuing eligibility of participants in benefit programs and in  identifying improper payments that have already been made. Analyses  and reporting on the extent to which agencies are participating in data- sharing activities, and additional data-sharing efforts that agencies are  currently pursuing or would like to pursue can help to advance the federal  government’s efforts to reduce improper payments.
One example of data sharing is agencies’ use of the Do Not Pay (DNP)  initiative. DNP is a web-based, centralized data-matching service that  allows agencies to review multiple databases to determine a recipient’s  award or payment eligibility prior to making payments. IPERIA requires  entities to review prepayment and preaward procedures and ensure a  thorough review of available databases to determine program or award  eligibility before the release of any federal funds. IPERIA lists five  databases that should be included in the DNP initiative and allows for the  inclusion of other databases designated by OMB in consultation with the  appropriate agencies. In August 2013, the Director of OMB issued  Memorandum No. M-13-20 (M-13-20), Protecting Privacy while Reducing  Improper Payments with the Do Not Pay Initiative. As required by IPERIA,  M-13-20 sets forth implementation guidance for the DNP initiative to help  ensure that the federal government’s efforts to reduce improper payments  comply with privacy laws and policies.
Predictive analytic technologies. The analytic technologies used by  HHS’s Centers for Medicare & Medicaid Services (CMS) are examples of  preventive techniques that may be useful for other programs to consider.  The Small Business Jobs Act of 2010 requires CMS to use predictive  modeling and other analytic techniques—known as predictive analytic  technologies—both to identify and to prevent improper payments under  the Medicare Fee-for-Service program. technologies are to be used to analyze and identify Medicare provider  networks, billing patterns, and beneficiary utilization patterns and detect  those that represent a high risk of fraudulent activity. Through such  analysis, unusual or suspicious patterns or abnormalities can be identified  and used to prioritize additional review of suspicious transactions before  payment is made.
Pub. L. No. 111-240, § 4241 (Sept. 27, 2010). detect improper payments and training providers or beneficiaries on  program requirements. For example, in its fiscal year 2013 AFR, HHS  reported that it has offered training through its Medicaid Integrity Institute  to over 4,000 state employees and officials from fiscal years 2008 through  2013.
Program design review and refinement. To the extent that provider  enrollment and eligibility verification problems are identified as a  significant root cause in a specific program, agencies may look to  establish enhanced controls in this area. For example, CMS has taken  steps to strengthen standards and procedures for Medicare provider  enrollment to help reduce the risk of providers intent on defrauding or  abusing the program. Further, exploring whether certain complex or  inconsistent program requirements—such as eligibility criteria and  requirements for provider enrollment—contribute to improper payments  may lend insight to developing effective strategies for enhancing  compliance and may identify opportunities for streamlining or changing  eligibility or other program requirements.
section_title: Implementing Effective Detective Controls to Identify and Recover Overpayments
paragraphs: Although strong preventive controls remain the frontline defense against  improper payments, effective detection techniques can help to quickly  identify and recover those overpayments that do occur. Detection  activities play a significant role not only in identifying improper payments  but also in providing data on why these payments were made and, in turn,  highlighting areas that need strengthened prevention controls. The  following are examples of key detection techniques.
Data mining. Data mining is a computer-based control activity that  analyzes diverse data for relationships that have not previously been  discovered. The central repository of data commonly used to perform  data mining is called a data warehouse. Data warehouses store tables of  historical and current information that are logically grouped. As a tool in  managing improper payments, applying data mining to a data warehouse  allows an organization to efficiently query the system to identify potential  improper payments, such as multiple payments for an individual invoice to  an individual recipient on a certain date, or to the same address. For  example, CMS has established One Program Integrity, a web-based  portal intended to provide CMS staff and contractors with a single source  of access to Medicare and other data needed to help detect improper  payments as well as tools for analyzing those data.
Recovery auditing. While internal control should be maintained to help  prevent improper payments, recovery auditing is used to identify and  recover overpayments. IPERA requires agencies to conduct recovery  audits, if cost effective, for each program or activity that expends   $1 million or more annually. In its fiscal year 2013 AFR, HHS reported  that the Medicare Fee-for-Service recovery audit program identified  approximately $4.2 billion and recovered $3.7 billion in overpayments by  the end of the fiscal year. Medicare recovery audit contractors are paid a  contingency fee based on both the percentage of overpayments collected  and underpayments identified.
It is important to note that some agencies have reported statutory or  regulatory barriers that affect their ability to pursue recovery auditing. For  example, in its fiscal year 2013 AFR, USDA reported that Section 281 of  the Department of Agriculture Reorganization Act of 1994 precluded the  use of recovery auditing techniques because Section 281 provides that  90 days after the decision of a state, a county, or an area committee is  final, no action may be taken to recover the amounts found to have been  erroneously disbursed as a result of the decision unless the participant  had reason to believe that the decision was erroneous. This statute is  commonly referred to as the Finality Rule, and according to USDA, it  affects the Commodity Credit Corporation’s ability to recover improper  payments.
IPERA allows agencies to use up to 25 percent of funds recovered, net of recovery  costs, under a payment recapture audit program, including providing a portion of funding  to state and local governments. improper payments. Incentives and penalties can be helpful to create  management reform and to ensure adherence to performance standards.
Chairman Mica, Ranking Member Connolly, and Members of the  Subcommittee, this completes my prepared statement. I would be  pleased to respond to any questions that you or other members of the  subcommittee may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For more information regarding this testimony, please contact Beryl H.  Davis, Director, Financial Management and Assurance, at (202) 512-2623  or by e-mail at davisbh@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. GAO staff who made key contributions to this testimony  included Phillip McIntyre (Assistant Director), James Healy, and Ricky A.  Perry, Jr.
section_title: Related GAO Products
paragraphs: Medicare Fraud: Further Actions Needed to Address Fraud, Waste, and  Abuse. GAO-14-712T. Washington, D.C.: June 25, 2014.
Medicare: Further Action Could Improve Improper Payment Prevention  and Recoupment Efforts. GAO-14-619T. Washington, D.C.: May 20,  2014.
Medicaid Program Integrity: Increased Oversight Needed to Ensure  Integrity of Growing Managed Care Expenditures. GAO-14-341.  Washington, D.C.: May 19, 2014.
School-Meals Programs: USDA Has Enhanced Controls, but Additional  Verification Could Help Ensure Legitimate Program Access. GAO-14-262.  Washington, D.C.: May 15, 2014.
Financial Audit: U.S. Government’s Fiscal Years 2013 and 2012  Consolidated Financial Statements. GAO-14-319R. Washington, D.C.:  February 27, 2014.
Social Security Death Data: Additional Action Needed to Address Data  Errors and Federal Agency Access. GAO-14-46. Washington, D.C.:  November 27, 2013.
Disability Insurance: Work Activity Indicates Certain Social Security  Disability Insurance Payments Were Potentially Improper. GAO-13-635.  Washington, D.C.: August 15, 2013.
Farm Programs: USDA Needs to Do More to Prevent Improper Payments  to Deceased Individuals. GAO-13-503. Washington, D.C.: June 28, 2013.
DOD Financial Management: Significant Improvements Needed in Efforts  to Address Improper Payment Requirements. GAO-13-227. Washington,  D.C.: May 13, 2013.
Medicaid: Enhancements Needed for Improper Payments Reporting and  Related Corrective Action Monitoring. GAO-13-229. Washington, D.C.:  March 29, 2013.
Financial Audit: U.S. Government’s Fiscal Years 2012 and 2011  Consolidated Financial Statements. GAO-13-271R. Washington, D.C.:  January 17, 2013.
Foster Care Program: Improved Processes Needed to Estimate Improper  Payments and Evaluate Related Corrective Actions. GAO-12-312.  Washington, D.C.: March 7, 2012.
Improper Payments: Moving Forward with Governmentwide Reduction  Strategies. GAO-12-405T. Washington, D.C.: February 7, 2012.
Government Operations: Opportunities to Reduce Potential Duplication in  Government Programs, Save Tax Dollars, and Enhance Revenue.  GAO-11-318SP. Washington, D.C.: March 1, 2011.
Improper Payments: Progress Made but Challenges Remain in  Estimating and Reducing Improper Payments. GAO-09-628T.  Washington, D.C.: April 22, 2009.
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