Improper Payments: Remaining Challenges and Strategies for Governmentwide Reduction Efforts
Published: 2012-03-28T00:00:00

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. Fiscal year 2011 marked the eighth year of implementation of the Improper Payments Information Act of 2002 (IPIA), as well as the first year of implementation for the Improper Payments Elimination and Recovery Act of 2010 (IPERA). IPIA requires executive branch agencies to annually identify programs and activities susceptible to significant improper payments, estimate the amount of improper payments for such programs and activities, and report these estimates along with actions taken to reduce them. IPERA amended IPIA and expanded requirements for recovering overpayments across a broad range of federal programs.
This testimony addresses (1) federal agencies reported progress in estimating and reducing improper payments; (2) challenges in meeting current requirements to estimate and evaluate improper payments, including the results of GAOs case study of the estimation methodology and corrective actions for the Foster Care program; and (3) possible strategies that can be taken to move forward in reducing improper payments. This testimony is primarily based on prior GAO reports, including the report released today on improper payment estimates in the Foster Care program. It also includes unaudited improper payment information recently presented in federal entities fiscal year 2011 performance and accountability reports and agency financial reports.
section_title: What GAO Found
paragraphs: Federal agencies reported an estimated $115.3 billion in improper payments in fiscal year 2011, a decrease of $5.3 billion from the prior year reported estimate of $120.6 billion. According to the Office of Management and Budget (OMB), the $115.3 billion estimate was attributable to 79 programs spread among 17 agencies. Ten programs accounted for about $107 billion or 93 percent of the total estimated improper payments agencies reported. The reported decrease in fiscal year 2011 was primarily related to 3 programsdecreases in program outlays for the Unemployment Insurance program, and decreases in reported error rates for the Earned Income Tax Credit program and the Medicare Advantage program. Further, OMB reported that agencies recaptured $1.25 billion in improper payments to contractors and vendors.
The federal government continues to face challenges in determining the full extent of improper payments. Some agencies have not reported estimates for all risk-susceptible programs, while other agencies estimation methodologies were found to be not statistically valid. For example, GAOs recently completed study of Foster Care improper payments found that the Administration for Children and Families (ACF) had established a process to calculate a national improper payment estimate for the Foster Care program, which totaled about $73 million for fiscal year 2010, the year covered by GAOs review. However, the estimate was not based on a statistically valid methodology and consequently did not provide a reasonably accurate estimate of the extent of Foster Care improper payments. Further, GAO found that ACF could not reliably assess the extent to which corrective actions reduced Foster Care improper payments.
A number of strategies are under way across government to help advance improper payment reduction goals. For example,
Additional information and analysis on the root causes of improper payment estimates will assist agencies in targeting effective corrective actions and implementing preventive measures. Although agencies were required to report the root causes of improper payments in three categories beginning in fiscal year 2011, of the 79 programs with improper payment estimates that year, 42 programs reported the root cause information using the required categories.
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 using data sharing, predictive analytic technologies, and training programs. Further, addressing program design issues, such as complex eligibility requirements, may also warrant further consideration.
Effective detection techniques to quickly identify and recover improper payments are also important to a successful reduction strategy. Detection activities include data mining and recovery auditing. Another area for further exploration is the broader use of incentives to encourage states in efforts to implement effective detective controls.
Continuing work to implement and enhance these strategies will be needed to effectively reduce federal government improper payments.

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 any  overpayments. It is important to note that not all of the reported improper  payment estimates represent a loss to the government. For example,  such estimates include payments where there is insufficient  documentation or a lack of documentation. 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. As requested by the Subcommittee, we recently completed  our study of the improper payment estimation methodology and related  corrective actions for the Department of Health and Human Services’  (HHS) Foster Care program administered by the Administration for  Children and Families (ACF).
Today, my testimony will focus on  federal agencies’ reported progress in estimating and reducing  improper payments;  challenges in meeting current requirements to estimate and evaluate  improper payments, including those identified through our case study of the estimation methodology used by HHS’s Foster Care program;and possible improper payment reduction strategies.
In preparing this statement, we drew primarily upon previously issued  work related to (1) our fiscal year 2011 audit of the Financial Report of the  United States Government, (2) our report released today on improper  payment estimates at HHS’s Foster Care program, and (3) our other  previously issued products dealing with improper payments. Our previous  products are listed at the end of this statement. That work was conducted  in accordance with generally accepted government auditing standards.  We are also including unaudited improper payment information that  federal entities reported in their fiscal year 2011 performance and  accountability reports (PAR), agency financial reports (AFR), or other  annual reporting.
subsections: section_title: Background
subsections: section_title: Improper Payments Information Act of 2002
paragraphs: Fiscal year 2011 marked the eighth year of implementation of the  Improper Payments Information Act of 2002 (IPIA), as well as the first  year of implementation for the Improper Payments Elimination and  Recovery Act of 2010 (IPERA). IPIA requires executive branch agencies  to annually review all programs and activities to identify those that are  susceptible to significant improper payments, estimate the annual amount  of improper payments for such programs and activities, and report these  estimates along with actions taken to reduce improper payments for  programs with estimates that exceed $10 million. IPERA, enacted   July 22, 2010, amended IPIA by expanding on the previous requirements  for identifying, estimating, and reporting on programs and activities  susceptible to significant improper payments and expanding requirements  for recovering overpayments across a broad range of federal programs.  IPERA included a new, broader requirement for agencies to conduct  recovery audits, where cost effective, for each program and activity with  at least $1 million in annual program outlays. This IPERA provision  significantly lowers the threshold for required recovery audits from   $500 millionall programs and activities. Another IPERA provision calls for federal  agencies’ inspectors general to annually determine whether their  respective agencies are in compliance with key IPERA requirements and  to report on their determinations. Under Office of Management and  Budget (OMB) implementing guidance, federal agencies are required to  complete these reports within 120 days of the publication of their annual  PARs or AFRs, with the fiscal year 2011 reports for most agencies due on  March 15, 2012.    to $1 million and expands the scope for recovery audits to  OMB continues to play a key role in the oversight of the governmentwide  improper payments issue. OMB has established guidance for federal  agencies on reporting, reducing, and recovering improper paymentshas established various work groups responsible for developing  recommendations aimed at improving federal financial management  activities related to reducing improper payments.
section_title: HHS’s Foster Care Program
paragraphs: Each year, hundreds of thousands of our nation’s most vulnerable  children are removed from their homes and placed in foster care, often  because of abuse or neglect. While states are primarily responsible for  providing safe and stable out-of-home care for these children until they  are returned safely home, placed with adoptive families, or placed in other  arrangements, Title IV-E of the Social Security Act provides states some   ACF under HHS is responsible for  federal financial support in this area.administering this program and overseeing Title IV-E funds. HHS’s  reported fiscal year 2010 outlays to states for their Foster Care programs  under Title IV-E totaled more than $4.5 billion, serving over 408,000  children, as of September 30, 2010, the most recent data available at the  time of our study.
Past work by the HHS Office of Inspector General (OIG), GAO, and  others have identified numerous deficiencies in state claims associated  with the Title IV-E Foster Care program. In particular, the HHS OIG found  hundreds of millions of dollars in unallowable claims associated with Title  IV-E funding. A 2006 GAO report also found variations in costs states claimed under the Title IV-E program and recommended a number of  actions HHS should take to better safeguard federal resources. In  addition, annual state-level audits have identified weaknesses in states’  use of federal funds, such as spending on unallowed activities or costs  and inadequate state monitoring of federal funding.
As required under IPIA, as amended, HHS has identified the Foster Care  program as susceptible to significant improper payments, and has  reported annually on estimated improper payment amounts for the  program since 2005. For fiscal year 2010, HHS reported estimated improper payments for Foster Care of about $73 million. The reported  estimate slightly decreased to about $72 million for fiscal year 2011.
section_title: OMB and Agencies Reported Progress in Estimating and Reducing Improper Payments
paragraphs: Federal agencies reported improper payment estimates totaling $115.3  billion in fiscal year 2011, a decrease of $5.3 billion from the revised prior  year reported estimate of $120.6 billion. Based on the agencies’ estimates, OMB estimated that improper payments comprised about 4.7  percent of the $2.5 trillion in fiscal year 2011 total spending for the  agencies’ related programs (i.e., a 4.7 percent error rate). The decrease  in the fiscal year 2011 estimate—when compared to fiscal year 2010—is  attributed primarily to decreases in program outlays for the Department of  Labor’s (Labor) Unemployment Insurance program, and decreases in  reported error rates for fiscal year 2011 for the Department of the  Treasury’s (Treasury) Earned Income Tax Credit program, and HHS’s  Medicare Advantage program.
According to OMB, the $115.3 billion in estimated federal improper  payments reported for fiscal year 2011 was attributable to 79 programs  spread among 17 agencies. Ten of these 79 programs account for most  of the $115.3 billion of reported improper payments. Specifically, these 10  programs accounted for about $107 billion or 93 percent of the total  estimated improper payments agencies reported for fiscal year 2011.  Table 1 shows the reported improper payment estimates and the reported  primary cause(s) for the estimated improper payments for these 10  programs.
While the programs identified in the table above represented the largest  dollar amounts of improper payments, 4 of these programs also had  some of the highest program improper payment error rates.table 2, the 10 programs with the highest error rates accounted for $45  billion, or 39 percent of the total estimated improper payments, and had  rates ranging from 11.0 percent to 28.4 percent for fiscal year 2011.
section_title: Governmentwide Challenges to Estimating and Evaluating Improper Payments
paragraphs: Despite reported progress in reducing estimated improper payment  amounts and error rates for some programs and activities during fiscal  year 2011, the federal government continues to face challenges in  determining the full extent of improper payments. Specifically, some  agencies have not yet reported estimates for all risk-susceptible  programs, and some agencies’ estimating methodologies need to be  refined. Until federal agencies are able to implement effective processes  to completely and accurately identify the full extent of improper payments  and implement appropriate corrective actions to effectively reduce  improper payments, the federal government will not have reasonable  assurance that the use of taxpayer funds is adequately safeguarded. In  this regard, at the request of this Subcommittee, we recently completed  our review of the improper payment estimation methodology used by  HHS’s Foster Care program. As discussed in our report released today,  we found that the Foster Care program’s improper payment estimation  methodology was deficient in all three key areas—planning, selection,  and evaluation—and consequently did not result in a reasonably accurate  estimate of the extent of Foster Care improper payments. Further, the  validity of the reporting of reduced Foster Care program error rates was  questionable, and we found that several weaknesses impaired ACF’s  ability to assess the effectiveness of corrective actions to reduce improper  payments.
subsections: section_title: Challenges in Developing Improper Payment Estimates
paragraphs: We found that not all agencies have developed improper payment  estimates for all of the programs and activities they identified as  susceptible to significant improper payments. Specifically, three federal  entities did not report fiscal year 2011 estimated improper payment  amounts for four risk-susceptible programs. In one example, HHS’s  fiscal year 2011 reporting cited statutory limitations for its state- administered Temporary Assistance for Needy Families (TANF)  program, that prohibited it from requiring states to participate in  developing an improper payment estimate for the TANF program. Despite  these limitations, HHS officials stated that they will continue to work with  states and explore options to allow for future estimates for the program.  For fiscal year 2011, the TANF program reported outlays of about $17  billion. For another program, HHS cited the Children’s Health Insurance  Program Reauthorization Act of 2009 as prohibiting HHS from  calculating or publishing any national or state-specific payment error rates  for the Children’s Health Insurance Program (CHIP) until 6 months after  the new payment error rate measurement rule became effective on  September 10, 2010. According to its fiscal year 2011 agency financial  report, HHS plans to report estimated improper payment amounts for  CHIP in fiscal year 2012. For fiscal year 2011, HHS reported federal  outlays of about $9 billion for CHIP.
As previously mentioned, OMB excluded estimated improper payment  amounts for two DOD programs from the governmentwide total because  those programs were still developing their estimating methodologies— Defense Finance and Accounting Service (DFAS) Commercial Pay, with  fiscal year 2011 outlays of $368.5 billion, and U.S. Army Corps of  Engineers Commercial Pay, with fiscal year 2011 outlays of $30.5 billion.  In DOD’s fiscal year 2011 agency financial report, DOD reported that  improper payment estimates for these programs were based on improper  payments detected through various pre-payment and post-payment  review processes rather than using methodologies similar to those used  for DOD’s other programs, including statistically valid random sampling or  reviewing 100 percent of payments.
GAO, DOD Financial Management: Weaknesses in Controls over the Use of Public  Funds and Related Improper Payments, GAO-11-950T (Washington, D.C.: Sept. 22,  2011), and Improper Payments: Significant Improvements Needed in DOD’s Efforts to  Address Improper Payment and Recovery Auditing Requirements, GAO-09-442  (Washington, D.C.: July 29, 2009). improper payments.statistically valid estimating process for its commercial payments and  addresses the known control deficiencies in its commercial payment  processes, the governmentwide improper payment estimates will  continue to be incomplete. We are currently working on an engagement  related to improper payment reporting at DOD.
Until DOD fully and effectively implements a  For fiscal year 2011, two agency auditors reported on compliance issues  with IPIA and IPERA as part of their 2011 financial statement audits.  Specifically, the Department of Agriculture (USDA) auditors identified  noncompliance with the requirements of IPERA regarding the design of  program internal controls related to improper payments. In the other  noncompliance issue, while for fiscal year 2011 HHS estimated an annual  amount of improper payments for some of its risk-susceptible programs, a  key requirement of IPIA, it did not report an improper payment estimate  for its TANF program and CHIP. Fiscal year 2011 marked the eighth  consecutive year that auditors for HHS reported noncompliance issues  with IPIA.
We recognize that measuring improper payments for federal programs  and designing and implementing actions to reduce or eliminate them are  not simple tasks, particularly for grant programs that rely on  administration efforts at the state level. The estimation methodologies for  these types of programs may vary considerably because of differences in  program designs across the states. For example, as I will discuss in more  detail later in this statement, the Foster Care program leveraged an  existing process to estimate improper payments that included a review of  a child’s eligibility for Title IV-E federal funding as claimed by the states  administering the program. In another example, the improper payment  estimate for HHS’s Medicaid program is based on the results of three  different reviews—eligibility, fee-for-service, and managed care—of  claims payments made by states to health care providers. The fee-for- service and managed care reviews both include a data processing review  to validate that claims were processed correctly. The fee-for-service  review also includes a medical necessity determination. The eligibility  review identifies payments made for services to beneficiaries that were  improperly paid because of erroneous eligibility decisions. We are  currently working on an engagement related to improper payment  reporting for the Medicaid program. Because of these state differences  and complexities within programs, as we previously reported,  communication, coordination, and cooperation among federal agencies  and the states will be critical to effectively estimate national improper  payment rates and meet IPIA reporting requirements for state- administered programs.
section_title: Case Study: Foster Care Program Faces Challenges in Estimating Improper Payments and Evaluating Corrective Actions
paragraphs: The results of our recently completed study of the improper payment  estimation methodology used by HHS’s Foster Care program serve to  provide a more detailed perspective on the challenges one federal  agency faced in attempting to develop a complete and accurate  nationwide estimate for a program largely administered at the state level.  Further, this case study provides an example of the types of problems  that may exist but go undetected because of the lack of independent  assessments of the reported information. As we previously testified  before this Subcommittee,auditors provide a valuable independent validation of agencies’ efforts to  report reliable information under IPIA. Independent assessments can also  enhance an agency’s ability to identify sound performance measures,  monitor progress against those measures, and help establish  performance and results expectations. Without this type of validation or  other types of reviews performed by GAO or agency OIGs, it is difficult to  reliably determine the full magnitude of deficiencies that may exist  governmentwide in agencies’ IPIA implementation efforts. For example,  our case study of the Foster Care program found that although ACF had  established a process to calculate a national improper payment estimate,  the estimate was not based on a statistically valid methodology and  consequently did not reflect a reasonably accurate estimate of the extent  of Foster Care improper payments. Further, without accurate data, the   separate assessments conducted by agency  validity of the Foster Care program’s reported reductions in improper  payments was questionable, and ACF’s ability to reliably assess the  effectiveness of its corrective actions was impaired.
For programs administered at the state level such as Foster Care, OMB  guidance provides that statistically valid annual estimates of improper  payments may be based on either data for all states or on statistical data  from a sample to generate a national dollar estimate and improper  payment rate. In this case, ACF took its existing Title IV-E Foster Care  program eligibility review process, already in place under the Social  Security Act, and also used it for IPIA estimation. ACF provides a national  estimated error rate based on a rolling average of error rates identified in  states examined on a 3-year cycle. As a result, ACF’s IPIA reporting for  each year is based on new data for about one-third of the states and  previous years’ data for the remaining two-thirds of the states. To  calculate a national estimate of improper payments, ACF uses error rates  that span a 3-year period of Title IV-E eligibility reviews in the 50 states,  the District of Columbia, and Puerto Rico. ACF applies the percentage  dollar error rate from the sample to the total payments for the period  under review for each state.
ACF’s methodology for estimating Foster Care improper payments was  approved by OMB in 2004 with the understanding that continuing efforts  would be taken to improve the accuracy of ACF’s estimates of improper  payments in the ensuing years. ACF, however, has since continued to  generally follow its initial 2004 methodology. When compared to federal  statistical guidance and internal control standards, we found it to be  deficient in all three phases of its fiscal year 2010 estimation  methodology—planning, selection, and evaluation—as summarized in  table 3. These deficiencies impaired the accuracy and completeness of  the Foster Care program improper payment estimate of $73 million  reported for fiscal year 2010.
Planning. ACF’s annual IPIA reporting for the Foster Care program did  not include about two-thirds of program expenditures, as shown in figure  1. Specifically, the estimate included improper payments for only one type  of program payment activity—maintenance payments—which, for fiscal  year 2010, represented 34 percent of the total federal share of  expenditures for the Foster Care program. Administrative and other  payments, such as those related to the operation and development of the  Statewide Automated Child Welfare Information System (SACWIS), were  not considered in ACF’s IPIA estimation process and thus were not  included in the Foster Care program improper payment estimate. OMB’s  December 2004 approval of ACF’s proposed methodology included an  expectation that ACF would develop a plan and timetable to test  administrative expenses by April 2005. ACF has conducted various pilots  in this area since 2007 with the goal of ensuring that improper payment  data for administrative costs are sufficiently reliable and valid without  imposing undue burden on states. Although ACF expects to estimate for  administrative improper payments and recognizes the importance of  doing so, it has not yet taken action to augment its existing methodology.
Selection. The population of data from which ACF selected its sample— the Adoption and Foster Care Analysis and Reporting System  (AFCARS)—were not reliable because ACF’s sampling methodology  did not provide for up-front data quality control procedures to (1) ensure  that the population of cases was complete prior to its sample selection  and (2) identify inaccuracies in the data field used for sample selection.  Specifically, ACF had to replace a high percentage of cases sampled  from the database of Foster Care cases for the fiscal year 2010 reporting  period because of inaccurate information in AFCARS.
Of the original 4,570 sample cases ACF selected for testing in its  primary and secondary reviews for fiscal year 2010, 298 cases  (almost 7 percent) had to be replaced with substitutes because the  selected cases had not received Title IV-E Foster Care maintenance  payments during the period under review.
Of the 298 over-sampled cases used to replace the cases initially  selected, 63 cases (more than 21 percent) then had to be replaced  again because those cases had also not received Title IV-E Foster  Care maintenance payments during the period under review.
Further, although we were able to determine how many sampled (or  over-sampled) cases had to be replaced because available records  showed no Title IV-E payment was received during the reporting  period, neither GAO nor ACF were able to determine the extent to  which the opposite occurred—cases that had received a payment  (and therefore should have been included in the sample population)  had not been coded as receiving Title IV-E payments.
Without developing a statistically valid sampling methodology that  incorporates up-front data quality controls to ensure complete and  accurate information on the population, including payment data, ACF  cannot provide assurance that its reported improper payment estimate  accurately and completely represents the extent of improper maintenance  payments in the Foster Care program.
Evaluation. Although ACF’s methodology identified some errors related  to underpayments and duplicate or excessive payments, it did not include  procedures to reliably determine the full extent of such errors. In its fiscal  year 2010 agency financial report, ACF reported that underpayments and  duplicate or excessive payments represented 19 percent and 6 percent,  respectively, or 25 percent of the errors that caused improper payments.  However, the extent of underpayments and duplicate or excessive  payment errors identified varied widely by state, and in some instances  were not identified at all. For example, ACF did not identify  underpayments in 31 of 51 state eligibility reviews and did not identify  duplicate or excessive payments in 36 of 51 state eligibility reviews.did not assess the validity of the reported data. However, the absence of  such errors for some states seems inconsistent with the general  distribution of errors reported elsewhere. Further, the lack of detailed   We  procedures for identifying any such payment errors may have contributed  to the variation or to whether the teams found any errors. The purpose of  the eligibility reviews is to validate the accuracy of a state’s claim for  reimbursement of payments made on behalf of eligible children or the  accuracy of federal financial assistance provided to states. Without  detailed procedures to guide review teams in the identification of  underpayments and duplicate or excessive payments, ACF cannot  provide assurance that it has identified the full extent of any such errors in  its Foster Care program.
The weaknesses we identified in ACF’s methodology to estimate  improper payments in the Foster Care program also impaired its ability to  reliably assess the extent to which its corrective actions reduced Foster  Care program improper payments. For example, although ACF has  reported significantly reduced estimated improper maintenance  payments, from a baseline error rate of 10.33 percent for 2004 to a 4.9  percent error rate for 2010, the validity of ACF’s reporting of reduced  improper payment error rates is questionable because the previously  discussed weaknesses in its estimation methodology impaired the  accuracy and completeness of the reported estimate and error rate. In  addition, we found that ACF’s ability to reliably assess the extent to which  its corrective actions reduced improper payments was impaired by  weaknesses in its requirements for state-level corrective actions. For  example, ACF used the number of cases found in error rather than the  dollar amount of improper payments identified to determine whether a  state was required to implement corrective actions. ACF required states  to implement corrective actions through a program improvement plan, if  during the Title IV-E primary eligibility review, a state was found to have  an error rate exceeding 5 percent of the number of cases reviewed. We  identified six states that were found substantially compliant in their  primary eligibility reviews as their case error rates were below the  established 5 percent threshold. However, the dollar-based improper  payment rates for those six states ranged from 5.1 percent to 19.8  percent—based on the percentage of improper payment dollars found in  the sample. Because dollar-based improper payment rates are not used  in applying the corrective action strategy, ACF’s method cannot  effectively measure states’ progress over time in reducing improper  payments. It also cannot effectively help determine whether further action  is needed to minimize future improper payments. This limits the extent to  which states are held accountable for the reduction of improper payments  in the Foster Care program.
Our report released today includes seven recommendations to help  improve ACF’s methodology for estimating improper payments for the  Foster Care program and its corrective action process. In commenting  on our draft report, HHS agreed that its improper payment estimation  efforts can and should be improved, generally concurred with four of our  recommendations, and agreed to continue to study the remaining three  recommendations. We reaffirm the need for all seven recommendations.
section_title: Current and Possible Strategies to Move Forward in Reducing Improper Payments
paragraphs: A number of actions are under way across the federal government to help  advance improper payment reduction goals. Completing these initiatives,  as well as designing and implementing enhanced strategies in the future,  will be needed to effectively reduce the federal government’s improper  payments. Identifying and analyzing the root causes of improper  payments is key to developing effective corrective actions and  implementing the controls needed to reduce and prevent improper  payments. In this regard, implementing strong preventive controls are  particularly important as these controls can serve as the front-line  defense against improper payments. Proactively preventing improper  payments increases public confidence in the administration of benefit  programs and avoids the difficulties associated with the “pay and chase”aspects of recovering improper payments. For example, addressing  program design issues that are a factor in causing improper payments  may be an effective preventive strategy. Effective monitoring and  reporting will also be important to help detect any emerging improper  payment issues. In addition, agencies’ actions to enhance detective  controls to identify and recover overpayments could help increase the  attention to preventing, identifying, and recovering improper payments.  For instance, agency strategies to enhance incentives for grantees, such  as state and local governments, will be important.
subsections: section_title: Identifying and Analyzing Root Causes of Improper Payments
paragraphs: Agencies cited a number of causes for the estimated $115.3 billion in  reported improper payments, including insufficient documentation;  incorrect computations; changes in program requirements; and, in some  cases, fraud. Beginning in fiscal year 2011, according to OMB’s  guidance, agencies were required to classify the root causes of  estimated improper payments into three general categories for reporting  purposes: (1) documentation and administrative errors, (2) authentication  and medical necessity errors, and (3) verification errors.information on the root causes of the current improper payment estimates  is necessary for agencies to target effective corrective actions and  implement preventive measures.
While agencies generally reported some description of the causes of  improper payments for their respective programs in their fiscal year 2011  reports, many agencies did not use the three categories prescribed by  OMB to classify the types of errors and quantify how many errors can be  attributed to that category. Of the 79 programs with improper payment  estimates in fiscal year 2011, we found that agencies reported the root  cause information using the required categories for 42 programs in their  fiscal year 2011 PARs and AFRs. Together, these programs represented  about $46 billion, or 40 percent of the total reported $115.3 billion in  improper payment estimates for fiscal year 2011. Of the $46 billion, the  estimated improper payments amounts were spread across the three  categories, with documentation and administrative errors being cited most  often. We could not calculate the dollar amounts associated with each  category because the narratives included in some of the agencies’  reporting of identified causes were not sufficiently detailed or  documented. Thorough and properly documented analysis regarding the  root causes is critical if federal agencies are to effectively identify and  implement corrective and preventive actions across their various  programs.
section_title: Implementing Effective Preventive Controls to Avoid Improper Payments
paragraphs: Many agencies and programs are in the process of implementing  preventive controls to avoid improper payments, including overpayments  and underpayments. Preventive controls may involve a variety of  activities, such as up-front validation of eligibility, predictive analytic tests,  training programs, and timely resolution of audit findings, as described  below. Further, addressing program design deficiencies that have caused  improper payments may be considered as part of an effective preventive  strategy.
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 any improper payments that have already  been made. Also, in June 2010, the President issued a presidential  memorandum, titled Enhancing Payment Accuracy Through a “Do Not  Pay List”, to help prevent improper payments to ineligible recipients.
This memorandum also directs agencies to review prepayment and  reward procedures and ensure that a thorough review of available  databases with relevant information on eligibility occurs before the  release of any federal funds. 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, are other important elements that merit  consideration as part of future strategies to advance the federal  government’s efforts to reduce improper payments.
For example, Labor reported that its Unemployment Insurance  program utilizes HHS’s National Directory of New Hires database to  improve the ability to detect overpayments caused by individuals who  claim benefits after returning to work—the largest single cause of  overpayments reported in the program. In June 2011, Labor  established the mandatory use of the database for state benefit  payment control no later than December 2011. Labor also  recommended operating procedures for cross-matching activity for  national and state directories of new hires.
GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1  (Washington, D.C: November 1999). identifying opportunities for streamlining or changing the eligibility or  other program control requirements.
section_title: Implementing Effective Detective Controls to Identify and Recover Overpayments
paragraphs: Although strong preventive controls remain the frontline defense against  improper payments, agencies’ improper payment reduction strategies  could also consider actions to establish additional effective detection  techniques to quickly identify and recover those improper payments 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 could benefit from  strengthened prevention controls. The following are examples of key  detection activities to be considered.
Data mining. Data mining is a computer-based control activity that  analyzes diverse data for relationships that have not previously been  discovered. The central repository of data commonly used to perform  data mining is called a data warehouse. Data warehouses store tables  of historical and current information that are logically grouped. As a  tool in detecting improper payments, data mining of a data warehouse  can enable an organization to efficiently identify potential improper  payments, such as multiple payments for an individual invoice to an  individual recipient on the same date, or to the same address. For  example, in the Medicare and Medicaid program, data on claims are  stored in geographically disbursed systems and databases that are  not readily available to CMS’s program integrity analysts. Over the  past decade, CMS has been working to consolidate program integrity  data and analytical tools for detecting fraud, waste, and abuse. The  agency’s efforts led to the initiation of the Integrated Data Repository  (IDR) program, which is intended to provide CMS and its program  integrity contractors with a centralized source that contains Medicaid  and Medicare data from the many disparate and dispersed legacy  systems and databases. CMS subsequently developed the One  Program Integrity (One PI) program,analytical tools by which these data can be accessed and analyzed to   a web-based portal and set of  help identify any cases of fraudulent, wasteful, and abusive payments  based on patterns of paid claims.
Recovery auditing. While internal control should be maintained to  help prevent improper payments, recovery auditing could be included  as a part of agencies’ strategy for identifying and recovering  contractor overpayments. The Tax Relief and Health Care Act of 2006  required CMS to implement a national Medicare recovery audit  contractor (RAC) program by January 1, 2010. HHS reported that the Medicare Fee-for-Service recovery audit  program identified $961 million in overpayments and recovered $797  million nationwide. Further, the Medicaid RAC program was  established by the Patient Protection and Affordable Care Act.  Under this program, each state is to contract with a RAC to identify  and recover Medicaid overpayments and identify any underpayments.  The final regulations provided that state Medicaid RACs were to be  implemented by January 1, 2012. Similar to the Medicare RACs,  Medicaid RACs will be paid on a contingency fee basis—a percentage  of any recovered overpayments plus incentive payments for the  detection of underpayments.
Pub. L. No. 109-432, div. B., title III, § 302, 120 Stat. 2922, 2991-92 (Dec. 20, 2006),  codified at 42 U.S.C. § 1395ddd(h). drafted language to address the issue and is working to publish a  notice of proposed rule making to amend its regulation.
In another instance, 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, 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.  As part of its annual improper payments reporting, USDA did not cite  an alternative approach for implementing a recovery auditing strategy.
Federal-state incentives.  Another area for further exploration for  agencies’ improper payment reduction strategies is the broader use of  incentives for states to implement effective detective controls.  Agencies have applied limited incentives and penalties for  encouraging improved state administration to reduce improper  payments. Incentives and penalties can be helpful to create  management reform and to ensure adherence to performance  standards.
Chairman Carper, Ranking Member Brown, and Members of the  Subcommittee, this completes my prepared statement. I would be  pleased to respond to any questions that you may have at this time.
section_title: GAO Contacts and Staff Acknowledgments
paragraphs: If you or your staff have any questions about this testimony, please  contact me at (202) 512-2623 or DavisBH@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this testimony. Individuals making key contributions to  this testimony included Carla Lewis, Assistant Director; Sophie Brown;  Francine DelVecchio; Gabrielle Fagan; and Kerry Porter.
section_title: Related GAO Products
paragraphs: 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.
For our report on the U.S. government’s consolidated financial statements  for fiscal year 2011, see Department of the Treasury. 2011 Financial  Report of the United States Government. Washington, D.C.:   December 23, 2011, pp. 211-231.
Medicaid Program Integrity: Expanded Federal Role Presents Challenges  to and Opportunities for Assisting States. GAO-12-288T. Washington,  D.C.: December 7, 2011.
DOD Financial Management: Weaknesses in Controls over the Use of  Public Funds and Related Improper Payments. GAO-11-950T.  Washington, D.C.: September 22, 2011.
Improper Payments: Reported Medicare Estimates and Key Remediation  Strategies. GAO-11-842T. Washington, D.C.: July 28, 2011.
Fraud Detection Systems: Centers for Medicare and Medicaid Services  Needs to Ensure More Widespread Use. GAO-11-475. Washington, D.C.:  June 30, 2011.
Improper Payments: Recent Efforts to Address Improper Payments and  Remaining Challenges. GAO-11-575T. Washington, D.C.: April 15, 2011.
Status of Fiscal Year 2010 Federal Improper Payments Reporting.  GAO-11-443R. Washington, D.C.: March 25, 2011.
Opportunities to Reduce Potential Duplication in Government Programs,  Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington,  D.C.: March 1, 2011.
High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February  2011.
Improper Payments: Significant Improvements Needed in DOD’s Efforts  to Address Improper Payment and Recovery Auditing Requirements.  GAO-09-442. Washington, D.C.: July 29, 2009.
Improper Payments: Progress Made but Challenges Remain in  Estimating and Reducing Improper Payments. GAO-09-628T.  Washington, D.C.: April 22, 2009.
Improper Payments: Status of Agencies’ Efforts to Address Improper  Payment and Recovery Auditing Requirements. GAO-08-438T.  Washington, D.C.: January 31, 2008.
Improper Payments: Federal Executive Branch Agencies’ Fiscal Year  2007 Improper Payment Estimate Reporting. GAO-08-377R. Washington,  D.C.: January 23, 2008.
Improper Payments: Weaknesses in USAID’s and NASA’s  Implementation of the Improper Payments Information Act and Recovery  Auditing. GAO-08-77. Washington, D.C.: November 9, 2007.
Improper Payments: Agencies’ Efforts to Address Improper Payment and  Recovery Auditing Requirements Continue. GAO-07-635T. Washington,  D.C.: March 29, 2007.
Improper Payments: Incomplete Reporting under the Improper Payments  Information Act Masks the Extent of the Problem. GAO-07-254T.  Washington, D.C.: December 5, 2006.
Improper Payments: Agencies’ Fiscal Year 2005 Reporting under the  Improper Payments Information Act Remains Incomplete. GAO-07-92.  Washington, D.C.: November 14, 2006.
Improper Payments: Federal and State Coordination Needed to Report  National Improper Payment Estimates on Federal Programs.  GAO-06-347. Washington, D.C.: April 14, 2006.
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