Patient Protection and Affordable Care Act: IRS Managing Implementation Risks, but Its Approach Could Be Refined
Released: 2012-06-13T00:00:00

Letter

Background

Enacted on March 23, 2010, PPACA involves major health care stakeholders, including federal and state governments, employers, insurers, and health care providers, in an attempt to reform the private insurance market and expand health coverage to the uninsured. IRS is one of several agencies accountable for implementing the legislation and has responsibilities pertaining to 47 PPACA provisions. Some provisions took effect immediately or retroactively while others are to take effect as late as 2018.

According to IRS officials, the most challenging of these provisions relate to the health care exchanges to be established by states by 2014. These exchanges are marketplaces for individuals and certain types of employers to purchase health insurance. To support the exchanges, IRS must modify existing or design new IT systems that are capable of transmitting data to and from HHS, help HHS craft eligibility determinations and related definitions, and engage in new interagency coordination, such as with HHS and the Department of Labor.

To coordinate agency-wide efforts, a PPACA Executive Steering Committee (ESC) oversees two Program Management Offices (PMOs) that coordinate with Health Care Counsel—which is part of IRS’s Office of Chief Counsel (Counsel)—on the implementation. The Services and Enforcement (S&E) PMO oversees the work completed within IRS’s existing business operating divisions (BOD) as well as the efforts of four workstream teams. The Modernization, Information Technology and Security Services (MITS) PMO leads IT development for the program. The Health Care Counsel provides legal counsel and guidance (see fig. 1). Management of the implementation teams is expected to shift from the program management office to the business operating divisions, MITS, and Counsel as the program is fully implemented.

The program management offices and business operating divisions, along with overall IRS leadership, coordinate with IRS’s Office of the Chief Financial Officer (CFO) to allocate resources for implementation efforts. Implementation costs are expected to reach $881 million through fiscal year 2013, with $521 million of that amount being provided through HHS’s Health Insurance Reform Implementation Fund (HIRIF), a fund to which Congress appropriated $1 billion for federal spending to implement PPACA, and the remainder from IRS’s 2013 budget request. Table 1 shows IRS’s PPACA budget and HIRIF funding amounts.

IRS’s risk management efforts are crucial in implementing a program of this size. By evaluating the probability and impact of a given risk’s occurrence, risk management encourages planning for ways to lessen the probability or minimize the impact. Much of the remaining implementation work is new to IRS, such as that related to health care exchanges. IRS is more likely to succeed with steps in place to identify and address risks before they occur and make contingency plans for events that cannot be controlled. Though not a guarantee, IRS’s planning for these tasks make successful implementation more likely.

IRS Has Made Varying Degrees of Progress in Implementing Our Recommendations but Has More to Do on Project Planning, Cost Estimating, and Evaluating Risk Mitigation Strategies

Over half of the 47 provisions requiring action from IRS were statutorily effective in or prior to 2010, forcing IRS to conduct short-term implementations and long-term strategic planning simultaneously. With many short-term projects now completed, IRS has been focusing on its long-term planning since our 2011 report, and has made varying degrees of progress in implementing our four recommendations. These efforts have helped IRS gain a better understanding and vision for the implementation work and challenges remaining and how IRS would manage risks to the program’s success.

IRS has implemented one of our four recommendations from June 2011 to strengthen PPACA implementation efforts by documenting a schedule for developing performance measures for PPACA that are to link to program goals (see table 2).

IRS made some progress on the remaining three recommendations from our June 2011 report. Absent more progress, IRS may encounter challenges in overseeing the program if activities in project plans are not linked, cost estimates are not current, and risk mitigation strategies are not properly assessed and decisions documented.

Integrating Goals and Project Plan

We recommended that IRS develop one set of goals and an integrated project plan across IRS to clarify the vision and mitigate the risk that lower level units may work at cross purposes. The program’s governance document now stipulates program goals that align with IRS’s mission. IRS continues to maintain separate project plans for S&E and MITS activities, though it has an additional plan that offers a high level overview of the major PPACA efforts and the related implementation progress across IRS. IRS officials said that the overview provides a sufficient perspective to assess overall progress, but we found it did not align with criteria for leading practices because it is updated manually, leaving it subject to error if those updating the plan are not acting in a timely manner or overlook a change in delivery schedules (see table 3).

We recommended that IRS adopt the leading practices outlined in the GAO Cost Guide and shown in table 4 to enhance the reliability of its cost estimate for PPACA. However, little progress has been made as IRS’s cost estimate is largely unchanged since it was developed in 2010. IRS’s Estimating Program Office (EPO) plans to revise the cost estimate this year after reaching a milestone that clarified some business requirements related to IT development. In April 2012, IRS awarded a contract for an independent cost estimate that is slated to include the steps outlined in GAO’s Cost Guide. Our June 2012 report on IRS’s fiscal year 2013 budget recommended that IRS revise its PPACA cost estimate by September 2012, which IRS agreed to do.

If IRS’s EPO completes an estimate and it is compared to an independent estimate, IRS will make significant progress in implementing our recommendation.

We recommended that IRS’s plan assure that strategic-level risks are identified and that alternative mitigation strategies for risks are evaluated. Our conclusion was based on a comparison between IRS’s risk plan from May 18, 2011, and the criteria outlined in GAO’s risk management framework, shown in figure 2.

Of the five stages of the risk management framework, IRS’s risk plan did not meet the criteria associated with three stages: risk assessment, alternative evaluation, and management selection (see table 5). Strategic- level risks are now better addressed because the revised plan calls for involvement of higher level executives, but the plan does not specify policies and procedures involved in evaluating and selecting potential risk mitigation strategies. We discuss this topic further in the next section on IRS’s revised risk management plan.

IRS’s Risk Management Plan Meets Criteria for Three of Five Risk Framework Stages but Lacks Specific Guidance on the Evaluation and Selection of Mitigation Strategies

Our assessment of IRS’s revised risk management plan from February 24, 2012, indicated that IRS adheres to the criteria for three of the five stages of our framework for risk management. However, the plan’s guidance on evaluating risk mitigation alternatives is not specific or comprehensive, nor does the plan address procedures for management in selecting strategies and documenting decisions made. Figure 3 summarizes our assessment of the IRS revised plan by comparing it to the five stages (see app. II for the full text included in fig. 3).

As figure 3 indicates, the risk plan’s discussion of evaluating potential risk mitigations is brief, with some processes and responsibilities left undefined. The plan did not provide specific guidance on the process for doing an evaluation, stating only that alternative strategies should be evaluated according to cost, level of effort, and return on investment. For example, the plan did not identify who is responsible for doing or reviewing the evaluation.

Further, the plan did not provide guidance on selecting mitigation strategies, including verifying that resources are available for selected strategies. IRS officials acknowledged that the plan did not include these processes and responsibilities but said that they believe that teams considered such factors when making decisions. Additionally, the plan did not provide guidance on documenting the rationale(s) for selecting one alternative over others. As a result, IRS is less likely to have a trail of analysis that explains the decisions to those who work on PPACA projects in the future. Such a trail is important, as PPACA implementation involves many people managing many tasks over a number of years and across multiple offices. In the years ahead, implementation responsibility will shift from the PMOs to staff in the BODs who may not have been involved in these decisions about the mitigations considered and chosen and may have to develop a new mitigation if the original does not work.

IRS officials noted that spending resources to do a thorough evaluation and to document the rationale for decisions may not be practical for risks that have a low probability of occurring or that IRS cannot control, such as a lack of funding. While this may be true, IRS’s risk plan does not offer guidance on factors like the probability of a risk’s occurrence that could affect the level of evaluation and amount of documentation to be done. Without specific guidance on evaluating potential mitigation strategies, the likelihood decreases that teams will conduct a thorough evaluation or have a consistent basis for deciding not to do so.

IRS Implemented Its Risk Management Plan Consistently for the Sample Provisions and in Crosscutting Areas, Except for Provisions Led by Counsel and When Coordinating with Partner Agencies

Managing Risks for Sample Provisions

Our analysis indicated that IRS generally implemented its risk management plan consistently for seven of the nine provisions in our sample. These seven provisions covered responsibilities such as for premium assistance tax credits for eligible individuals purchasing health insurance coverage through state exchanges, penalties on individuals who do not have minimum essential coverage, penalties on larger employers who do not offer coverage as required, and other taxes, credits, and fees. IRS did not follow its risk management plan for two sample provisions that IRS believed primarily required legal guidance and that IRS assigned primary responsibility for implementing to Counsel.

In reviewing the seven sample provisions that were expected to have relatively high dollar impacts and greater risks, we asked for evidence that IRS completed the steps prescribed by its risk plan. summarizes the steps and results we found in IRS’s implementation of the plan for the seven provisions (see app. III for detail on the sample provisions and our assessment of whether the sample provisions followed the four stages of IRS’s risk plan).

Our analyses focused on whether rather than how well IRS completed the required steps.

Key steps included in the stage Brainstorming sessions with relevant stakeholders; guidance from Counsel; complete and document approval of Provision Assessment Form; record identified risks in tracking software, using information from Provision Assessment Form.

Results found in implementation IRS provided evidence of taking these steps.

Monitor risks weekly.

IRS provided evidence of a weekly review meeting for risks.

Determine risk levels for each recorded risk; evaluate and select risk mitigation strategies; assign risk ownership; establish performance thresholds that offer early warning that chosen mitigation strategies do not work.

Risk levels were determined; risk ownership was assigned; little evidence of mitigation strategy evaluation; provisions with earlier effective dates were more likely to have established early warning indicators.

Regularly scheduled reports reviewed at meetings by IRS management committees.

IRS provided evidence of taking these steps.

IRS consistently completed all steps outlined in the plan’s Identification, Tracking, and Reporting stages. While some steps called for in the Resolution/Mitigation stage were consistently completed, we did not find an analysis of alternative risk mitigation strategies for several provisions in our sample. This inconsistency could stem from the lack of guidance, as previously discussed, on how to do mitigation evaluations, including documenting why a mitigation strategy is selected over the alternatives considered.

As for the two sample provisions that Counsel was responsible for implementing, the risk management plan was not used. When asked about efforts to identify risks for one of the provisions, a Counsel official said that this responsibility rested with the BODs who ultimately would implement the provision. However, the S&E PMO overseeing the work in the BODs told us that Counsel was responsible for the provision’s implementation, including managing the related risks. As a result of confusion as to who should take the lead in identifying and mitigating risks for provisions in which Counsel had lead responsibility, risks may not be identified and mitigated. IRS officials acknowledged that the risk plan was not used for these provisions, noting that the provisions were not expected to have an impact on IRS operations. However, one of the two provisions, an imposition of penalties for underpayments attributable to transactions lacking economic substance, had an operational impact in areas such as tax forms, customer service, and compliance checks, indicating that the risk plan should have been used.

Managing Risks for Four Crosscutting Management Areas

Looking more broadly beyond the provisions in our sample, we found that IRS generally implemented its risk management plan in four crosscutting areas: (1) resource allocation, (2) collaboration with other agencies, (3) decisions to extend deadlines or provide transitional relief, and (4) challenges related to addressing compliance and burden. However, IRS did not have a formal system for managing risks when coordinating with HHS.

While we noted in Table 3 that most activities in project plans were not assigned specific resources, IRS’s risk plan does facilitate knowledge sharing among the entities involved in allocating resources to the program, with the exception previously stated that it does not provide guidance on verifying that resources are available for selected mitigation strategies. The CFO, along with IRS management, allocates IRS’s appropriation to IRS teams doing the implementation work. By involving the CFO in reviewing identified risks, the risk plan ensures that the CFO is aware of any risks related to the availability of resources. Regularly scheduled meetings between the CFO and PPACA implementation leadership also serve to facilitate discussion of the risks related to resource allocation. To the extent that IRS provides more specific guidance in the risk plan on verifying resources and updates its cost estimate for PPACA implementation, IRS will enhance its ability to manage risks related to allocating resources in an efficient manner.

IRS and HHS developed an informal process for regular communication on project management, consisting of meetings several times per week to monitor progress on deliverables and solicit needed input on IRS activities that affect other agencies. IRS officials expressed confidence that the informal system of coordination worked effectively. The agencies also jointly established more formal guiding principles for their implementation efforts in 2010 to clarify goals and objectives.

Although IRS and HHS regularly coordinated, we did not find a formal system for managing risks threatening the agencies’ success in achieving their goals. Without a joint tracking system for risks related to the agencies’ coordinated efforts, the agencies may duplicate efforts. They could also focus on tracking implementation deadlines while losing sight of risks that pose obstacles to meeting those deadlines.

We found consistent evidence IRS had taken steps to identify potential compliance challenges. IRS used its Research, Analysis, and Statistics (RAS) organization to help project the volume of tax returns that would be subject to PPACA and help identify the likely population requiring outreach and education. When historical data for similar provisions were available, IRS attempted to use the data to construct a baseline of anticipated results. Counsel solicited formal comments from stakeholders and taxpayers in response to preliminary guidance. IRS made limited use of other means, such as focus groups, to gain insight into compliance and burden challenges facing the public. IRS officials said that they received informal feedback from conversations with other tax stakeholders, such as groups representing taxpayers, tax software developers, and tax preparers. We also saw evidence, such as with tax credits for small employers offering health insurance, that IRS enforcement staff attempted to account for known or suspected compliance risks. The risk plan calls for early warning thresholds that indicate that results are below expectations and we saw evidence that such thresholds are used regularly.

Conclusions

Since our 2011 report, IRS has gained a better understanding of the work and challenges it faces in implementing PPACA. IRS has made varying degrees of progress in implementing our recommendations from 2011. As IRS continues to implement them, IRS leadership will enhance its line of sight over its progress and the challenges that remain.

With expected implementation costs approaching $1 billion as IRS gets closer to major milestones in 2014, careful consideration of risks and alternatives for mitigating those risks is crucial in meeting deadlines and making the best use of taxpayer dollars. While IRS developed a risk management plan for PPACA implementation that meets several leading practices, IRS did not take any actions to implement our 2011 recommendation on assessing mitigation strategies. Further, IRS could take specific steps such as providing additional guidance on how to evaluate potential mitigation strategies and document the rationales for decisions made. Without additional guidance, IRS staff selecting mitigation strategies may not fully evaluate all alternatives or verify that resources are available for the strategy chosen. Not knowing the rationale behind selecting a mitigation strategy over others could hinder future decisions if the original strategy did not work and the original decision makers are no longer involved.

While IRS’s PPACA implementation teams generally followed the steps of the risk management plan in identifying and mitigating risks, the plan was not followed when Counsel led pieces of the implementation. If the plan is not followed, risks may not be addressed. Additionally, without a shared system for tracking and monitoring risks with partner agencies, such as HHS, the agencies will be more likely to overlook potential challenges or duplicate efforts to mitigate risks.

Recommendations for Executive Action

To strengthen the PPACA risk management plan, we recommend that the Commissioner of Internal Revenue enhance guidance on evaluating risk mitigation alternatives to clarify who is responsible for doing the evaluation and making decisions based on the results as well as how they might do the evaluation, assure that resources are available for the chosen mitigation strategy, document the mitigation alternatives considered and rationale(s) for the decisions made.

To ensure more consistent implementation of the risk management plan, we recommend that the Commissioner of Internal Revenue take the following two actions: ensure that the PPACA risk management plan is applied to provisions in which the Office of Chief Counsel assumes lead responsibility for implementation, and develop agreements with HHS (and other external parties as needed) on a system to record and track details on decisions made or to be made to ensure that risks are identified and mitigated.

Agency Comments and Our Evaluation

In a June 1, 2012, letter responding to a draft of this report (which is reprinted in app. IV), the IRS Deputy Commissioner for Services and Enforcement provided comments on our findings and recommendations as well as information on IRS efforts and progress to date on its PPACA implementation.

IRS agreed with our first recommendation to enhance guidance in its PPACA risk management plan related to evaluating risk mitigation alternatives. Specifically, IRS agreed to revise its plan to (1) clarify responsibilities for doing the evaluation and making related decisions, (2) assure that resources are available for the mitigation strategy chosen, and (3) document the alternatives considered and the rationale(s) for decisions made.

IRS also agreed with our two recommendations to ensure more consistent application of its risk management plan. First, IRS agreed to revise its plan to address the use of the plan for provisions being led by the Office of Chief Counsel. Second, IRS agreed to consult with HHS on the best approach to document and track decisions, risks, or both that affect both agencies. In that this recommendation referenced HHS specifically and possibly other external parties in identifying and mitigating these “joint” risks, we encourage IRS to take similar coordinated steps, as needed, when risks arise that affect IRS and these other parties.

We are sending copies of this report to appropriate congressional committees, the Commissioner of Internal Revenue, the Secretary of the Treasury, the Chairman of the IRS Oversight Board, and the Director of the Office of Management and Budget. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staffs have any questions or wish to discuss the material in this report further, please contact me at (202) 512-9110 or at whitej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V.

Appendix I: Scope and Methodology

To assess IRS’s progress in addressing our 2011 recommendations for improving PPACA implementation efforts, we compared IRS’s planned and ongoing actions to leading practices described in our report. We analyzed IRS documentation and data, including program goals, project plans, cost estimates, risk management plans, governance plan, and presentations. We interviewed IRS officials and staff at IRS’s National Office, including those in the Office of the Chief Financial Officer (CFO); Office of Chief Counsel; and Services & Enforcement (S&E) and Modernization and Information Technology Services (MITS) Program Management Offices (PMO) to clarify our understanding of IRS’s progress and plans for implementing our recommendations.

To assess IRS’s risk management plan for PPACA, we compared the contents of IRS’s Risk Management Plan, governance plan, and high- level action plans to the criteria outlined by GAO’s risk management approach. We met with officials from the S&E PMO to confirm our understanding of the policies and procedures included in IRS’s risk management process.

To evaluate how consistently IRS applies its risk management plan for PPACA implementation, we analyzed IRS activities across a sample of PPACA provisions to verify that IRS followed the steps included in its risk plan. To assemble our sample, we identified provisions with the greatest likelihood of adverse effects and potential for the most significant financial consequences if risks were not identified and mitigated. We limited the scope of our sample to the 23 provisions with anticipated revenue and expenditure impacts of over $1 billion over the first 10 years of the legislation, as scored by the Joint Committee of Taxation and Congressional Budget Office. We eliminated 14 provisions to arrive at the final sample of 9 provisions based on the following criteria (see app. III for the 9 provisions in the sample).

For example, since we focused on IRS’s use of its PPACA risk plan, which was initially drafted in 2011, we removed six provisions, including:

Four provisions that were implemented prior to the existence of IRS’s risk plan:

Section 10909 related to an adoption tax credit,

Section 1408 (HCERA) related to the exclusion of cellulosic biofuel from a tax credit,

Section 9003 related to repealing a tax exclusion in health flexible spending arrangements, and

Section 9004 related to a tax on distributions from certain health savings accounts.

Two provisions for which implementation had not started:

Section 9005 related to the limits on health flexible spending

Section 9001 related to an excise tax on high-cost employer- provided health insurance plans.

To target provisions with the greatest likelihood of adverse effects from a failure to mitigate risks, we removed another seven provisions, including:

Three provisions because IRS had identified only low level risks for them:

Section 9013 related to the medical expense deduction threshold,

Section 1405 (HCERA) related to an excise tax on medical

Section 9012 related to the elimination of an employer deduction for a retiree prescription drug subsidy.

Four provisions for which only 1 risk had been identified:

Section 1322 related to a tax exemption for start-up nonprofit

Section 6301 related to a fee on health insurance plans,

Section 10907 related to an excise tax on tanning salon services,

Section 9010 related to an annual fee on health insurers.

Finally, because of overlap in the remaining provisions that required very similar work for IRS, we removed a provision from Section 9015 related to an increase of the Hospital Insurance tax on wages over a specified threshold.

We asked IRS to provide evidence of its risk management activity in four key areas. For three of these areas—resource allocation, coordination with external partners, and compliance and burden challenges—we also sought this documentation as part of our work on the nine provisions. We analyzed IRS’s responses and documentation, including risk logs, to determine what gaps, if any, existed between the steps called for by the risk plan and the actions that IRS took. We interviewed IRS officials and staff responsible for PPACA implementation, including officials from the PMOs for S&E and MITS, Office of the Chief Counsel, and Office of the CFO, and officials from the Department of Health and Human Services in conducting this work.

For the risks related to the fourth key area—deadline extensions and other transitional relief—we interviewed officials in the Office of Chief Counsel. We sought information on their approach to understand how Chief Counsel coordinates with implementation teams about risks as decisions are considered and made about the extensions and relief.

We conducted this performance audit from August 2011 to June 2012 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.

Appendix II: How IRS Fulfills GAO Risk Management Criteria

To assess how IRS’s revised risk plan meets the criteria for each of GAO’s risk management framework stages, we compared the criteria for each stage of the framework to the steps included in each of the stages of IRS’s risk management plan. Table 7 shows how IRS’s risk management plan meets the criteria for the risk management framework.

Appendix III: Provisions Evaluated for Consistent Use of Risk Management Plan

In evaluating IRS’s responses to a sample of nine PPACA provisions, we found that IRS generally followed the plan to identify, track and report risks. As discussed in our report, exceptions were (1) IRS did not consistently evaluate potential risk mitigation strategies in the Resolution/Mitigation stage of its risk plan, and (2) the risk plan was not used when the Office of Chief Counsel led the implementation of provisions related to a reinsurance program for early retirees and the economic substance doctrine. Table 8 shows the results of our evaluation.

Appendix IV: Comments from the Internal Revenue Service

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the to the individual named above, Thomas Short, Assistant Director; Ben Atwater; Linda Baker; Amy Bowser; Dean Campbell; Jennifer Echard; Rebecca Gambler; Meredith Graves; Sairah Ijaz; Sherrice Kerns; Donna Miller; Patrick Murray; Sabine Paul; and Cynthia Saunders made key contributions to this report.

Related GAO Products

IRS 2013 Budget: Continuing to Improve Information on Program Costs and Results Could Aid in Resource Decision Making. GAO-12-603. Washington, D.C.: June 8, 2012.

Small Employer Health Tax Credit: Factors Contributing to Low Use and Complexity. GAO-12-549. Washington, D.C.: May 14, 2012.

Patient Protection and Affordable Care Act: IRS Should Expand Its Strategic Approach to Implementation. GAO-11-719. Washington, D.C.: June 25, 2011.

GAO Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Costs. GAO-09-3SP. Washington, D.C.: March 2, 2009.

Risk Management: Further Refinements Needed to Assess Risks and Prioritize Protective Measures at Ports and Other Critical Infrastructure. GAO-06-91. Washington, D.C.: December 15, 2005.