Welfare Benefits: Potential to Recover Hundreds of Millions More in Overpayments
Released: 1995-07-05T00:00:00

Letter

Introduction

In federal fiscal year 1992, three of the nation’s largest means-tested programs—Aid to Families With Dependent Children (AFDC), Food Stamps, and Medicaid—provided almost $161 billion in cash, food coupons, and medical benefits, respectively, to millions of our nation’s low-income people. These people included families with children who are deprived of support; households that need help buying food basics; and the low-income aged, blind, or disabled. That same year, however, people or households who were ineligible for these benefits, or who were not entitled to the level of benefits provided, received nearly $4.7 billion in AFDC, Food Stamp, and Medicaid benefit overpayments or about 4 percent of the total benefits paid in the three programs.

Program administrators try to prevent overpayments by carefully determining an applicant’s initial eligibility. However, when errors are made, recovering overpayments is often very time consuming and difficult. Nationwide success in recovering these overpayments varies considerably among the three programs. While states recovered about $215.6 million of nearly $1.2 billion of AFDC overpayments, or about 18.7 percent, in fiscal year 1992, the recovery rate was appreciably lower for the other two programs. In this same year, almost $104.3 million of about $1.6 billion of Food Stamp overpayments, or about 6.5 percent, was recovered; while about $13.2 million, or nearly 2 percent, of an estimated $670.6 million of overpayments was recovered in the Medicaid program.

When states do not promptly and efficiently identify and collect overpayments, governments lose the immediate use of these funds and incur additional expenses to recover them. Without a vigorous recovery effort, current and potential recipients may infer that the government considers the unrecovered funds dispensable. Under the legislative welfare reform proposals that the Congress is considering, resources available to help low-income Americans may become increasingly limited. Therefore, ensuring that the funds appropriated for these programs reach only those entitled to them is crucial.

The Ranking Minority Member of the Subcommittee on Oversight of Government Management, Senate Committee on Governmental Affairs, asked us to determine (1) what states are doing to collect benefit overpayments in the AFDC, Food Stamp, and Medicaid programs; the more effective practices that they are using; and what, if anything, they could do better; and (2) what the federal government could do to help states collect more overpayments.

Federal Government and States Share Responsibility for Three Large Welfare Programs

Each year, the AFDC, Food Stamp, and Medicaid programs provide cash and other assistance to millions of economically disadvantaged persons. In 1992, the AFDC program, authorized by title IV-A of the Social Security Act, provided about $22 billion in cash assistance to more than 13.6 million recipients—members of low-income families with children who were deprived of support due to the absence, death, disability, or unemployment of at least one parent. The Food Stamp Program, authorized by the 1964 Food Stamp Act, provided about $21 billion in food coupons to more than 25.4 million recipients to help them buy food to meet their nutritional needs. And the Medicaid program, authorized by title XIX of the Social Security Act, paid about $118 billion in 1992 for medical services for more than 30 million low-income persons who are aged, blind, or disabled; AFDC recipients; and other low-income persons.

Federal Government Oversees State Administration of Programs

The Department of Health and Human Services’ (HHS) Administration for Children and Families (ACF) is responsible for the AFDC Program; HHS’ Health Care Financing Administration (HCFA) oversees administration of the Medicaid Program; and the Department of Agriculture’s (USDA) Food and Consumer Service (FCS) oversees the Food Stamp Program.

ACF’s, FCS’, and HCFA’s oversight responsibility supports program operation at the state level. These agencies develop and issue regulations on general eligibility and benefit criteria, provide technical assistance and guidance to the states, and help monitor state performance through quality control systems. Under these systems, states must review a sample of their cases each month to assess the accuracy of their staffs’ eligibility and benefit determination decisions. In turn, federal quality control reviewers from ACF, FCS, and HCFA assess the correctness of state findings by evaluating a subsample of the state samples. Differences between the state and federal findings are reconciled to calculate an official state error rate. If the error rate is greater than a program’s targeted error rate—for example, 3 percent in the case of Medicaid—then federal payments may be reduced by an amount calculated on the basis of the percentage point difference between the actual and target error rate. The error rate is also used to estimate the total dollar value of estimated overpayments for the state.

The federal government and states both provide funding for AFDC, Food Stamps, and Medicaid. The federal government pays from 50 to about 80 percent of benefit costs for AFDC and Medicaid and 50 percent of most administrative costs of those programs. The federal government pays 100 percent of benefit costs for Food Stamps and 50 percent of state administrative costs.

States Determine Household and Individual Eligibility and Benefit Amounts

The states manage the day-to-day functioning of AFDC, Food Stamps, and Medicaid through local offices—either district, county, or city. As part of the daily administration, eligibility staff evaluate applications to determine a household’s or an individual’s eligibility and to ensure that the correct level of benefits is authorized. Depending upon the state, these staff may be determining eligibility and benefit levels for one or all three programs.

The three programs’ eligibility rules and income tests are complex and differ from one another; so, although all three programs take into account assets, household income, and size, the extent to which they do so varies. For example, in determining an applicant’s eligibility under AFDC in fiscal year 1995, staff generally exclude the first $1,500 in equity value of an applicant’s automobile and count the remainder in determining available financial resources; under Medicaid, depending upon the type of applicant, staff exclude the first $1,500 in equity value or $4,500 in fair market value and, in certain cases, may exclude all of the value; and, under Food Stamps, staff exclude the first $4,550 in fair market value and, in some cases, may exclude all of the fair market value. A requirement that clients notify the staff when their income changes further complicates eligibility determinations. Staff must then use three sets of eligibility criteria to recalculate benefit levels.

Overpayments Occur for Several Reasons

Given the complexity and diversity of eligibility rules among the three welfare programs, ineligible clients sometimes receive benefits or medical services or eligible clients sometimes receive more benefits than they are entitled to. Overpayments generally result when (1) a participating household or individual intentionally provides incorrect or insufficient information on which eligibility and benefit determinations are based (fraud), (2) a participating household or individual unintentionally provides incorrect or insufficient information (client error), or (3) the administering state agency miscalculates eligibility or benefits or does not correctly act on client-reported information (agency error).

States Are Responsible for Recovering Overpayments

Regardless of the cause of overpayments, state AFDC and Food Stamp offices are responsible for (1) preventing and identifying overpayments, (2) verifying potential overpayments and establishing claims for them, and (3) collecting overpayments. While no federal goals exist for states to recover a minimum percentage of their overpayments, federal legislation generally requires states to try to recover them in these two programs. Although state Medicaid offices’ overpayment responsibilities are similar to those for the other two programs, under Medicaid law, the focus is on recovering overpayments to providers of medical services rather than the recipients of services. States may, but are not required to, recover funds from ineligible Medicaid clients when overpayments to providers are made in their behalf. In 1992, as a result of state law or policy, most states attempted to recover overpayments due to errors from Medicaid clients, including long-term care clients who received nursing home services to which they were not entitled.

States use a variety of methods, including computer matching and quality control reviews, to help prevent overpayments and to identify overpayments. The Deficit Reduction Act of 1984 requires states to routinely compare data supplied by applicants and clients of AFDC, Food Stamps, and Medicaid with other data sources in search of discrepancies. These other data sources include (1) Internal Revenue Service (IRS) data on interest, dividends, and other types of unearned income; (2) Social Security Administration data on benefits and earnings; and (3) state reports on quarterly wages and unemployment insurance benefits. States may also identify overpayments when they conduct their monthly quality control reviews of individual cases or verify an individual’s alien status.

After identifying a possible overpayment, the next step is to verify the overpayment. Because one key factor in determining eligibility and benefit levels is a household’s or an individual’s financial information, this may involve contacting the client—or his or her employer—to obtain wage statements to compare with the information originally provided by the client. Once the overpayment is verified, states establish a claim for it by entering a record in the state client billing and tracking system. By regulation, however, states are not required to pursue every overpayment. For example, both the AFDC and Food Stamp programs give states the option of not pursuing a nonfraudulent overpayment of less than $35 if it cannot be collected by reducing the individual’s or household’s benefit. Under existing waiver authority, FCS has increased the less than $35 threshold to less than $100 for some states.

After establishing a claim for collection, states then send a written notice to the current or former client who received the overpayment advising him or her of the amount owed, explaining how the overpayment occurred, and requesting repayment. Federal law and regulations allow states to collect AFDC overpayments by offsetting a portion of current clients’ benefits (recoupment) without their consent and do not distinguish between the types of overpayment (agency or client error). However, the Food Stamp Program can recoup for agency errors only if the client voluntarily agrees to such recoupment. In addition, states must first allow clients with client error overpayments to repay them by lump sum or installment payments. States can use recoupment if the client chooses recoupment to repay a client error claim or if the client fails to pay the claim using the method chosen. If the state determines that collection action through any of these payment methods would cause undue hardship for the client, collections can be suspended or repayment amounts reduced.

States have several other alternatives available to collect overpayments. Depending upon the program, they may garnish wages or intercept federal or state income tax refunds or state lottery winnings. States may also refer cases to collection agencies, report client debt to credit bureaus, use a small claims court, or place liens against a client’s property to collect the outstanding debt.

All three programs allow states to retain a portion of the overpayments they recover. For AFDC and Medicaid, states keep an amount equal to the proportion of the benefits they originally provided in matching funds—from about 20 to 50 percent—regardless of the type of overpayment error. Although Food Stamp benefits are paid entirely by the federal government, states get to keep a portion of the overpayments that they recover. Currently, state agencies retain 25 percent of recovered Food Stamp overpayments due to client fraud, 10 percent for those due to client error, and nothing for those due to agency error.

Implications of Welfare Reform on Recovering Overpayments

As the Congress discusses various approaches to serving AFDC, Food Stamp, and Medicaid clients, some members are proposing restructuring these programs to give states more flexibility in administering them. While federal agencies currently oversee various aspects of these programs, states may find, under reform, that they must assume more—or even all—administrative and oversight responsibility. AFDC, Food Stamps, and Medicaid are entitlement programs: no limit exists on the amount of federal funding a state can receive since every person who is determined to be eligible must receive benefits. Under a block grant approach, however, states would receive a capped, defined amount of money. In this instance, they likely would also have increased financial interest in ensuring that funds are spent only on those who are eligible.

Scope and Methodology

To accomplish our objectives, we mailed a separate questionnaire for each of the three welfare programs to welfare officials in all 50 states and the District of Columbia. These questionnaires gathered information on (1) the methods states use to identify and collect overpayments, (2) how recovery efforts are coordinated among the three programs, (3) the level of overpayments established and collected in fiscal year 1992, and (4) what factors hinder or help states’ abilities to recover overpayments. We also interviewed officials at ACF, FCS, HCFA, the Department of the Treasury’s Financial Management Service, and IRS and welfare officials in seven states. Appendix I more completely describes our scope and methodology.

We conducted our work between April 1993 and March 1995 in accordance with generally accepted government auditing standards.

Successful Recovery of Overpayments Is Related to Establishment of Claims and Tools States Use

For each of the three programs we reviewed, about a third of the states—high-performing states—had recovered a substantially greater portion of their estimated overpayments than the lower one-third of the states. One key reason for the high-performing states’ success is that they established more claims for their overpayments than low-performing states. In addition, they used a broader array of tools and practices to both establish and collect overpayments than the low-performing states. We estimated that, if all states had achieved recovery rates equal to those of the high-performing states, an additional $262 million potentially could have been recovered in fiscal year 1992.

States’ awareness and understanding of successful recovery techniques can help enhance their collection efforts. At the time of our review, the Food and Consumer Service (FCS) was sharing best Food Stamp recovery practices and overpayment collection data among the states, and the Administration for Children and Families (ACF) was planning to provide similar assistance for AFDC in 1996. However, HCFA was not providing, nor is it planning to provide, such assistance to the states for recovering Medicaid overpayments from clients.

Recovery Rates of High-Performing States

The median recovery rate for high-performing states was at least twice that of the low-performing states for each program. For example, as illustrated in figure 2.1, the high-performing states’ median recovery rate in the AFDC program was about 28 percent of estimated overpayments, compared with 6 percent for the low-performing states.

Although high-performing states were not always the same in each program, the following states were consistently among the high-performing states in fiscal year 1992 for at least two of the three programs: Alabama, Arkansas, California, Colorado, Georgia, Hawaii, Idaho, Illinois, Kentucky, New Mexico, North Dakota, Oregon, Utah, and Wyoming. Appendixes II through IV show individual state recovery rates for each program.

One main reason that high-performing states’ recovery rates were greater than low-performing states’ is that they established claims for a significantly greater portion of their overpayments. For states to collect any overpayment, they must first establish claims for them. As illustrated in figure 2.2, the high-performing states’ median rate for establishing claims in the AFDC program, for example, was about 54 percent of estimated overpayments, compared with 14 percent for the low-performing states. The median recovery rate of high-performing states in the AFDC program was substantially higher than that for low-performing states, as shown in figure 2.1.

Successful Practices for Establishing Claims and Recovering Overpayments

States that had the most success in establishing claims and recovering overpayments used a much higher number of certain recovery practices and tools than other states. States can use many different practices or tools, under current law, to help recover overpayments. Following are the practices and tools for establishing claims and recovering overpayments that were used more by high-performing states than by low-performing states. The practices and tools used for establishing claims were use of self-initiated computer matches to identify potential overpayments, use of multiple approaches to identify potential overpayments, timely verification of overpayments, timely establishment of claims, and establishment of claims for more difficult collection cases.

The practices and tools used for recovering overpayments were lower average caseloads for eligibility staff, greater portion of a state’s total staff working to recover overpayments, use of state income tax refund intercept, use of multiple approaches to collect overpayments, automated tracking and billing system with a full range of functions, and more of a state’s overpayment records in automated tracking and billing system.

In studying the high-performing states, we found that they used a broad array of these practices, focusing on two aspects of the recovery process—establishing the claim and collecting the overpayment. Although not all of the high-performing states used every practice listed, we found that, overall, a greater proportion used at least five of these practices than did the low-performing states. Many states indicated in our survey that limited staff may have prevented them from doing more to recover overpayments.

Practices for Establishing Claims

We found that high-performing states were more timely in verifying potential overpayments and establishing claims than were low-performing states. As illustrated in figure 2.3, high-performing states for the AFDC program, for example, established overpayment claims for current clients on average in about 3 months—half the average time it took for the lower one-third of the states, which was about 6 months.

In addition, one of our prior studies showed that successful recovery of overpayments is directly related to the time it takes to establish an overpayment claim once it is identified. The timely establishment of overpayment claims for collection is important because, once clients discontinue receiving program benefits and overpayments can no longer be recouped, collection can be more difficult.

Another practice used by high-performing states was to establish claims for the more difficult collection cases, such as former clients who have moved out of state, provided no forwarding addresses, declared bankruptcy, or died. Although establishing claims in these cases is time consuming, states that did this increased their collection potential.

Practices for Collecting Overpayments

In addition to the specific practices associated with establishing claims, high-performing states also used several practices for collecting overpayments from former or current clients. For example, we found that these states had lower average caseloads per eligibility staff, which allowed their staff an opportunity to spend more time with each collection case. Further, these states dedicated a greater portion of their total staff to recovering overpayments, including using recovery specialists and fraud investigators where appropriate. For example, in the Food Stamp Program, an average of 8 percent of high-performing states’ total staff were fraud investigators compared with 3 percent of low-performing states’.

While having more resources helped them to collect overpayments, high-performing states also used other practices not as common among the low-performing states. These included state tax refund intercepts, multiple collection methods, and automated systems with a full range of client billing and tracking functions. About 12 of the 15 high-performing states for the Food Stamp Program, for example, reported that they had a full range of automated functions, whereas 9 of the 20 low-performing states had this capacity. Appendix V has additional information related to state collection practices.

Potential for States to Improve Recovery Efforts

If all states had performed as high-performing states did in recovering AFDC, Food Stamp, and Medicaid overpayments in 1992, we estimate that an additional $262 million could have potentially been recovered. Our estimate is based on each state agency performing at the median recovery rate of the top one-third performing states for each of the programs in 1992. This estimate is broken down among the three programs as follows: $132 million in AFDC recoveries (61-percent increase over current recoveries), $100 million in Food Stamp recoveries (96-percent increase), and $30 million in Medicaid recoveries (230-percent increase).

Federal Efforts Help States Learn About Best Recovery Practices

Our estimate of $262 million in potential additional recoveries assumes that lower performing states would use more of the recovery practices of the high-performing states. To do so, states would have to identify these practices and evaluate the cost benefit of using them. We found that FCS has helped states identify other states’ “best practices” for recovering Food Stamp overpayments. ACF and HCFA, on the other hand, are not helping states learn about best recovery practices for AFDC or Medicaid overpayments, respectively. However, ACF has plans to begin offering such help in 1996; HCFA has no similar plans.

FCS communicates Food Stamp overpayment collection data and best recovery practices to states in a variety of ways. It annually collects recovery data—such as dollar amounts recouped—from the states and disseminates this information, which helps states compare their performance and establish recovery goals of their own. FCS also collects information on successful recovery practices from the states, periodically publishes this information, and disseminates it nationwide. In addition, FCS established a State Exchange Program that subsidizes state officials’ travel to other states to learn about effective recovery practices, as well as methods to prevent overpayments. Finally, FCS provides training to states on the use of federal income tax refund intercepts. FCS officials told us that they believe their sharing of best practice and recovery information has helped states improve their overpayment recovery efforts.

In contrast, the AFDC and Medicaid programs provide little guidance on best recovery practices to the states. ACF had collected overpayment information until September 1988 when the Office of Management and Budget’s approval of its reporting form expired. ACF did not renew the form. Subsequently, in November 1992, HHS’ Office of the Inspector General reported that ACF did not have a reporting mechanism to collect information needed to assess the effectiveness of state agency compliance with program requirements for identifying and recovering AFDC overpayments. ACF officials told us that, as a result of that report, they have redesigned the form and are planning to begin collecting financial recovery data from states in fiscal year 1996. In addition, the officials said that they are working on a guidance document for states that would include best recovery practices. During our review, Medicaid officials were not aware that several states were recovering overpayments from clients and, thus, were not collecting recovery data or sharing best practice information. Medicaid officials said that they had no plans to collect or disseminate best practice information because states are not required to collect overpayments from clients.

Extending Effective Federal Recovery Provisions to One or More Programs Could Increase Collections

Looking at the programs from the federal perspective, we found that federal laws and regulations that facilitate recovery in one welfare program are not in place in all three. If legislative changes were made to extend recovery practices used in one program to the others, we estimate that states could potentially recover millions more in welfare overpayments annually.

A large part of the potential additional collections we estimate involves the Food Stamp Program, in which a rule limiting recovery of overpayments resulting from agency error has cost the program about $33 million a year in potential collections. Currently, unless the client consents, states may not recover an overpayment by reducing the client’s monthly benefits if the overpayment results from agency error.

We also estimated that about $24 million could potentially be collected annually by extending the use of federal income tax refund intercept to the AFDC and Medicaid programs. Currently, only the Food Stamp Program allows states to intercept a federal income tax refund to recover overpayments from a former program client who is delinquent in repayment.

Eliminating Limitations on Recoupment Could Potentially Increase Food Stamp Collections

Recovering overpayments due to agency error through recoupment—or temporarily reducing benefits, without client consent—is an accepted collection method in AFDC but not allowed for Food Stamp overpayments. Food Stamp legislation precludes states from using recoupment, unless the client consents, to recover overpayments resulting from agency error. Eliminating the requirement for client consent could potentially yield additional collections estimated at about $33 million annually.

For agency error overpayments, the Food Stamp restriction on using recoupment without client consent could negatively affect states’ recovery efforts. As shown in table 3.1, although about 40 percent of the estimated overpayments in 1992 involved agency errors, less than 19 percent of the states’ established claims and less than 16 percent of total collections involve agency error overpayments. One reason for these rates may be that, unlike for fraud or inadvertent client error, states cannot keep any collections of overpayments resulting from agency errors. Six states responding to our questionnaire commented on a need for financial incentives for states to collect agency error overpayments.

Thirty-seven states reported that a federal requirement to recover agency error overpayments, such as using recoupment without client consent, would help them collect overpayments. Only 11 states reported that they opposed such a requirement. One reason for their response, provided by several states, may be that states do not keep any part of the amount collected when the overpayment results from agency error.

Allowing recoupment without client consent to collect overpayments resulting from agency error could enable states to potentially collect an estimated $33 million in additional Food Stamp overpayments annually. Our estimate is based on an assumption that states would establish claims for agency error overpayments at the same rate that they did for client error overpayments in 1992 and collect overpayments at least at the same rate that agency error claims were collected in that year (see app. VI, table VI.1).

USDA supports using recoupment of Food Stamp benefits without client consent to recover agency error overpayments. In 1985, a legislative proposal to require recoupment without client consent for agency error overpayments was introduced but not enacted. Subsequently, we recommended in 1986 that the Congress amend the Food Stamp Act to authorize states to pursue recoupment of agency error overpayments without client consent. At that time, USDA supported using such recoupment for agency error claims. Subsequently, in 1993, USDA proposed legislation that recommended recoupment of agency error claims, but the Congress did not act on the recommendation. USDA is again evaluating efforts needed, such as the use of recoupment of agency error claims without client consent, to ensure that agency error claims are treated the same as client error claims.

Extending Federal Income Tax Refund Intercept Could Potentially Increase AFDC and Medicaid Overpayment Collections

Although intercepting federal income tax refunds has proven effective in collecting Food Stamp overpayments, its use is not authorized for the AFDC and Medicaid programs. The Food Stamp Program currently intercepts tax refunds under demonstration project authority with participation by about two-fifths of the states. Twenty-one states intercepted federal income tax refunds to collect over $30 million in Food Stamp benefit overpayments in 1994. Legislation would be needed to authorize AFDC’s and Medicaid’s use of federal income tax refund intercept. We estimate that such legislation could potentially result in overpayment collections increasing by $23.6 million annually.

Federal Tax Refund Intercept Succeeds in Collecting Overpayments for the Food Stamp Program

States that use federal income tax refund intercepts in the Food Stamp Program do so as a last resort. First, only claims resulting from client error are referred for federal income tax refund intercept. Also, states may only refer claims for intercept if the client is no longer a Food Stamp beneficiary and the claim becomes delinquent after a state agency has tried several times to collect it.

Intercepting federal income tax refunds to collect delinquent claims from former Food Stamp clients involves a joint effort by the Food and Consumer Service (FCS), IRS, and the states. State agencies submit claims to FCS and notify the former beneficiaries. FCS consolidates individual state submissions, refers them to IRS for processing, and then transfers the amounts intercepted, including any earned income tax credit in the refund, to the states. States paid half of the $8.28 IRS processing fee for each intercept in 1993; FCS paid the other half.

While no cost benefit study of the Food Stamp federal tax intercept program has been made, it appears effective in recovering substantial overpayments at a limited cost. Since FCS’ 1992 pilot of the demonstration project in two states, collections from intercepts plus voluntary payments made in place of offset have represented at least 23 percent of total collections in the participating states.

Each year since 1992, FCS has added states to the program. As shown in table 3.2, intercept-related collections represented about 33 percent of total overpayments recovered in 21 participating states in fiscal year 1994. The federal share (not less than 75 percent) of the $30.6 million intercepted in that year was at least 23 times greater than the $983,000 that FCS estimated it spent in administrative costs in 1994. These costs included salary and contractor costs, training costs, and FCS’ share of the IRS processing fee. While FCS does not determine state administrative costs spent for tax intercept, FCS officials stated that they believed the states’ retention share exceeded their administrative costs.

Legislation Needed to Extend Federal Income Tax Refund Intercept to AFDC and Medicaid

Current law does not authorize using federal income tax refund intercept in the AFDC and Medicaid programs. Broad support exists, however, to extend such authority to the two programs. Over the years, GAO, HHS, Treasury’s Financial Management Service, state agencies, and the United Council on Welfare Fraud, Inc.—a program integrity advocacy group—have called for extending the federal income tax intercept, primarily to the AFDC program. Sixteen states responding to our AFDC survey and 10 states responding to our Medicaid survey cited a need for extending federal income tax intercept to collecting outstanding AFDC and Medicaid overpayments.

Legislation to extend federal income tax refund intercept to the AFDC program was introduced in 1994 but did not pass. The legislation, part of a welfare reform proposal introduced in the 103rd Congress, would have authorized an intercept program for AFDC overpayments. Commenting on this proposal, officials from the Treasury’s Financial Management Service cited the need to revise the proposal’s language so that HHS’ ACF would be the focal point for working with IRS. This would lessen the administrative burden on IRS because it could deal with one entity rather than 50 states and the District of Columbia. This approach would more closely resemble the Food Stamp intercept program, which uses FCS as its focal point.

In addition to new legislation for AFDC and Medicaid, legislative and regulatory change would be needed to achieve the full potential of the Food Stamp federal income tax intercept program. FCS officials told us that since they piloted the demonstration project, they have recruited additional states each year on the basis of the states’ willingness to devote the staff and computer resources to implement the program. In its 1995 package of legislative recommendations to update Food Stamp legislation, USDA recommended a legislative change that would require all states to use the federal income tax refund intercept. Such a provision is contained in the recently passed House of Representatives’ welfare reform bill, H.R. 4.

According to FCS officials, USDA also has drafted a regulatory change that would remove the program from its demonstration project status and fully authorize federal income tax refund intercept to collect client error overpayments. FCS officials told us that the decision to limit the federal income tax refund intercept to only overpayments caused by client error was a reaction to the failure of a 1994 legislative proposal to extend tax intercept to agency error overpayments. In commenting on a draft of this report, however, USDA stated that, as part of its evaluation of efforts needed to ensure that agency error claims are treated the same as client error claims, it is again considering the referral of agency error claims for federal tax intercept.

Extending Federal Tax Intercept Could Potentially Recover Substantial Overpayments

If the federal income tax refund intercept program were extended to the AFDC and Medicaid programs, we estimate that overpayment collections could potentially be increased $23.6 million annually. The AFDC portion of our estimate—$22.3 million—is based on an analysis of 24 states that reported using state income tax refund intercept in 1992. (See app. VI, table VI.2.) We also estimated that 11 states that used state tax intercept might collect about $1.3 million through extending the federal tax refund intercept to the Medicaid program (see app. VI, table VI.3).

One ACF official we interviewed suggested that the possibility of intercepting AFDC overpayments might not be as great as in the Food Stamp Program because AFDC clients are less likely than Food Stamp clients to be getting a federal income tax refund. Further, all of the ACF officials we interviewed believed that states may have to “wait in line” behind other programs already using federal income tax refund intercepts to collect from the same clients. Other than federal tax liability and past due child support owed AFDC clients, which receive first priority, the law does not prioritize agencies.

Conclusions, Matters for Congressional Consideration, Agency Comments, and Our Evaluation

Conclusions

Federal and state efforts to recover AFDC, Food Stamp, and Medicaid benefit overpayments have fallen short of their potential. While not all such overpayments are collectable, recovery of overpayments could substantially increase if lower performing states improved their recovery practices, particularly in establishing claims for overpayments. Although our estimates of the additional collections account for a small proportion of the total estimated overpayments in 1992, they represent a substantial increase in the amount that states collected in each program in that year. With the Food and Consumer Service’s (FCS) continued sharing of state recovery information and best recovery practices and the Administration for Children and Families’ (ACF) plans to do so soon, states have an opportunity to improve their recovery efforts in the AFDC and Food Stamp programs.

Moreover, states could improve their ability to recover more overpayments if the Congress would remove certain federal legislative barriers to collection and recovery techniques. Specifically, states could run more fiscally sound welfare programs if (1) limits on offsetting Food Stamp benefits to recover Food Stamp overpayments arising from agency error were removed and (2) authority to use federal income tax refund intercepts was extended to AFDC and Medicaid overpayments. While providing states these additional tools will not end overpayments in these welfare programs, it would provide states additional opportunities to recover overpayments.

Managing the three welfare programs’ funds—including identifying, establishing, and collecting overpayments—is critical to the programs’ integrity, regardless of how they may be structured or administered after the welfare reform debate. Preventing overpayments is clearly one way to ensure that taxpayer dollars are not used for unwarranted benefits, but overpayments will inevitably occur. Finding methods to better identify and recover overpayments, and obtaining additional collection tools, should continue to be a central concern of program administrators.

Matters for Congressional Consideration

The Congress may want to consider legislative amendments to remove barriers to states’ collecting additional overpayments. Specifically, it may want to consider amending the Food Stamp Act of 1977 to authorize states to offset current recipients’ benefits, without their consent, to recover overpayments caused by agency errors and extending the authority for states to intercept federal income tax refunds to include the recovery of AFDC and Medicaid overpayments.

Agency Comments

We requested written comments on a draft of this report from USDA, HHS, and IRS. IRS did not provide comments. USDA and HHS comments and our evaluation of them are summarized below. USDA’s and HHS’ written comments appear in full in appendixes VII and VIII, respectively.

USDA Comments and Our Evaluation

USDA concurred with our conclusion that more can be done to recover overpayments from current and former welfare clients. It agreed that, because some states establish claims for a greater percentage of their overpayments than others, they recover more overpayments. USDA also identified recent actions it is taking to reduce errors that lead to overpayments, including the creation of a core FCS team to work solely on developing and coordinating payment accuracy issues and identifying methods and incentives to encourage states to devote the necessary resources to identifying and establishing more overpayment claims. We believe these are positive steps toward reducing overpayments and improving collections and encourage USDA to continue such efforts. USDA also commented on a few specific observations in our report. Its detailed comments and our evaluation of them follow.

Collection Improvements

USDA noted that, while the nationwide recovery rate of Food Stamp overpayments was 7 percent, state agencies have been increasing the amount of overpayments collected in recent years. It stated that this increase is due in part to the use of the Federal Tax Refund Offset Program. USDA also commented that state agencies are collecting nearly 50 percent of the overpayments they establish as claims.

While we agree that states have increased their collection of overpayments each year, they have not increased collections relative to the growing amount of their estimated overpayments. For example, in fiscal year 1988, states collected about 8.6 percent (about $71 million) of their estimated overpayments but collected less than 6.4 percent (about $117 million) of estimated overpayments in fiscal year 1993. Regarding USDA’s comment that states are collecting almost 50 percent of the overpayment claims they establish, USDA did not consider that most states are establishing claims for a small percentage of their estimated overpayments. For example, in 1992, 31 states had established claims for less than 20 percent of their total estimated Food Stamp overpayments.

Welfare Reform Implications

Regarding our comments about the implications of welfare reform on recovering overpayments, USDA believes it is our opinion and not fact that states would have an increased financial interest in ensuring that block grant funds are spent only on those who are eligible. In addition, USDA commented that a capped level of funding under block grants does not presume that overpayment errors will be fewer or that more staff will be available to collect overpayments. It also noted that, under block grants, the accuracy in determining benefit levels would largely depend on the state eligibility standards that would replace current federal standards.

It is our opinion that states would have an increased interest in ensuring payment accuracy under block grants. However, we did not state, nor do we presume, that with block grants fewer overpayment errors would occur or more staff would be available to collect overpayments. We agree with USDA that the accuracy of determining benefit levels depends on the eligibility standards. Eligibility standards, however, are not the only variable that affects the accuracy of benefit determinations. The accuracy of benefit determinations is also affected, for example, if the client intentionally or unintentionally withholds necessary eligibility information, such as earnings or assets.

Involuntary Recoupment of Agency Errors

USDA points out that we did not accurately report its position on involuntary recoupment of agency error overpayments. It previously supported and continues to support the position that states should be able to use involuntary recoupment to collect agency error overpayments. We revised the report to reflect USDA’s position.

Estimate of Additional Agency Error Collections

USDA believes that our estimate of additional agency error collections if states were allowed to use involuntary recoupment of benefits is optimistic. It questioned an assumption we used in calculating our estimate—that states would establish agency error claims at the same rate as client errors. USDA contends that states may not devote the same amount of resources to establish and collect agency error claims as they do to determine client errors because states do not keep a portion of agency error collections as they do for client error collections. While some states may aggressively pursue agency error claims, USDA does not believe that involuntary recoupment alone would generate the added incentive to achieve the additional agency error collections we estimated.

We do not believe our estimate of additional agency error collections is overly optimistic. While we agree that states have a clear incentive to devote their limited resources to collecting client error overpayments, we also believe that states would have a continued interest to recover overpayments caused by agency errors. First, by law, states are required to establish claims for, and attempt to collect, all types of overpayments. Collecting all types of overpayments helps maintain program integrity. Second, as noted in the report, our survey results suggest that most states would favor a federal requirement to recover agency error overpayments, such as involuntary recoupment, because it would increase their ability to collect such overpayments. We believe that involuntary recoupment would make it easier for states to collect agency error overpayments and, thus, states would be more likely to establish claims for agency error overpayments as they do for client error overpayments.

Other Technical Comments

USDA also provided technical comments on our draft report. We made changes where appropriate in the final report.

HHS Comments and Our Evaluation

In commenting on a draft of this report, HHS agreed that federal and state efforts to recover overpayments fall short of their potential. In particular, it said that a substantial potential for increase in AFDC recoveries exists if lower performing states improved to the level of the high-performing ones. The Department also believes that federal agencies and states must emphasize the need to maintain payment accuracy as well as find methods to better identify and recover overpayments.

HHS also provided other comments that raised questions about our analyses and scope of review. These and other comments and our evaluation of them follow.

Quality of GAO Analysis

HHS raised questions about the quality of our analysis and stated that we were somewhat selective in citing findings that may exaggerate differences in the characteristics of high- and low-performing states. Specifically, it questioned how we (1) defined high- and low-performing states and specific overpayment terms used throughout the report, (2) identified most promising practices, and (3) measured collection rates.

We disagree with HHS’ assertions about the quality of our analysis and presentation of findings. As we explained in appendix I, for each program, our definition of state performance is based upon a ranking of the states according to the percentage of estimated overpayments they collected and a subsequent division of the state rankings into approximate thirds—high-, middle-, and low-performing states. The practices that we referred to as most promising in the draft of this report are those that tended to be more commonly used by high-performing states than by low-performing states. Thus, because we did not study the effectiveness of individual practices, we deleted our reference to the practices as most promising. The overpayment terms we use throughout the report and our methodology for calculating collection rates were also explained in appendix I. While we agree with HHS about the difficulties associated with calculating state collection rates, in the absence of better data, we established the proxy measure defined in the report.

HHS also stated that it hoped the report would elaborate more on the cost-effectiveness of various practices, causes for differences among states’ performance, and differences in state administrative costs. These issues were beyond this report’s scope and objectives. Our review focused more broadly on the recovery of welfare overpayments and not on any individual state’s performance.

Multiple Program Goals Require Staff Tradeoffs

HHS believes that the report needs to acknowledge that the programs discussed in this report have multiple goals that often require tradeoffs. It commented that state eligibility workers who spend their time recovering overpayments have to divert their efforts from helping the client population attain self-sufficiency. Clearly, between these two program goals are tradeoffs that states would have to make in allocating their resources. We are not suggesting that significant state resources be diverted from casework. Rather, we are suggesting that, by adopting some of the practices discussed in the report, states could improve their performance in recovering overpayments. Most states already have recovery specialists devoted to recovering overpayments. By providing effective recovery techniques to these specialists, states may not have to divert scarce resources from self-sufficiency efforts to recover overpayments.

Other Technical Comments

In considering other HHS comments, we clarified our discussion of program administration, rules, and procedures. In addition, HHS offered technical comments on the report draft. We considered these comments for the final report and made changes where appropriate.