Improper Payments: Federal and State Coordination Needed to Report National Improper Payment Estimates on Federal Programs
Released: 2006-04-14T00:00:00

Letter

Background

In November 2002, the Congress passed IPIA. The major objective of IPIA is to enhance the accuracy and integrity of federal payments. The law requires executive branch agency heads to annually review all programs and activities that they administer, identify those that may be susceptible to significant improper payments, and estimate and report annually on the amount of improper payments in those programs and activities. IPIA also requires the agencies to report annually to the Congress on the actions they are taking to reduce erroneous payments for programs for which estimated improper payments exceed $10 million.

IPIA further requires OMB to prescribe guidance for federal agencies to use in implementing the act. OMB issued this guidance in Memorandum M-03- 13 in May 2003. It requires use of a systematic method to annually review and identify those programs and activities that are susceptible to significant improper payments. OMB guidance defines significant improper payments as annual improper payments in any particular program exceeding both 2.5 percent of program payments and $10 million. The OMB guidance then requires agencies to estimate the annual amount of improper payments using statistically valid techniques for each susceptible program or activity. For those agency programs, including state-administered programs, determined to be susceptible to significant improper payments and with estimated annual improper payments greater than $10 million, IPIA and related OMB guidance require each agency to report the results of its improper payment efforts. OMB guidance requires the reporting to be in the Management Discussion and Analysis section of the agency’s PAR for each fiscal year ending on or after September 30, 2004. IPIA requires the following information to be reported to the Congress: a discussion of the causes of the improper payments identified, actions taken to correct those causes, and results of the actions taken to address those causes; a statement of whether the agency has the information systems and other infrastructure it needs to reduce improper payments to minimal cost-effective levels; if the agency does not have such systems and infrastructure, a description of the resources the agency has requested in its most recent budget submission to the Congress to obtain the necessary information and infrastructure; and a description of the steps the agency has taken and plans to take to ensure that agency mangers are held accountable for reducing improper payments.

OMB’s guidance in M-03-13 requires that three additional things be included in the PAR: a discussion of the amount of actual erroneous payments that the agency expects to recover and how it will go about recovering them; a description of any statutory or regulatory barriers that may limit the agency’s corrective actions in reducing improper payments; and provided the agency has estimated a baseline improper payment rate for the program, a target for the program’s future improper payment rate that is lower than the agency’s most recent estimated error rate.

In August 2004, OMB established Eliminating Improper Payments as a new program-specific initiative in the President’s Management Agenda (PMA). The separate improper payments PMA program initiative began in the first quarter of fiscal year 2005. Previously, agency efforts related to improper payments were tracked along with other financial management activities as part of the Improving Financial Performance initiative. The objective of establishing a separate initiative for improper payments was to ensure that agency managers are held accountable for meeting the goals of IPIA and are therefore dedicating the necessary attention and resources to meeting IPIA requirements. This program initiative establishes an accountability framework for ensuring that federal agencies initiate all necessary financial management improvements for addressing this significant and widespread problem. Specifically, agencies are to measure their improper payments annually, develop improvement targets and corrective actions, and track the results annually to ensure the corrective actions are effective.

Estimating Improper Payments at the State Level Is Limited

State responses to our survey show that the number of state-administered federal programs (state programs) estimating improper payments significantly decreases if there is no federal requirement to estimate or if the states are not participating in a federally administered pilot to estimate. For the 25 major programs reviewed for fiscal years 2003 and 2004, all 51 states estimated improper payments where there was a federal requirement to do so. For the federally administered improper payment pilots, the number decreased to 29 states. Where there was no federal requirement or pilot in place, only 11 states reported estimating improper payments on their own initiative, as shown in figure 1.

Programs with Federal Requirements

Only 2 of the 25 major programs in our review had federal requirements for all the states to annually estimate improper payments—the Food Stamp and UI programs. In total, 47 states reported estimating improper payments for one or more major programs, which represented 97 program surveys for fiscal year 2003, fiscal year 2004, or both. More than half of the reported estimates were for the Food Stamp and UI programs. Food Stamp and UI program outlays expended by the states totaled about $61 billion for fiscal year 2004. This constitutes about 15 percent of the total federal funds that are estimated to be annually distributed to states and other nonfederal entities for redistribution to eligible parties. Both of these programs are benefit programs, have a history of measuring improper payments through established systems, and can calculate a national error rate.

The purpose of the Food Stamp Program is to help low-income individuals and families obtain a more nutritious diet by supplementing their incomes with benefits to purchase food. As reported in USDA’s fiscal year 2005 PAR, the causes of improper payments in the Food Stamp Program include client errors, such as incomplete or inaccurate reporting of income, assets, or both by participants at the time of certification or by not reporting subsequent changes. Causes can also be provider based, such as errors in determining eligibility or benefit amounts or delays in action or inaction on client reported changes. The Food Stamp quality control system measures payment accuracy and monitors how accurately states determine food stamp eligibility and calculate benefits. USDA reports a rate and dollar amount of estimated improper payments for the Food Stamp Program in its annual PAR based on the quality control system. In its fiscal year 2005 PAR, USDA reported a national improper payment error rate of 5.88 percent, or $1.4 billion, for the Food Stamp Program. A national error rate is calculated and incentives and penalties are applied to the states that have rates lower or higher than the national rate. Recent initiatives reported in USDA’s fiscal year 2005 PAR include the agency’s fiscal year 2004 nationwide implementation of an electronic benefit transfer (EBT) system for the delivery of food stamp benefits. The EBT card, which replaced paper coupons, creates an electronic record for each transaction that makes fraud easier to detect. Other USDA efforts include Partner Web, which is an intranet for state food stamp agencies, and the National Payment Accuracy Workgroup, which consists of representatives from USDA headquarters and regional offices who meet to discuss best practice methods and strategies. (See app. III for more details on the Food Stamp Program.)

The UI Program provides temporary cash benefits to workers who lose their jobs through no fault of their own. Labor reported in its fiscal year 2005 PAR that the principal cause of improper payments was claimants who continue to claim benefits despite having returned to work. Pursuant to Part 602 of Title 20, Code of Federal Regulations, Labor implemented the Benefit Accuracy Measurement system to measure state payment accuracy in the UI Program. Labor also reports a rate and dollar amount of estimated improper payments for the UI Program in its annual PAR. In its fiscal year 2005 PAR, Labor reported an annual error rate of 10.13 percent, or $3.2 billion, for the UI Program. Labor’s initiatives to reduce improper payments in the UI Program include implementing new cross-matching technologies like the National Directory of New Hires database and funding states’ data-sharing efforts with federal agencies, such as the Social Security Administration, and other state agencies, such as the state departments of motor vehicles. Further, Labor is instilling additional performance measures for states to detect and recover overpayments of benefits and continuing analyses of the causes, costs, and benefits of improper payment prevention or establishing recovery operations. (See app. IV for more details on the UI Program.)

Federal Programs with Pilots

Twenty-nine states in our review responded in our surveys or during interviews that they voluntarily participated in federally administered pilot projects to estimate improper payments. We visited the state participating in the Department of Transportation’s (DOT) Highway Planning and Construction Program and one of the states participating in the Department of Health and Human Services’ (HHS) Medicaid program and discussed the states’ efforts to measure improper payments. These pilots serve as models for the federal agencies on obtaining improper payment information and establishing a methodology for other states to estimate improper payments for those programs. Neither of the two pilots was sufficiently comprehensive to allow the responsible federal agency to project an error rate with statistical precision to all of the states.

DOT provides funding to the state departments of transportation to administer the nation’s federal Highway Planning and Construction Program. During our review, DOT had a pilot in place to estimate improper payments for two construction projects in Tennessee. The sampled transactions reviewed to identify improper payments for these two projects were selected from a population of almost $35 million, which represented a small portion of DOT’s fiscal year 2005 outlays totaling $31 billion for the Highway Planning and Construction Program. For one of these projects, DOT reported that the estimated improper payments amount was statistically insignificant. For the other project, DOT reported an improper payment estimate of $111,671. The methodology and testing procedures that resulted from DOT’s pilot project will be used to extend the methodology nationwide. In its fiscal year 2005 PAR, DOT reported a zero-dollar improper payment estimate for this program. However, the DOT OIG also reported that detecting improper payments for several grant programs, including the Highway Planning and Construction Program, was a top management challenge for the agency. In particular, the OIG reported that the DOT pilot project was too limited and that OIG investigators continue to identify instances of improper payments. The OIG cited two improper payment examples totaling over $1.3 million, which was reimbursed to DOT as a result of OIG investigations. In response, DOT is reorganizing and redesigning its procedures to better improve oversight of research agreements. This includes creating a new division within DOT’s Office of Acquisition Management devoted to the award and administration of cooperative agreements. (See app. V for more details on the improper payment pilot for the Highway Planning and Construction Program.)

In coordination with the states, HHS finances health care services to low-income individuals and families through the Medicaid program. Medicaid improper payments are caused by medical review, eligibility review, or data-processing review errors. In fiscal year 2002, HHS began a pilot to estimate improper payments for its Medicaid program. The number of states voluntarily participating in the pilot has increased each year, and in the second year of the pilot, fiscal year 2003, 12 states participated. In the third year, fiscal year 2004, 24 states participated in the pilot. Because HHS had not fully implemented a statistically valid methodology, the agency did not report an improper payment estimate for the Medicaid program in its fiscal year 2005 PAR. According to agency officials, HHS is in the process of implementing a methodology for estimating payment error rates for Medicaid in all states. HHS stated that it expects to be fully compliant with the IPIA requirements for the Medicaid program by fiscal year 2008. Other initiatives HHS is undertaking for the Medicaid program are the hiring of additional staff to do prospective reviews of state Medicaid operations and the Medicare/Medicaid data match program designed to identify improper payments and areas in need of improved payment accuracy. (See app. VI for more details on the Medicaid program.)

We identified other improper payment pilot initiatives during our review of agencies’ fiscal year 2005 PARs. Specifically, HHS reported that improper payment pilots are being conducted for three other state-administered programs to assist HHS in its efforts to report a national improper payment estimate in the future. For HHS’s State Children’s Health Insurance Program (SCHIP), 15 states participated in a payment accuracy measurement pilot in fiscal year 2004. The states performed a combination of medical, eligibility, or data-processing reviews of claims and applicable payments for the period October 1, 2003, to December 31, 2003. Using a standard methodology, those states computed a payment accuracy error rate for their programs. Based on these results, HHS has adopted a national strategy using federal contractors to obtain a national error rate for SCHIP with expected implementation in fiscal year 2006. In fiscal year 2007, HHS expects to begin measuring SCHIP error rates nationwide for its fee-for- service component. HHS expects to report SCHIP error rates for its fee-for- service, managed care, and eligibility components in its fiscal year 2008 PAR.

For HHS’s Child Care and Development Fund (CCDF) Program, 11 states participated in an improper payment pilot in fiscal year 2004 to assess states’ efforts to prevent and reduce improper payments. The states worked with HHS to assess the adequacy of state systems, databases, policy, and administrative structures. In fiscal year 2005, HHS expanded pilot participation to 18 states. HHS also conducted an error rate study in 4 states to assess those states’ ability to verify information received from clients during the initial eligibility process or to establish eligibility correctly. In addition, HHS conducted interviews in 5 other states to gather information about improper payment activities. HHS reported that it will continue to work with states during fiscal year 2006 to identify an appropriate strategy for determining estimates of payment errors in the CCDF Program.

For HHS’s Temporary Assistance for Needy Families (TANF) Program, one state participated in a pilot to undergo a more in-depth review of TANF expenditures as part of its single audit requirement. The objective of the pilot was to explore the viability of estimating improper payments in the single audit process. Using statistical sampling, the auditors reviewed 208 cases to test controls. According to HHS, the auditors reported an overall case error rate of 20 percent and a payment error rate of 3.9 percent from their review of the 208 cases. In addition to this pilot, state-led initiatives involving the TANF Program were also under way, as described below.

State Initiatives to Estimate Improper Payments

During our review of survey responses, we also noted that 11 states, on their own initiative, were estimating improper payments related to 5 separate programs for fiscal year 2003, fiscal year 2004, or both. For example, 6 of the 11 states indicated in their survey responses that they were estimating improper payments for HHS’s TANF Program. Among the varying methods the 11 states used to estimate amounts, error rates, or both were statistically representative samples of payments and findings from states’ single audits. Other techniques respondents reported using included Food Stamp Program quality control reviews to ascertain the accuracy of TANF payments, which would be reasonable to do if the eligibility requirements of the two programs were similar.

States Reported Using Various Techniques to Detect, Prevent, or Reduce Improper Payments

As part of their funds stewardship responsibilities for federal awards, states are required to establish and maintain internal control designed to provide reasonable assurance that funds are administered in compliance with federal laws, regulations, and program requirements. This includes maintaining accountability over assets and safeguarding funds against loss from unauthorized use or disposition. To ensure proper administration of federal funds, states reported using a variety of prepayment and postpayment mechanisms. For example, states reported the use of computer-related techniques to identify and prevent improper payments as well as recovery audits to collect overpayments. In addition, selected programs reported that federal incentives and penalties are in place to help reduce improper payments. These types of actions contribute to a strong internal control structure that helps mitigate the risk and occurrence of improper payments.

Generally, improper payments result from a lack of or an inadequate system of internal control, but some result from program design issues. Our Standards for Internal Control in the Federal Government provides a road map for entities to establish control for all aspects of their operations and a basis against which entities’ control structures can be evaluated. Also, our executive guide on strategies to manage improper payments focuses on internal control standards as they relate to reducing improper payments. The five components of internal control—control environment, risk assessment, control activities, information and communication, and monitoring—are defined in the executive guide in relation to improper payments as follows: Control environment—creating a culture of accountability by establishing a positive and supportive attitude toward improvement and the achievement of established program outcomes.

Risk assessment—analyzing program operations to determine if risks exist and the nature and extent of the risks identified.

Control activities—taking actions to address identified risk areas and help ensure that management’s decisions and plans are carried out and program objectives are met.

Information and communication—using and sharing relevant, reliable, and timely financial and nonfinancial information in managing activities related to improper payments.

Monitoring—tracking improvement initiatives over time, and identifying additional actions needed to further improve program efficiency and effectiveness.

For this engagement, we focused on two of these internal control components—risk assessments and control activities, which are discussed in more detail in the following sections.

States Frequently Use Risk Assessments and Computer- Related Techniques to Prevent or Detect Improper Payments

All states except 1 acknowledged using computer-related techniques to prevent or detect improper payments, while 21 states reported having performed some type of statewide assessments to determine what programs are at risk of improper payments. Strong systems of internal control provide reasonable assurance that programs are operating as intended and are achieving expected outcomes. A key step in the process of gaining this assurance is conducting a risk assessment, an activity that entails a comprehensive review and analysis of program operations to determine where risks exist and what those risks are, and then measuring of the potential or actual impact of those risks on program operations. In performing a risk assessment, management should consider all significant interactions between the entity and other parties, as well as all internal factors at both the organizationwide and program levels.

IPIA requires agencies to review all of their programs to identify those that may be susceptible to significant improper payments. Since the programs in our review were state administered, we asked the states if they performed statewide reviews to assess if their programs may be at risk of improper payments. Twenty-one states responded that they had performed some type of statewide assessment of their programs. Some of the states’ risk assessment processes included internal control assessments, which were generally self-assessments performed by the states’ program agencies and entities. Two states noted that these self-assessments can be used as a tool by state auditors to evaluate weaknesses or to plan work to be performed. Regular evaluation of internal control systems is statutorily required by at least 2 states. Other risk assessment methods states reported using included single audits and other audits or reviews performed by state auditors or by state agencies.

Survey respondents also cited using control activities, such as computer- related techniques, to aid in the detection and prevention of improper payments. Computer-related techniques play a significant role not only in identifying improper payments, but also in providing data on why these payments were made and, in turn, highlighting areas that need strengthened prevention controls. The adoption of technology allows states to have effective detection techniques to quickly identify and recover improper payments. Data sharing, data mining, smart technology, data warehousing, and other techniques are powerful internal control tools that provide more useful and timely access to information. The use of these techniques can achieve potentially significant savings by identifying client- related reporting errors and misinformation during the eligibility determination process—before payments are made—or by detecting improper payments that have been made. Fifty of the 51 states representing 21 different programs reported in their surveys that they used computer- related techniques to prevent or detect improper payments. Table 1 shows the number of programs that reported using each technique.

As table 1 shows, for the state programs that reported using a computer- related technique, 106 state program administrators reported using some sort of fraud detection system. One example is the Transportation Software Management Solution, a fraud detection system used by several states for the Highway Planning and Construction Program. This software contains a Bid Analysis Management System that allows highway agencies to analyze bids for collusion. Also, a limited number of states in our survey reported using smart technology. For example, the Medicaid Fraud, Abuse and Detection System is designed to structure, store, retrieve, and analyze management information. It has the ability to detect fraud patterns, and it works with the Medicaid Management Information System, which contains a data warehouse that can be queried for information to be used in a variety of analyses. Other techniques include one state’s use of a Web-based system that allows National School Lunch Program participants to enter monthly claims by site. System checks are in place to ensure that sites do not overclaim meals based on days served and eligible students.

States Have Implemented Recovery Auditing Efforts

Recovery auditing is another method that states can use to recoup detected improper payments. Recovery auditing focuses on the identification of erroneous invoices, discounts offered but not received, improper late payment penalties, incorrect shipping costs, and multiple payments for single invoices. Recovery auditing can be conducted in-house or by recovery audit firms.

Section 831 of the National Defense Authorization Act for Fiscal Year 2002 contains a provision that requires all executive branch agencies entering into contracts with a total value exceeding $500 million in a fiscal year to have cost-effective programs for identifying errors in paying contractors and for recovering amounts erroneously paid. The legislation further states that a required element of such a program is the use of recovery audits and recovery activities. The law authorizes federal agencies to retain recovered funds to cover in-house administrative costs as well as to pay contractors, such as collection agencies. OMB guidance suggests that federal agencies awarding grants may extend their recovery audit programs to cover significant contract activity by grant recipients (e.g., states). States may engage in their own recovery audit programs.

As shown in table 2, based on our review of survey responses, 15 states reported conducting recovery audits in fiscal year 2003, fiscal year 2004, or both. In fiscal year 2003, states reported recovering over $180 million, compared to $155 million for fiscal year 2004.

In survey responses, states reported using either outside contractors to perform recovery audits or establishing in-house fraud and detection units to recover improperly paid amounts. One state noted that it passed legislation requiring the use of recovery auditors in its state agencies. In June 2005, Texas enacted legislation that directs the state’s Comptroller of Public Accounts to contract to conduct recovery audits of payments made by state agencies to vendors and to recommend improved state agency accounting operations. The law requires state entities with more than $100 million in biennial expenditures to undertake annual recovery audits. The state expects to recover up to $4.5 million annually starting in state fiscal year 2007.

Few State-Administered Programs Receive Incentives or Penalties regarding Improper Payments

Viewed broadly, 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. The IPIA implementing guidance requires that each federal agency report on steps it has taken to ensure that agency managers are held accountable for reducing and recovering improper payments. When a culture of accountability over improper payments is instilled in an organization, everyone in the organization, including the managers and day-to-day program operators, have an incentive to reduce fraud and errors. Transparency, through public communication of performance results, also acts as an incentive for agencies to be vigilant in their efforts to address the wasteful spending that results from lapses in controls that lead to improper payments.

In the survey, we asked the state program administrators to identify any incentives they have received from the federal government to encourage them to reduce improper payments. We also asked them to identify any penalties they have received from the federal government for not doing so. Thirty-two states reported incentives such as enhanced funding and reduced reporting requirements for 5 of the 25 major programs. Most incentives were related to the Food Stamp Program, largely because of a statutory requirement that USDA assess penalties and provide financial incentives to the states. As we previously reported on the Food Stamp Program, the administration of the quality control process and its system of performance bonuses and sanctions is a large motivator of program behavior and has assisted in increasing payment accuracy. Examples of other incentives identified by the state programs included reduced reporting requirements for benefit recipients and additional funding received for a fraud and abuse detection system.

Penalties such as decreased funding, increased reporting, and client sanctions were reported by 17 states for four different programs. As with incentives, most of the penalties identified related to the Food Stamp Program. States can get approval from USDA to reinvest portions of their penalties toward corrective actions to reduce the error rate as opposed to USDA recovering the penalty from the state; thus the distinction between incentives and penalties is somewhat blurred. Our survey results showed that some states believed that being able to reinvest a portion of their food stamp penalty toward corrective action plans to improve payment accuracy was actually an incentive, while other states considered it a penalty. For another program, one state noted in its survey response that it was penalized by the federal government for not applying applicable reductions to TANF beneficiaries for noncompliance with child support enforcement regulations. In lieu of paying a penalty of over $1 million, the state submitted a corrective action plan to address the problems.

Certain states perceive limitations in their ability to adequately address improper payments. For example, 37 states reported in their survey responses that federal legislative and program design barriers hinder their ability to detect, prevent, and reduce improper payments for one or more programs. Legislative barriers relate to an agency’s ability to take actions to reduce improper payments. Program design barriers relate to the complexity and variety of programs.

From our review of survey responses, several state program officials, representing multiple programs, reported that they encountered legislative barriers related to due process. Specifically, states are not permitted to stop or adjust payments until the due process hearing or appeals processes are complete, even though they know the payment is improper. For example, one state reported that it has a state superior court ruling that requires paying UI benefits conditionally under certain circumstances, and that the recovery of the paid benefits can only take place once the courts have determined the payments were incorrect. Another state program response said that lack of authority to mandate the submission of Social Security numbers for those applying for benefits was a barrier that limited the ability to identify and prevent improper payments. Additionally, 23 state programs identified statutory restrictions over the use of certain data as a barrier to improved accuracy. For example, three state programs noted that because of security policies, they were restricted from accessing and using information from the Internal Revenue Service.

Program design barriers have also contributed to states’ inability to reduce improper payments. Generally, states receive broad statutory and regulatory program guidelines from the responsible federal agency. States then issue state-specific guidelines to manage day-to-day operations, which may vary among the states. A few survey respondents indicated that inconsistent requirements between programs hindered their ability to reduce improper payments. For example, four state programs noted that efforts to manage improper payments are hindered because of the different eligibility requirements among the federal programs that they administer. The survey responses of the state programs also indicated that they encountered resource barriers, such as lack of funding for additional personnel or information technology. For example, one state program responded that the lack of funding needed to identify eligible beneficiaries through data matching was a barrier.

Federal Action Needed to Help States Report Improper Payment Information

Minimizing improper payments is often most efficiently and effectively achieved through the exchange of relevant, reliable, and timely information between individuals and units within an organization and with external entities that have oversight and monitoring responsibilities. For state- administered programs, assistance from the federal agencies and OMB may be needed in order for the states and state programs to successfully assist the federal agencies in implementing IPIA requirements. The types of communication and information that may be necessary at both the state and federal levels include (1) a determination of what information is needed by managers to meet and support initiatives aimed at reducing improper payments; (2) adequate means of communicating with, and obtaining information from, external stakeholders that may have a significant impact on improper payment initiatives, such as periodic meetings with oversight bodies; and (3) working relationships with other organizations to share information on improper payments.

Of the 227 state program surveys received, 100 identified one or more areas where guidance or resources from the federal government would be helpful. OMB can play an important role in encouraging and coordinating efforts between the state programs and federal agencies. OMB, as part of its responsibilities, develops and implements budget, program, management, and regulatory policies. As such, OMB can set the tone at the top by creating a general framework and setting expectations for federal agencies in meeting the requirements of IPIA.

Selected States Want Federal Assistance

Additional resources and guidance would be needed for increased state involvement. As noted above, 100 state program officials requested various tools cited as needed in their efforts to estimate improper payments and to help the federal agencies in meeting various IPIA requirements, including guidance on estimating improper payments, additional funding for staffing and various projects, sharing of best practices and available guidance, and guidance on performing risk assessments. State programs also indicated that they would want an opportunity to comment on any proposed regulations prior to implementation that would require state actions to estimate and report improper payment information.

In our survey, we asked the state program officials what types of guidance and resources from the federal agencies or OMB would be beneficial to better estimate improper payments. State program officials identified one or more types of guidance or resources that would be helpful to assist the federal agencies in meeting the requirements of IPIA. We classified these responses into the following areas: Guidance on estimating improper payments. Forty-four of the state programs asked for general procedures, program-specific procedures, or both for identifying and detecting improper payments, calculating error rates, and establishing sampling methodologies. One state program suggested that guidance related to training for detecting improper payments and on how to design controls to facilitate improper payment detection be made available.

Additional funding. Forty-three of the state programs indicated a need for additional funding to train and support the additional staff levels they believe would be necessary to estimate improper payments. Additional funding also was requested for automation projects. One state requested enhanced funding to update its eligibility system to include fraud detection. Another state requested additional funding for developing an automated Quality Management System to capture data from all levels of reviews and programs.

Sharing of best practices and available guidance. Fifteen of the state programs also expressed interest in the creation of groups to discuss trends and best practices in improper payment-related areas, while other states wanted general information on IPIA and the states’ roles.

Assessing risk/risk assessment instruments. Thirteen of the state programs requested procedures for assessing risk of improper payments, including items to take into consideration when assessing their programs for risk susceptibility.

Recognition of state input. Seven of the state programs want an opportunity to comment on any proposed regulations prior to implementation of any requirements to estimate or report improper payment information. For example, one state responded in its survey that the state, in coordination with its cognizant federal agency, should determine its own plans to detect improper payments. Additionally, another state program inquired as to the purpose of involving the states, particularly those that have had little occurrence of audit findings, and another wanted clarification on what sanctions would be assessed for those that identified improper payments.

Other guidance and resources. Forty-eight of the state programs requested other types of guidance and resources relating to enhancing the use of information technology, overcoming legislative barriers, and establishing incentives and penalties for subrecipients, among others. For example, one state program wanted the creation of a national database to track the activity of medical providers that operate in multiple states.

Actions Initiated at the Federal Level to Involve States in Measuring Improper Payments

OMB has continued to conduct its improper payments work through CFOC and PCIE’s Erroneous and Improper Payments Workgroup. The workgroup periodically convenes to discuss and develop best practices and other methods to reduce or eliminate, where possible, improper payments made by federal government agencies. It has issued reports and other products to CFOC/PCIE, reflecting workgroup deliberations and determinations. OMB officials have told us that they have started to draft a plan on developing and maintaining partnerships with states to facilitate state’s estimating and reporting information to the federal agencies. For federal agencies’ fiscal year 2005 PAR reporting, OMB included a new requirement in Circular No. A-136, Financial Reporting Requirements, that federal agencies were to report on their actions and results at the grantee level. However, based on our review of selected federal agencies’ fiscal year 2005 PARs, reporting of fund stewardship at the grantee level was limited.

The CFOC and PCIE Erroneous and Improper Payments Workgroup created the Grants Subgroup in March 2004 to explore the feasibility of using various tools to measure and report improper payments, including evaluating currently available policies and guidance and modifying OMB single audit guidance to fulfill IPIA reporting requirements. Specifically, the Grants Subgroup’s work focused on developing cost-effective approaches for tracking improper payments at each stage of the payment cycle, including (1) evaluating existing policies and guidance that could be used to measure and report improper payments and (2) examining the possibilities of measuring improper payments using the audits conducted under the Single Audit Act of 1996, as amended; OMB’s Circular No. A-133 Single Audit Compliance Supplement; and the Federal Single Audit Clearinghouse.

In March 2005, the subgroup issued a report reflecting the results of its work. Specifically, the subgroup identified issues with (1) the current structure and design of grant programs’ distribution of funding, which hinders determining a national payment error rate; (2) little incentive for states to assist federal agencies with IPIA reporting; (3) lack of funding to perform IPIA compliance activities; and (4) awareness and commitment from all levels of management within an agency to address the causes of improper payments. Further, in an effort to foster working relationships among federal agencies and the states, OMB has begun work to clarify state and federal roles in estimating and reporting improper payments information and planning the development of state partnerships for certain state-administered programs.

Additionally, beginning with fiscal year 2005 PARs, OMB included three reporting requirements for those agencies with grant-making programs: (1) agency’s accomplishments in the area of funds stewardship past the primary recipient, (2) status of projects, and (3) results of any reviews. Our preliminary review of these PARs showed that in general agencies either did not report on their grant-making activities, did not clearly identify grant programs, or did not address fund stewardship beyond the primary recipient. However, we noted that some agencies provided partial information on the three reporting requirements. For example, eight agencies reported on the status of their projects, including one that discussed linking grants management and financial data to produce better information to ensure that projects funded by grants achieve program objectives and grant recipients are technically competent to carry out the work.

In November 2005, OMB issued draft revisions to its IPIA implementing guidance. This implementing guidance, together with recovery auditing guidance, is to be consolidated into future Parts I and II of Appendix C to OMB Circular No. A-123, Management’s Responsibility for Internal Controls (Dec. 21, 2004). Among the proposed changes, OMB provides that for state-administered programs, federal agencies may provide state-level estimates either for all states or a sample of states to generate a national improper payment rate for that program. Also, OMB proposes to allow modifications to agency-specific compliance supplements to enhance implementation of IPIA for federal grant-making agencies, such as the ones discussed in this report. While OMB has taken steps to begin addressing the complexities related to reporting improper payment information for federally funded, state-administered programs, additional enhancements could be made that address how federal agencies define state-administered programs and the methodology to be employed for generating a national estimate. Specifically, we found that the proposed changes do not clearly define the term state-administered programs. Without a clear definition, OMB is at risk of receiving inconsistent improper payment reports because agencies could define programs differently. In addition, we noted that the draft guidance did not provide basic criteria, such as the nature and extent of data and documentation that agencies should consider when developing a plan or methodology to calculate a national improper payment error rate for these state-administered programs.

Conclusions

Federal agencies continue to make progress toward meeting the requirements of IPIA, in response to the PMA and other key initiatives to eliminate improper payments. However, measuring improper payments and designing and implementing actions to reduce or eliminate them are not simple tasks, particularly for grant programs that rely on quality administration efforts at the state level. With budgetary pressures rising across the federal government, agencies are under constant and increasing pressure to do more with less. Preventing improper payments and identifying and recouping those that occur become an even higher priority in this environment. States have a fundamental responsibility to ensure the proper administration of federal awards by using sound management practices and maintaining internal controls to ensure distribution of federal funding to subrecipients or beneficiaries in accordance with federal and state laws and regulations. Given their involvement in determining eligibility and distributing benefits, states are in a position to assist federal agencies in reporting on IPIA requirements. In fact, the success of several existing programs and pilots in estimating improper payment rates indicates that such efforts could logically be expanded. Communication, coordination, and cooperation among federal agencies and the states will be critical factors in estimating national improper payment rates and meeting IPIA reporting requirements for state-administered programs.

Recommendations for Executive Action

We are making four recommendations to help further the progress toward meeting the goals of IPIA and determining states’ role in assisting federal agencies to report a national improper payment estimate on federal programs. Specifically, we recommend that the Director, Office of Management and Budget, revise IPIA policy guidance to clearly define state-administered programs so that federal agencies can consistently identify all such programs; expand IPIA guidance to provide criteria that federal agencies should consider when developing a plan or methodology for estimating a national improper payment estimate for state-administered programs, such as criteria that address the nature and extent of data and documentation needed from the states to calculate a national improper payment estimate; require federal agencies to communicate, and make available to the states, guidance on conducting risk assessments and estimating improper payments for federally funded, state-administered programs; and share ideas, concerns, and best practices with federal agencies and states regarding improper payment reporting requirements for federally funded, state-administered programs.

Agency Comments

We received written comments on a draft of this report from OMB and reprinted them in appendix VII. OMB agreed with our recommendations and highlighted several initiatives under way to ensure that accurate improper payment rates can be generated without creating undue cost and burden on federal agencies or state partners that manage federally funded programs. OMB also provided technical comments that we incorporated, as appropriate.

We are sending copies of this report to the Director, Office of Management and Budget; Secretaries of Agriculture, Health and Human Services, Labor, and Transportation; appropriate congressional committees; and other interested parties. We will also make copies available to others upon request. In addition, the report is available at no charge on GAO’s Web site at http://www.gao.gov.

Please contact me at (202) 512-9095 or williamsm1@gao.gov if you have any questions about this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix VIII.

Objectives, Scope, and Methodology

The objectives of this report were to determine (1) what actions are being taken by states to assist federal agencies in estimating improper payments; (2) what techniques, related to detecting, preventing, or reducing improper payments, have states employed to ensure proper administration of federal awards; and (3) what assistance can be provided by the Office of Management and Budget (OMB) that state program administrators would find helpful in supporting the respective federal agencies with the implementation of the Improper Payments Information Act of 2002 (IPIA).

To address each of these objectives, we conducted a statewide survey in all 50 states and the District of Columbia regarding actions to estimate improper payments for state- administered federal programs for fiscal years 2003 and 2004, conducted a program-specific survey of the major programs in each of performed site visits to selected states, conducted interviews with federal and state officials, and reviewed federal agencies’ fiscal year 2005 performance and accountability reports (PAR) and prior GAO and office of inspector general (OIG) reports.

More detailed information on each of these aspects of our research is presented in the following sections. We conducted our work from April 2005 through December 2005 in accordance with generally accepted government auditing standards.

Survey Development and Implementation

The surveys were developed based on IPIA, the National Defense Reauthorization Act for Fiscal Year 2002, and our executive guide on managing improper payments, and included questions about state-issued policies or guidance on internal controls or on estimating statewide risk assessments for improper payments; state recovery auditing efforts; state program efforts to prevent, detect, and reduce improper payments; state program participation in improper payment pilots; and additional assistance needed by state programs to support efforts in measuring and reporting improper payments.

The surveys were pretested with state officials in two states. Revisions to the survey were made based on comments received during the pretests.

To determine the state programs that would receive the program-specific survey, we designed a spreadsheet for each state containing its major programs, which we defined as those programs for which federal funds covered at least 60 percent of total state-administered expenditures. To do this, we used the Federal Audit Clearinghouse single audit database to identify a universe of federally funded, state-administered programs for each state. We sorted the programs from largest to smallest expenditure amount and identified the major programs in decreasing order until we obtained, in aggregate, at least 60 percent of the total federal portion of state-administered expenditures in each state. We provided this spreadsheet to states so they could confirm it with their state records. Table 3 lists the 25 major programs and the number of states in which each major program was included. The number of states identified for each major program ranged from 1 to 51.

As shown in table 4, the number of major programs identified for each state ranged from 1 to 12.

We e-mailed the surveys in June 2005 and followed up with subsequent mailings and telephone communications. The collection of survey data ended in October 2005 with a response rate of 98 percent for the statewide surveys (50 of the 51 states) and a 95 percent response rate for the program-specific surveys (227 of the 240 programs).

We conducted follow-up phone calls to clarify responses where there appeared to be discrepancies; however, we did not independently verify the responses or information obtained through the surveys.

Although no sampling errors were associated with our survey results, the practical difficulties of conducting any survey may introduce certain types of errors, commonly referred to as nonsampling errors. For example, differences in how a particular question is interpreted or differences in the sources of information that participants use to respond can introduce unwanted variability into the survey results. We included steps in both the data collection and data analysis stages to reduce such nonsampling errors. Specifically, social science survey specialists designed draft questionnaires, we pretested two versions of the questionnaire, and we performed reviews to identify inconsistencies and other indications of error prior to analysis of data. The data were keyed and verified after data entry. We conducted our survey work from June 2005 through December 2005.

Site Visits

We visited two states and interviewed state agency officials and other relevant parties about initiatives in place to estimate improper payments for the Highway Planning and Construction, Medicaid, and Unemployment Insurance (UI) programs. The two states were selected based on our knowledge of actions under way for programs in Tennessee and Texas. We went to Tennessee to obtain information about the Department of Transportation’s (DOT) implementation of a pilot project to estimate improper payments related to the Highway Planning and Construction Program. The pilot was the first that DOT’s Federal Highway Administration had conducted to estimate improper payments in a state and covered two construction projects.

We went to Texas to obtain information about the Department of Health and Human Services’s (HHS) Medicaid program and the Department of Labor’s (Labor) UI Program. One reason for selecting Texas was that HHS’s Center for Medicare and Medicaid Services had identified Texas as having a leadership role in estimating improper payments for its Medicaid program. In addition, Texas was one of three states participating in a new pilot project organized by Labor to begin data-matching work using the National Directory of New Hires. More information about these states’ efforts in these three programs is provided in appendixes IV, V, and VI. Detailed information regarding the Department of Agriculture’s Food Stamp Program and its efforts in estimating and reporting improper payments is presented in appendix III. Improper payment estimates and references from agencies’ PARs are used for background purposes. We did not assess the reliability of these data.

States and Programs Included in Our Review

Temporary Assistance for Needy Families Surveys, Studies, Investigations, and Special Purpose Grants Child Care and Development Block Grant Temporary Assistance for Needy Families Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Special Supplemental Nutrition Program for Women, Infants, and Children Highway Planning and Construction (Continued From Previous Page)

Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Lower Income Housing Assistance Program Section 8 Moderate Rehabilitation Child Care and Development Fund Improving Teacher Quality State Grants Temporary Assistance for Needy Families Temporary Assistance for Needy Families Temporary Assistance for Needy Families Temporary Assistance for Needy Families Capitalization Grants for Clean Water State Revolving Funds Unemployment Insurance (Continued From Previous Page)

Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Medicaid (Continued From Previous Page)

Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Temporary Assistance for Needy Families Temporary Assistance for Needy Families Temporary Assistance for Needy Families (Continued From Previous Page)

Temporary Assistance for Needy FamiliesTitle I Grants to Local Educational AgenciesTemporary Assistance for Needy Families Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Child Care and Development Block Grant Temporary Assistance for Needy Families Highway Planning and Construction (Continued From Previous Page)

Temporary Assistance for Needy Families Capitalization Grants for Clean Water State Revolving Funds Capitalization Grants for Drinking Water State Revolving Funds Title I Grants to Local Educational Agencies Temporary Assistance for Needy Families Title I Grants to Local Educational Agencies Temporary Assistance for Needy Families Child Care and Development Block Grant Food Stamp Program (Continued From Previous Page)

Food Stamp Quality Control System

Improper Payment Estimates

OMB’s implementing guidance requires that agencies report overpayments and underpayments in their programs if the figures are available. USDA reports these amounts in its PAR for the Food Stamp Program. Table 5 provides the overpayment and underpayment amount for each state. In fiscal year 2003, overpayments ranged from $454,636 to $103,236,074 while underpayments ranged from $126,288 to $40,679,714. In fiscal year 2004, overpayments ranged from $756,935 to $94,118,074 and underpayments ranged from $151,016 to $46,714,340.

State and Federal Improper Payment Initiatives Under Way

Since fiscal year 1999, the combined Food Stamp error rate has continued to decline. Figure 2 displays the error rates for the 6-year period from fiscal years 1999 to 2004.

Actions taken by both the states and FNS contributed to the declining error rates. For example, the state of Arizona has completed a statewide implementation of a fingerprint imaging system. The state is using the system as a means of positive identification of welfare applicants and clients to ensure that participants do not use false identities to receive benefits to which they are not entitled; the system is also used in the eligibility determination process. The state reported that cost avoidance savings resulted from welfare fraud reduction achieved through the identification and prevention of duplicate enrollments in the Food Stamp and TANF programs.

Recent initiatives reported in USDA’s fiscal year 2005 PAR include FNS’s nationwide implementation of an electronic benefit transfer (EBT) system for the delivery of food stamp benefits. EBT recipients use a plastic card, much like debit cards, to pay for their food at authorized retail stores. Funds are transferred from a Food Stamp benefits account to a retailer’s account. With EBT cards, food stamp customers pay for groceries without any paper coupons changing hands. By eliminating paper coupons, EBT creates an electronic record for each transaction that precludes certain types of fraudulent claims and makes other attempted frauds easier to detect.

Other FNS efforts include Partner Web, a Web-based system to facilitate communication and information exchange between USDA and its nutrition assistance program partners. Another initiative, the National Payment Accuracy Workgroup, consists of representatives from USDA headquarters and regional offices who meet to discuss best practice methods and strategies. The practices the states are promoting include preparing reports detailing causes and sources of errors for the local offices and publishing and distributing monthly error rates for all local offices; transmitting the results of statewide error review panels on the source and causes of errors to local offices, along with suggested corrective actions; sponsoring statewide QC meetings and state best practices conferences for local offices to discuss error rate actions taken and common problems; and sponsoring local office participation in FNS regional conferences.

Table 6 summarizes these and other factors contributing to the declining error rate.

UI Benefit Accuracy Measurement and National Directory of New Hires Database

Improper Payment Estimates

Since 1988, Labor has reported a national improper payment estimate for its UI Program. As part of the BAM program’s quality control, each state is responsible for selecting representative samples and investigating the accuracy of the benefit determinations, benefit payments, and recoveries. The results of these reviews are integrated with the BAM system to identify erroneously paid claims.

UI overpayments at a national level have fluctuated over the past 16 years. The lowest reported national error rate occurred in 1991 at 7.5 percent while the highest national error rate occurred in 1988 with 10.1 percent, as shown in figure 3.

We also noted that since 2001, UI’s national error rate has steadily increased. Labor attributes the rise in error rates to an increase in payments to claimants who improperly continue to claim benefits despite having returned to work. Although when combined, the dollar amounts of overpayments and underpayments decreased between calendar years 2003 and 2004, the national error rate increased from 9.9 percent in calendar year 2003 to 10.6 percent in calendar year 2004.

At the state level, the improper payment overpayments in calendar year 2003 ranged from $2,829,017 to $450,073,624, while underpayments ranged from $100,263 to $37,825,338. In calendar year 2004, overpayments ranged from $2,250,919 to $317,991,985 and underpayments ranged from $20,184 to $40,330,046. Table 7 lists the UI improper payment overpayments and underpayments by state.

State and Federal Improper Payment Initiatives Under Way

In addition to its leadership role in producing improper payment estimates on a national level, Labor has initiated the NDNH pilot for the UI Program to further assist in identifying, detecting, and preventing improper payments. In fiscal year 2005, three states (Texas, Utah, and Virginia) participated in the pilot. Labor initiated the NDNH pilot to determine how a cross-match between NDNH and state UI claimant data would help identify and reduce improper payments. For further review of Labor’s pilot project, we visited the state of Texas.

Texas’s participation in the NDNH pilot was through its Texas Workforce Commission (TWC). During this pilot, TWC conducted three matches of the state UI claimant data against the NDNH’s new hire data, UI claimant data, and quarterly wage data to identify potential overpayments. Generally, to perform these matches, TWC electronically transmitted state UI claimant data to HHS’s OCSE. OCSE then compared the state UI claimant data to data in the NDNH. Potential matches of claimants who may have improperly received unemployment benefits were then transmitted to TWC. TWC investigated all matches to determine the validity and amount of overpayment. According to TWC, using the national cross-match along with the statewide cross-match helped detect 50 percent more cases of potential fraud in one quarter than it would have detected otherwise.

Besides the NDNH pilot, Texas also communicated to us that it had several other actions in place to manage UI improper payments. In July 2004, the Texas governor issued an executive order for each state agency to report on efforts to assess risk in the agency; identify best practices for eliminating fraud in contracting, contract management, and procurement; and describe common components for fraud prevention and elimination programs. Each agency was also to develop a fraud prevention program. Additionally, the executive order required TWC to prioritize prevention, detection, and elimination of fraud and abuse in the UI Program by identifying any state policies, weaknesses in computer cross-matching systems, and other appropriate factors that are ineffective in preventing fraud and abuse; developing strategies to address benefit fraud and claims overpayments; identifying and implementing national best practices for detecting and prosecuting fraudulent schemes, identifying cost-effective strategies designed to eliminate fraud, and increasing recovery of overpayments.

Further, TWC has been educating employers on their responsibilities to provide TWC with information to make benefit determinations. For example, TWC sent letters to those employers that have a history of not providing complete or timely information during the initial claims investigation. These letters reiterated employers’ responsibilities and TWC’s expectations for receiving timely information during an investigation.

Based on its NDNH pilot results, Labor reported in its fiscal year 2005 PAR that a substantial amount of additional overpayments could be detected using the database. In addition, Labor reported that it is already moving ahead with full implementation of the NDNH cross-match with 5 states (Connecticut, Texas, Utah, Virginia, and Washington). Labor expects 29 states to use NDNH by the end of fiscal year 2006.

In addition to funding initiatives related to the new hire cross-matches, Labor has announced that states will be given an additional incentive to prevent and detect overpayments by implementing core measures in states’ performance budget plans based on the level of overpayments the states have detected. Labor’s fiscal year 2006 budget request contained a legislative proposal that is designed to give states the means to obtain funding for integrity activities, including additional staff, to enhance recovery and prevent overpayments. Also, to reduce overpayments and facilitate reemployment, Labor awarded Reemployment and Eligibility Assessments grants to 21 states during fiscal year 2005. The grants have been used to conduct in-person claimant interviews to assess UI beneficiaries’ need for reemployment services and their continued eligibility for benefits and to ensure that beneficiaries understand that they must stop claiming benefits upon their return to work. Further, Labor continues to promote data sharing with other agencies, such as the Social Security Administration, to identify, detect, and prevent improper payments.

Highway Planning and Construction Pilot to Estimate Improper Payments

Improper Payment Estimates

In its fiscal years 2004 and 2005 PARs, DOT reported a zero-dollar amount for its improper payment estimate for the Highway Planning and Construction Program. To enhance its reporting of improper payments, DOT conducted a pilot in the state of Tennessee. DOT completed this project in the summer of 2005. Testing disclosed three underpayments, one of which was determined by DOT to be statistically insignificant. An extrapolation of the other two errors to the population of payments for that construction project resulted in an improper payment estimate of $111,671. The sample was not designed to produce an estimate for the Tennessee statewide Highway Planning and Construction Program.

State and Federal Improper Payment Initiatives Under Way

DOT noted in its fiscal year 2005 PAR that the Tennessee pilot resulted in a methodology and testing procedures that will be used nationwide, but that the testing procedures may need to be modified based on each state’s grant management policies. DOT plans to pilot the project in more volunteer states in fiscal year 2006 and extend the process nationwide in fiscal year 2007. In addition to participating in the pilot, states work to reduce improper payments by implementing computer software to detect fraud and abuse. One such tool is the Transportation Software Management Solution, which was used by several state programs in their Highway Planning and Construction programs and contains a Bid Analysis Management System that allows highway agencies to analyze bids for collusion. At the federal level, DOT improper payment initiatives for the future include citing the inherent higher risk of improper payments because of concentrated and accelerated spending related to Hurricanes Katrina and Rita. Fiscal year 2006 Highway Planning and Construction Program testing will be focused on these hurricane regions. In its fiscal year 2006 PAR, DOT will provide interim information on the amounts and causes of improper payments and control procedures that can be used to prevent or detect improper payments in national emergency situations.

Medicaid Payment Accuracy and Payment Error Rate Measurement Project

Improper Payment Estimates

Because of the variations in the states’ Medicaid programs, CMS provided states the option of either testing for the FFS or managed care components, including testing eligibility for the two components. The rates for the 12 states that participated in the PAM pilot for Year 2 (fiscal year 2003) ranged from 0.3 percent to 18.6 percent for the FFS component and 0 percent to 2.5 percent for the managed care component. The rates for the 24 states that participated in the Year 3 PAM pilot (fiscal year 2004) ranged from 0.80 percent to 54.3 percent for the FFS component and 0 percent to 7.45 percent for the managed care component. Rates for the Year 1 PERM pilot (fiscal year 2005) had not been published at the conclusion of our fieldwork.

Although all states used a standard methodology to produce the rates, CMS noted that these rates should not be compared among states. Specifically, states applied different administrative standards that resulted in a lack of a common approach to the reviews among states. For medical reviews, states have different policies against which the reviews are conducted. For eligibility reviews, states had two review options under the PAM Year 3 pilot for verifying program eligibility. Other differences include the level of provider cooperation in submitting information and whether states conducted reviews in-house or contracted with vendors to perform the reviews.

CMS identified Texas as having a leadership role in estimating improper payments for its Medicaid program. Texas was estimating improper payments prior to implementing the CMS pilots. Under state statute, effective 1997, Texas was required to biennially estimate improper payments for its Medicaid program. In September 2003, the state of Texas passed another statute, among other things, to fund 200 additional positions to investigate Medicaid fraud. Texas has also initiated a Medicaid Integrity Pilot (MIP) project to assist in preventing improper payments. The MIP project incorporates the use of biometric technology, such as fingerprint imaging and smart cards, as eligibility verification tools. For example, Texas issues smart cards to Medicaid clients participating in the pilot and smart card and biometric readers to medical providers. When a client obtains services, he or she inserts the card into the smart card reader and positions his or her finger on the biometric reader, which compares the print to the fingerprint image contained on the card. The use of this type of technology promotes positive identification, incorporates automated eligibility determination, and assists in an electronic billing process.

Furthermore, Texas has performed a feasibility study to consolidate multiple program benefits onto a single card called an Integrated Benefits Card (IBC). This study has identified four primary benefit programs for consolidation—Medicaid; TANF; Food Stamps; and Women, Infants, and Children. Texas believes that the IBC may facilitate the needs of the Medicaid program by preventing fraud, making payments to medical providers more quickly, and offering a means for providers to quickly and accurately verify the eligibility of a client.

In addition to the above initiatives, CMS has taken additional steps programwide to estimate improper payments at the national level. See table 9 for a detailed description of actions taken.

State and Federal Improper Payment Initiatives Under Way

In October 2005, CMS published an interim final rule, with plans to publish a final rule that would include responses to comments received. According to the interim final rule, states would be stratified based on the states’ annual FFS Medicaid expenditures from the previous year, and a random sample of up to 18 states would be reviewed. States would only be selected once every 3 years. The interim final rule also outlines the strategy for conducting medical and data-processing reviews on claims made for FFS only. CMS will address estimating improper payments for Medicaid’s managed care and eligibility components at a later time. In November 2005, CMS sent a memo to the states selected for review during fiscal year 2006.

Subsequent to the publication of the October 2005 interim final rule, CMS stated that it anticipates the number of states selected each year will be 17 to ensure that each state and the District of Columbia would only be selected once every 3 years. This approach would exclude any U.S. territories or possessions that receive Medicaid funds. In a discussion with CMS’s consultant firm, it communicated to us that the sampling approach to be employed was statistically valid since every state was selected by strata, for each of the 3 years, in year 1 of this process, and thus, each state had an equal chance of being selected for years 1 through 3. Because CMS’s sampling methodology, including sampling plans, had not been fully documented by the conclusion of our fieldwork, we were unable to independently assess the statistical validity of CMS’s approach to obtain a national improper payment estimate for its Medicaid program.

In its fiscal year 2005 PAR, HHS also identified efforts to detect and reduce improper payments through activities other than the pilot project. For example, HHS’s Health Care Fraud and Abuse Control Office has two projects under way that will assist in reporting improper payments. The office plans to hire 100 staff to conduct prospective reviews of state Medicaid operations and the Medicare/Medicaid data match program to identify areas where efficiencies could be made to enhance payment accuracy. Additionally, HHS expects to improve its data match capabilities to detect improper payments for Medicaid, as well as other programs, through the use of its Public Assistance Reporting Information System (PARIS). PARIS is a voluntary project that enables the 33 participating states’ public assistance data to be matched against several databases to help maintain program integrity and to detect and deter improper payments. CMS expects to be fully compliant with the IPIA requirements for its Medicaid program by fiscal year 2008.

Comments from the Office of Management and Budget

GAO Contact and Staff Acknowledgments

GAO Contact

Acknowledgments

In addition to the contact named above, Carla Lewis, Assistant Director; Verginie Amirkhanian; Francine DelVecchio; Louis Fernheimer; Danielle Free; Wilfred Holloway; Stuart Kaufman; Donell Ries; and Bill Valsa made important contributions to this report.

Related GAO Products

Financial Management: Challenges Continue in Meeting Requirements of the Improper Payments Information Act. GAO-06-581T. Washington, D.C.: April 5, 2006.

Financial Management: Challenges Remain in Meeting Requirements of the Improper Payments Information Act. GAO-06-482T. Washington, D.C: March 9, 2006.

Financial Management: Challenges in Meeting Governmentwide Improper Payment Requirements. GAO-05-907T. Washington, D.C.: July 20, 2005.

Financial Management: Challenges in Meeting Requirements of the Improper Payments Information Act. GAO-05-605T. Washington, D.C.: July 12, 2005.

Food Stamp Program: States Have Made Progress Reducing Payment Errors, and Further Challenges Remain. GAO-05-245. Washington, D.C.: May 5, 2005.

Financial Management: Challenges in Meeting Requirements of the Improper Payments Information Act. GAO-05-417. Washington, D.C.: March 31, 2005.

Medicaid Program Integrity: State and Federal Efforts to Prevent and Detect Improper Payments. GAO-04-707. Washington D.C.: July 16, 2004.

TANF and Child Care Programs: HHS Lacks Adequate Information to Assess Risk and Assist States in Managing Improper Payments. GAO-04- 723. Washington, D.C.: June 18, 2004.

Financial Management: Fiscal Year 2003 Performance and Accountability Reports Provide Limited Information on Governmentwide Improper Payments. GAO-04-631T. Washington, D.C.: April 15, 2004.

Financial Management: Status of the Government Efforts to Address Improper Payment Problems. GAO-04-99. Washington, D.C.: October 17, 2003.

Financial Management: Effective Implementation of the Improper Payments Information Act of 2002 Is Key to Reducing the Government’s Improper Payments. GAO-03-991T. Washington, D.C.: July 14, 2003.

Financial Management: Challenges Remain in Addressing the Government’s Improper Payments. GAO-03-750T. Washington, D.C.: May 13, 2003.

Financial Management: Coordinated Approach Needed to Address the Government’s Improper Payments Problems. GAO-02-749. Washington, D.C.: August 9, 2002.

Unemployment Insurance: Increased Focus on Program Integrity Could Reduce Billions in Overpayments. GAO-02-697. Washington, D.C.: July 12, 2002.

Financial Management: Improper Payments Reported in Fiscal Year 2000 Financial Statements. GAO-02-131R. Washington, D.C.: November 2, 2001.

Strategies to Manage Improper Payments: Learning From Public and Private Sector Organizations. GAO-02-69G. Washington, D.C.: October 2001.

Financial Management: Billions in Improper Payments Continue to Require Attention. GAO-01-44. Washington, D.C.: October 27, 2000.