VA’s mission is to promote the health, welfare, and dignity of all veterans in recognition of their service to the nation by ensuring that they receive medical care, benefits, social support, and lasting memorials. It is the second largest federal department and, in addition to its central office located in Washington, D.C., has field offices throughout the United States, as well as the U.S. territories and the Philippines. The department has three major components that are primarily responsible for carrying out its mission: the Veterans Benefits Administration (VBA), which provides a variety of benefits to veterans and their families, including disability compensation, educational opportunities, assistance with home ownership, and life insurance; the Veterans Health Administration (VHA), which provides health care services, including primary care and specialized care, and performs research and development to serve veterans’ needs; and the National Cemetery Administration (NCA), which provides burial and memorial benefits to veterans and their families. Collectively, the three components rely on approximately 340,000 employees to provide services and benefits. These employees work in 167 VA medical centers, approximately 800 community-based outpatient clinics, 300 veterans centers, 56 regional offices, and 131 national and 90 state or tribal cemeteries. For fiscal year 2016, VA reported about $176 billion in net outlays, an increase of about $16 billion from the prior fiscal year. VBA and VHA account for about $102 billion (about 58 percent) and $72 billion (about 41 percent) of VA’s reported net outlays, respectively. The remaining net outlays were for NCA and VA’s administrative costs. The fiscal year 2017 appropriations act that covered VA provided approximately $177 billion to the agency, about a $14 billion increase from the prior fiscal year. As we recently reported, improper payments remain a significant and pervasive government-wide issue. Since fiscal year 2003—when certain agencies began reporting improper payments as required by IPIA— cumulative reported improper payment estimates have totaled over $1.2 trillion, as shown in figure 1. For fiscal year 2016, agencies reported improper payment estimates totaling $144.3 billion, an increase of over $7 billion from the prior year’s estimate of $136.7 billion. The reported estimated government-wide improper payment error rate was 5.1 percent of related program outlays. As shown in figures 2 and 3, the government-wide reported improper payment estimates—both dollar estimates and error rates—have increased over the past 3 years, largely because of increases in Medicaid’s reported improper payment estimates. For fiscal year 2016, overpayments accounted for approximately 93 percent of the government-wide reported improper payment estimate, according to www.paymentaccuracy.gov, with underpayments accounting for the remaining 7 percent. Although primarily concentrated in three areas (Medicare, Medicaid, and the Earned Income Tax Credit), the government-wide reported improper payment estimates for fiscal year 2016 were attributable to 112 programs spread among 22 agencies. (See fig. 4.) We found that not all agencies had developed improper payment estimates for all of the programs they identified as susceptible to significant improper payments. Eight agencies did not report improper payment estimates for 18 risk-susceptible programs. (See table 1.) As we have previously reported, the federal government faces multiple challenges that hinder its efforts to determine the full extent of and reduce improper payments. These challenges include potentially inaccurate risk assessments, agencies that do not report improper payment estimates for risk-susceptible programs or report unreliable or understated estimates, and noncompliance issues. For fiscal year 2016, VA’s reported improper payment estimate totaled $5.5 billion, an increase of about $500 million from the prior year. The reported VA improper payment error rate was 4.5 percent of related program outlays for fiscal year 2016, a slight increase from the 4.4 percent reported error rate for fiscal year 2015. As shown in table 2, VA’s Community Care and Purchased Long-Term Services and Support programs accounted for the majority of VA’s estimated improper payments. Specifically, for fiscal year 2016, VA’s reported improper payment estimate for VA’s Community Care was approximately $3.6 billion (about 65 percent of VA’s total reported improper payments estimate) and for VA’s Purchased Long-Term Services and Support was approximately $1.2 billion (about 22 percent of VA’s total reported improper payments estimate). As shown in figures 5 and 6, VA’s reported improper payment estimates have increased over the past 3 years, and the reported improper payment error rates have increased over the past 2 years. The significant increase in VA’s reported improper payment estimates and error rates primarily occurred, according to the VA OIG, because VA changed its sample evaluation procedures in fiscal year 2015, which resulted in more improper payments being identified. In response to a finding by the VA OIG, VA began classifying every payment as improper when it made a payment that did not follow all applicable Federal Acquisition Regulation (FAR) and Veterans Affairs Acquisition Regulation (VAAR) provisions. The OIG reported that when those purchases do not follow applicable legal requirements, such as having FAR-compliant contracts in place, the resulting payments are improper because they “should not have been made or were made in an incorrect amount under statutory, contractual, administrative, or other legally applicable requirements, according to the definition of improper payments set forth in OMB Circular A-123, Appendix C.” As a result of the change in its sample evaluation procedures, VA reported significant increases in estimated improper payments for both its Community Care and Purchased Long- Term Services and Support programs. As shown in table 3, VA’s Community Care and Purchased Long-Term Services and Support programs’ reported improper payment error rates are the two highest reported error rates government-wide for fiscal year 2016. Specifically, VA’s Community Care and Purchased Long-Term Services and Support programs had reported improper payment error rates of about 75.9 percent and 69.2 percent, respectively. The reported improper payment error rates for these two programs were each over 45 percentage points higher than the reported improper payment error rate for the next highest federal program—the Department of the Treasury’s Earned Income Tax Credit program. In its fiscal year 2016 agency financial report, VA did not report improper payment estimates for four programs it identified as susceptible to significant improper payments. These four programs were Communications, Utilities, and Other Rent; Medical Care Contracts and Agreements; VA Community Care Choice payments made from the Veterans Choice Fund. Because VA did not report improper payment estimates for these risk- susceptible programs, VA’s improper payment estimate is understated and the agency is hindered in its efforts to reduce improper payments in these programs. In its fiscal year 2016 agency financial report, VA stated that it will report improper payment estimates for these programs in its fiscal year 2017 agency financial report. According to OMB guidance, to reduce improper payments, VA can use root cause analysis to identify why improper payments are occurring and develop effective corrective actions to address those causes. In addition, our two prior reports identified problems with how VA processed its claims to reasonably assure the accuracy of or eligibility for the disability benefits, increasing the risk of improper payments. VA can implement our recommendations from these two reports to better ensure the accuracy of or eligibility for disability benefits. Root cause analysis is key to understanding why improper payments occur and to developing and implementing corrective actions to prevent them. In 2014, OMB established new guidance to assist agencies in better identifying the root causes of improper payments and assessing their relevant internal controls. Agencies across the federal government began reporting improper payments using these more detailed root cause categories for the first time in their fiscal year 2015 financial reports. Figure 7 shows the root causes of VA’s estimated improper payments for fiscal year 2016, as reported by VA. According to VA’s fiscal year 2016 agency financial report, the root cause for over three-fourths of VA’s reported fiscal year 2016 improper payment estimates was program design or structural issues. As noted above, most of the improper payments occurred in VA’s Community Care and Purchased Long-Term Services and Support programs. In the fiscal year 2016 agency financial report, VA provided details on how it plans to correct some program design issues by making its procurement practices compliant with relevant laws and regulations. The agency stated that it has made certain changes, such as issuing of new policies that can reduce the amount of improper payments in this area. For example, in VA’s fiscal year 2016 agency financial report, VA stated that it issued guidance in May 2015 to appropriately purchase care, such as hospital care or medical services, in the community through the use of VAAR- compliant contracts. VA stated that the implementation of this guidance is ongoing with full impact and compliance anticipated during fiscal year 2017. According to VA’s fiscal year 2016 agency financial report, the second largest root cause for VA’s reported improper payments was administrative or process errors made by the federal agency. VA reported that most of these errors occurred in its Compensation program. These errors, such as failure to reduce benefits appropriately, affected the payment amounts that veterans and beneficiaries received. To address this root cause, VA stated in its fiscal year 2016 agency financial report that it is updating procedural guidance to reflect such things as changes in legislation and policy. In addition, VA stated that it will train employees on specific subjects related to errors found during improper payment testing and quality reviews. Accurate claim decisions help ensure that VA is paying disability benefits only to those eligible for such benefits and in the correct amounts. Thus, it is critical that VA follows its claims processes accurately and consistently. However, we previously reported problems with how VA processed its claims to reasonably assure the accuracy of or eligibility for the disability benefits, increasing the risk of improper payments. In November 2014, we reported that while VA pays billions of dollars to millions of disabled veterans, there were problems with VA’s ability to ensure that claims were processed accurately and consistently by its regional offices. VA measures the accuracy of disability compensation claim decisions mainly through its Systematic Technical Accuracy Review (STAR). Specifically, for each of the regional offices, completed claims are randomly sampled each month and the data are used to produce estimates of the accuracy of all completed claims. In our November 2014 report, we reported that VA had not always followed generally accepted statistical practices when calculating accuracy rates through STAR reviews, resulting in imprecise performance information. We also identified shortcomings in quality review practices that could reduce their effectiveness. We made eight recommendations to VA to review the multiple sources of policy guidance available to claims processors and evaluate the effectiveness of quality assurance activities, among other things. In response to the draft report, VA agreed with each of our recommendations and identified steps it planned to take to implement them. To date, VA has implemented six of the report’s eight recommendations. For example, VA has revised its sampling methodology and has made its guidance more accessible. VA has initiated action on the remaining two recommendations related to quality review of the claims processes. VA reported that it is in the process of making systems modifications to its electronic claims processing system that will allow VA to identify deficiencies during the claims process. In addition, VA is developing a new quality assurance database that will capture data from all types of quality reviews at various stages of the claims process. VA stated that this new database will support increased data analysis capabilities and allow the agency to evaluate the effectiveness of quality assurance activities through improved and vigorous error rate trend analysis. VA stated that it anticipates deploying the systems modifications and the new quality assurance database by July 2017. In June 2015, we reported that VA’s procedures did not ensure that Total Disability Individual Unemployability (TDIU) benefit decisions were well-supported. To begin receiving and remain eligible for TDIU benefits, veterans must meet the income eligibility requirements. VA first determines a claimant’s income by requesting information on the last 5 years of employment on the claim form and subsequently requires beneficiaries to annually attest to any income changes. VA uses the information provided by claimants to request additional information from employers and, when possible, verifies the claimant’s reported income, especially for the year prior to applying for the benefit. In order to receive verification, VA sends a form to the employers identified on the veteran’s benefit claim and asks them to provide the amount of income earned by the veteran. However, VA officials indicated that employers provided the requested information only about 50 percent of the time. In our 2015 report, we reported that VA previously conducted audits of beneficiaries’ reported income by obtaining income verification matches from Internal Revenue Service (IRS) earnings data through an agreement with the Social Security Administration (SSA), but was no longer doing so despite the standing agreement. In 2012, VA suspended income verification matches in order to develop a new system that would allow for more frequent, electronic information sharing. VA officials told us that they planned to roll out a new electronic data system that would allow for compatibility with SSA data sources in fiscal year 2015. They noted that they planned to use this system to conduct more frequent and focused income verifications to help ensure beneficiaries’ continued entitlement. VA officials also anticipated being able to use the system to conduct income verifications for initial TDIU applicants. However, at the time of our 2015 report, VA could not provide us with a plan or timeline for implementing this verification system. In the 2015 report, we recommended that VA verify the self-reported income provided by veterans (1) applying for TDIU benefits and (2) undergoing the annual eligibility review process by comparing such information against IRS earnings data, which VA currently has access to for this purpose. To date, VA is developing processes to use IRS earnings data from SSA in verifying income eligibility requirements. According to VA, in February 2016, it launched a national workload distribution tool within its management system to improve its overall production capacity and assist with reaching claims processing goals that will be used in implementing our recommendation. To determine if new beneficiaries are eligible for TDIU benefits, VA stated that it is expanding the data-sharing agreement with SSA to develop an upfront verification process. Specifically, when VA receives a TDIU claim, it will electronically request the reported IRS income information from SSA and receive a response within 16 days. In addition, according to VA, it is also planning to begin a process for checking incomes of veterans to determine whether they remain eligible for TDIU benefits. Specifically, VA has reinstituted the data match agreement with SSA that was set to expire in December 2016 to allow VA to compare reported income earnings of TDIU beneficiaries to earnings actually received. According to VA, it also has drafted a new guidance manual for the annual eligibility review process. VA stated that it planned to fully implement the upfront and annual eligibility verification processes by the summer of 2017. In conclusion, in light of VA’s significant financial management challenges, we continue to be concerned about VA’s ability to reasonably ensure its resources are being used cost-effectively and efficiently. Because VA’s payment amounts are likely to increase with the increase in appropriations for fiscal year 2017, it is critical that VA takes actions to reduce the risks of improper payments. While VA has taken several actions to help prevent improper payments, further efforts are needed to help minimize the risks of improper payments across its programs. Chairman Bergman, Ranking Member Kuster, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff have any question about this testimony, please contact Beryl H. Davis, Director, Financial Management and Assurance, at (202) 512-2623 or davisbh@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Matthew Valenta (Assistant Director), Daniel Flavin (Analyst in Charge), Marcia Carlsen, Francine Delvecchio, Robert Hildebrandt, Melissa Jaynes, Jason Kelly, and Jason Kirwan. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Summary: For several years, GAO has reported in its audit reports on the consolidated financial statements of the U.S. government that the federal government is unable to determine the full extent to which improper payments occur and reasonably assure that actions are taken to reduce them. Strong financial management practices, including effective internal control, are important for federal agencies to better detect and prevent improper payments. VA faces significant financial management challenges. In 2015, GAO designated VA health care as a high-risk area because of concern about VA's ability to ensure that its resources are being used cost effectively and efficiently to improve veterans' timely access to health care and to ensure the quality and safety of that care. Further, improving and modernizing federal disability programs has been on GAO's high-risk list since 2003, in part because of challenges that VA has faced in providing accurate, timely, and consistent disability decisions related to disability compensation. In addition, in VA's fiscal year 2016 agency financial report, the independent auditor cited material weaknesses in internal control over financial reporting. This statement discusses improper payments on both the government-wide level and at VA. The statement also discusses certain actions that VA has taken and other actions that VA can take to reduce improper payments. This statement is based on GAO's recent work on improper payments and its analysis of agency financial reports and VA's Office of Inspector General reports. Improper payments, which generally include payments that should not have been made, were made in the incorrect amount, or were not supported by sufficient documentation, remain a significant and pervasive government-wide issue. Since fiscal year 2003—when certain agencies began reporting improper payments as required by the Improper Payments Information Act of 2002—cumulative improper payment estimates have totaled over $1.2 trillion. For fiscal year 2016, agencies reported improper payment estimates totaling $144.3 billion, an increase of about $7.6 billion from the prior year's estimate of $136.7 billion. For fiscal year 2016, the Department of Veterans Affairs' (VA) reported improper payment estimate totaled $5.5 billion. VA's Community Care and Purchased Long-Term Services and Support programs accounted for reported improper payment estimates of $3.6 billion and $1.2 billion, respectively, or about 87 percent of VA's reported improper payment estimate for fiscal year 2016. VA's reported improper payment estimates increased significantly from $1.6 billion for fiscal year 2014 to $5.0 billion for fiscal year 2015. According to the VA Office of Inspector General, this increase was primarily due to a change in VA's evaluation procedures, which resulted in more improper payments being identified. In accordance with Office of Management and Budget guidance, to reduce improper payments, VA can use detailed root cause analysis to identify why improper payments are occurring and to develop corrective actions. For example, according to VA, the root cause for over 75 percent of VA's reported improper payments for fiscal year 2016 was program design or structural issues. Most of these errors occurred in VA's health care area. To reduce these improper payments, VA stated that it will make its procurement practices compliant with Federal Acquisition Regulation provisions. GAO has also recommended steps that VA can take to reduce the risk of improper payments related to disability benefits. For example, in November 2014, GAO reported that VA had shortcomings in quality review practices that could reduce its ability to ensure accurate and consistent processing of disability compensation claim decisions, and GAO made eight related recommendations to improve the program. To date, VA has implemented six of the report's eight recommendations and expects to implement the other two recommendations related to the effectiveness of quality assurance activities later this summer.