Federal agencies reported improper payment estimates of $72 billion for fiscal year 2008, which represented about 4 percent of the $1.8 trillion of reported outlays for the related programs and a $23 billion increase from the fiscal year 2007 estimate of about $49 billion. These efforts represent a positive step to improve transparency over the full magnitude of federal improper payments so that appropriate corrective actions can be put in place. This increase was primarily attributable to (1) a $12 billion increase in the Medicaid program’s estimate for its Fee-for-Service and managed care payments and payments related to incorrect eligibility determinations; and (2) 10 newly reported programs with improper payment estimates totaling about $10 billion. Of these 10 programs, we identified 4 that had been required by OMB to report selected improper payment information beginning with fiscal year 2003 budget submissions prior to the passage of IPIA. In total, these 4 programs represented $3.1 billion, or 31 percent, of the approximately $10 billion in newly reported programs. Further, we noted that agencies consistently identified new programs or activities as risk-susceptible after the first year of IPIA implementation: fiscal year 2005—17 new programs or activities, fiscal year 2006—15 new programs or activities, fiscal year 2007—19 new programs or activities, and fiscal year 2008—10 new programs or activities. The $72 billion estimate of improper payments federal agencies reported in fiscal year 2008 encompasses 78 programs spread among 22 agencies (see app. I for further details) and represents about 2.4 percent of total fiscal year 2008 federal executive branch outlays of nearly $3 trillion. In addition, the majority of the $72 billion of reported improper payments in fiscal year 2008 is accounted for by ten programs, as shown in figure 1. Specifically, the ten programs account for about $63 billion or approximately 88 percent of the total estimate. Seven of the 10 programs with the largest improper payment estimates are either means-tested programs, state-administered programs, or both. A common control used by these programs to ensure payment accuracy includes verifying the financial eligibility of the applicant. However, our previous work has shown that the financial eligibility of an applicant can be difficult to verify in means-tested programs, increasing the risk of payment to an ineligible recipient. Specifically, there are differences related to detailed aspects of the income rules such as whose income in a household is counted and the types of income included or excluded in either whole or part. For example, the Supplemental Nutrition Assistance Program (previously Food Stamp Program) considers the income of the entire household, including children aged 18 and over who are not students, in calculating income; whereas several other programs either do not include children’s income or exclude portions of their income from consideration. Similar differences exist in state-administered programs as a number of states define additional and unique eligibility requirements beyond what is required at the federal level. Collectively, these multiple variations in approaches to identifying recipients’ income for determining program eligibility are likely contributing factors to the high dollar value of improper payments that exist within these programs. Federal agencies continued to report progress in reducing improper payments in their programs and activities. Of the 35 agency programs reporting improper payment estimated error rates for each of the 5 fiscal years—2004 through 2008—24 programs, or about 69 percent had reduced error rates when comparing fiscal year 2008 error rates to the initial error rates reported for fiscal year 2004. Further, we found the number of programs with error rate reductions totaled 35 when comparing fiscal years 2008 and 2007 error rates. For example, the error rate of the U.S. Department of Labor’s (Labor) Unemployment Insurance (UI) program decreased from 10.3 percent in fiscal year 2007 to 9.96 percent in fiscal year 2008. Labor reported that the leading cause of UI overpayments resulted from claimants who returned to work, yet continued to claim UI benefits. Early detection of these overpayments allows agencies to stop payments sooner and to recover these overpayments more expeditiously. Labor reported that matching Social Security numbers of UI claimants with the Department of Health and Human Services’ National Directory of New Hires database is the most effective tool to identify UI program improper payments and had prevented about $93 million of UI overpayments during fiscal year 2008. While federal agencies have shown progress, major challenges remain in meeting the goals of IPIA and ultimately provide reasonable assurance as to the integrity of payments. Specifically, while improved, the total improper payment estimate reported in fiscal year 2008 does not yet reflect the full scope of improper payments across executive branch agencies; noncompliance issues with IPIA implementation continue to exist; and agencies continue to face challenges in the design or implementation of internal controls to identify and prevent improper payments. Not all agencies have yet developed improper payment estimates for all of the programs and activities they identified as susceptible to significant improper payments. As shown in table 1, the fiscal year 2008 total improper payment estimate of $72 billion did not include any amounts for 10 risk-susceptible programs—including the Medicare Prescription Drug Benefit program—with fiscal year 2008 outlays totaling about $61 billion. For fiscal year 2008, a limited number of agency auditors reported on IPIA implementation compliance issues as part of their financial statement audit, although such reporting is not specifically required by IPIA. Specifically, auditors for 4 of the 35 agencies included in our scope reported on agencies’ noncompliance with IPIA. Agency auditors reported noncompliance issues related to risk assessments, testing of payment transactions, development of corrective action plans to reduce improper payments, recovering improper payments, and inadequate documentation. Fiscal year 2008 reflected the fifth year that auditors for the Departments of Health and Human Services (HHS) and Homeland Security (DHS) reported IPIA noncompliance issues, including not estimating for all risk-susceptible programs, deficiencies related to testing of payment transactions, and the lack of corrective action plans. Agency auditors at the Department of Transportation (Transportation) and DOD reported noncompliance with IPIA for a third year. For example, Transportation auditors reported that they had not received sufficient documentation by the time of PAR issuance to determine if the department’s sampling plan used to estimate improper payments was statistically valid. The auditors for DOD reported for fiscal year 2008, that the department was still in the process of developing procedures to identify improper payments and that its efforts to manage recovery audit contracts had been largely unsuccessful. As we previously testified before this Subcommittee, separate assessments conducted by agency auditors provided a valuable independent validation of agencies’ efforts to implement IPIA. Independent assessments can also enhance an agency’s ability to identify sound performance measures, monitor progress against those measures, and help establish performance and results expectations. Without this type of validation or other types of reviews performed by GAO and agency OIGs, it is difficult to reliably determine the full magnitude of deficiencies that may exist in agencies’ IPIA implementation efforts. Agencies continue to face challenges in the design or implementation of internal controls to identify and prevent improper payments. Over half of the OIGs for agencies required to report under IPIA identified management or performance challenges that could increase the risk of improper payments, including challenges related to internal controls. Examples of fiscal year 2008 challenges are highlighted below. Department of Transportation—The OIG reported that its audits and investigations continue to find oversight and control deficiencies increasing vulnerability to improper payments, including fraud and abuse, and other ethics issues involving agency officials and contractors, including schemes related to bribery and kickbacks, bid rigging, and over-billing of labor and materials. Department of Education—The OIG reported that effective oversight of the agency’s student federal assistance programs has been a long- standing and significant challenge. Specifically, the Education OIG cited control issues related to insufficient numbers of personnel with the necessary skills and ineffective oversight and monitoring of its programs and participants, placing billions of taxpayer dollars at risk of waste, fraud, abuse, and noncompliance. Department of the Treasury—The OIG cited erroneous and improper payments as the sixth top management challenge facing the Internal Revenue Service (IRS). According to the OIG, erroneous and improper and payments generally involve improperly paid refunds, tax return filing fraud, or overpayments to vendors or contractors. The Treasury OIG also reported some tax credits, such as the Earned Income Tax Credit (EITC) and the Education Credit, provide opportunities for abuse in income tax claims. The IRS receives a substantial number of excessive or incorrect EITC claims. According to the OIG, the exponential growth in fraud in processing year 2007 presented a challenge for the IRS, which did not have the resources to handle the volume. The OIG noted that if this trend continues over the next few years, the IRS might issue an even greater number of improper refunds, possibly resulting in a significantly increasing annual revenue loss to the federal government. The Department of Health and Human Services (HHS) annually reports on improper payments in its Agency Financial Report (AFR). For fiscal year 2008, HHS reported improper payment estimates for several programs, including Medicare and the Medicaid, which together provide health insurance for one in four Americans. Collectively, HHS reported improper payment estimates for Medicare and Medicaid totaling about $36 billion for fiscal year 2008. (See figure 1.) This represents about 50 percent of the total $72 billion in reported improper payments. The Centers for Medicare and Medicaid Services (CMS), a component of HHS, administers Medicare and oversees Medicaid at the federal level. CMS is responsible for IPIA implementation for these programs. CMS reported it has taken steps to address improper payment requirements for its Medicare and Medicaid programs, but more work remains to measure annual improper payments for all its risk-susceptible programs and to design and implement effective internal controls to prevent improper payments. Medicare provides health insurance to roughly 44 million elderly and disabled beneficiaries.